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: June 29, 2024
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 July 31, 2024 was 9,145,144.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited) | ||||||||
First Quarter Ended | ||||||||
June 29, | June 24, | |||||||
2024 | 2023 | |||||||
Service Revenue | $ | 43,778 | $ | 39,853 | ||||
Distribution Sales | 22,929 | 20,745 | ||||||
Total Revenue | 66,707 | 60,598 | ||||||
Cost of Service Revenue | 28,895 | 26,882 | ||||||
Cost of Distribution Sales | 15,157 | 15,006 | ||||||
Total Cost of Revenue | 44,052 | 41,888 | ||||||
Gross Profit | 22,655 | 18,710 | ||||||
Selling, Marketing and Warehouse Expenses | 7,801 | 6,469 | ||||||
General and Administrative Expenses | 9,755 | 7,601 | ||||||
Total Operating Expenses | 17,556 | 14,070 | ||||||
Operating Income | 5,099 | 4,640 | ||||||
Interest Expense | 52 | 814 | ||||||
Interest Income | (312 | ) | - | |||||
Other Expense | 131 | 64 | ||||||
Total Interest and Other, net | (129 | ) | 878 | |||||
Income Before Provision For Income Taxes | 5,228 | 3,762 | ||||||
Provision for Income Taxes | 820 | 813 | ||||||
Net Income | $ | 4,408 | $ | 2,949 | ||||
Basic Earnings Per Share | $ | 0.49 | $ | 0.39 | ||||
Average Shares Outstanding | 9,064 | 7,622 | ||||||
Diluted Earnings Per Share | $ | 0.48 | $ | 0.38 | ||||
Average Shares Outstanding | 9,196 | 7,762 | ||||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited) | ||||||||
First Quarter Ended | ||||||||
June 29, | June 24, | |||||||
2024 | 2023 | |||||||
Net Income | $ | 4,408 | $ | 2,949 | ||||
Other Comprehensive (Loss) / Income : | ||||||||
Currency Translation Adjustment | (161 | ) | 476 | |||||
Other, net of tax effects of $2 and $2 for the first quarter ended June 29, 2024 and June 24, 2023, respectively | 6 | 6 | ||||||
Total Other Comprehensive (Loss) / Income | (155 | ) | 482 | |||||
Comprehensive Income | $ | 4,253 | $ | 3,431 | ||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
(Unaudited) | (Audited) | |||||||
June 29, | March 30, | |||||||
2024 | 2024 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and Cash Equivalents | $ | 22,657 | $ | 19,646 | ||||
Marketable Securities | - | $ | 15,533 | |||||
Accounts Receivable, less allowance for credit losses of $492 and $544 as of June 29, 2024 and March 30, 2024, respectively | 48,156 | 47,779 | ||||||
Other Receivables | 242 | 506 | ||||||
Inventory, net | 18,128 | 17,418 | ||||||
Prepaid Expenses and Other Current Assets | 5,070 | 4,276 | ||||||
Total Current Assets | 94,253 | 105,158 | ||||||
Property and Equipment, net | 45,954 | 38,944 | ||||||
Goodwill | 138,146 | 105,585 | ||||||
Intangible Assets, net | 26,254 | 19,987 | ||||||
Right to Use Assets, net | 17,996 | 16,823 | ||||||
Other Assets | 1,049 | 1,055 | ||||||
Total Assets | $ | 323,652 | $ | 287,552 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts Payable | $ | 13,076 | $ | 11,495 | ||||
Accrued Compensation and Other Current Liabilities | 12,677 | 16,739 | ||||||
Income Taxes Payable | 3,687 | 2,926 | ||||||
Current Portion of Long-Term Debt | 2,362 | 2,339 | ||||||
Total Current Liabilities | 31,802 | 33,499 | ||||||
Long-Term Debt | 1,218 | 1,817 | ||||||
Deferred Tax Liabilities, net | 9,287 | 9,291 | ||||||
Lease Liabilities | 15,400 | 14,873 | ||||||
Other Liabilities | 3,657 | 2,903 | ||||||
Total Liabilities | 61,364 | 62,383 | ||||||
Shareholders' Equity: | ||||||||
Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 9,144,731 and 8,839,299 shares issued and outstanding as of June 29, 2024 and March 30, 2024, respectively | 4,572 | 4,420 | ||||||
Capital in Excess of Par Value | 175,299 | 141,624 | ||||||
Accumulated Other Comprehensive Loss | (1,104 | ) | (949 | ) | ||||
Retained Earnings | 83,521 | 80,074 | ||||||
Total Shareholders' Equity | 262,288 | 225,169 | ||||||
Total Liabilities and Shareholders' Equity | $ | 323,652 | $ | 287,552 | ||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited) | ||||||||
Three Months Ended | ||||||||
June 29, | June 24, | |||||||
2024 | 2023 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Income | $ | 4,408 | $ | 2,949 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||
Net (Gain)/Loss on Disposal of Property and Equipment | (4 | ) | 8 | |||||
Deferred Income Taxes | (4 | ) | 44 | |||||
Depreciation and Amortization | 4,113 | 2,790 | ||||||
(Recovery of)/Provision for Accounts Receivable and Inventory Reserves | (89 | ) | 138 | |||||
Stock-Based Compensation Expense | 697 | 930 | ||||||
Changes in Assets and Liabilities, net of acquisitions: | ||||||||
Accounts Receivable and Other Receivables | 2,814 | 3,115 | ||||||
Inventory | (235 | ) | 1,950 | |||||
Prepaid Expenses and Other Current Assets | (687 | ) | 531 | |||||
Accounts Payable | 1,425 | (4,315 | ) | |||||
Accrued Compensation and Other Current Liabilities | (4,273 | ) | (1,203 | ) | ||||
Income Taxes Payable | 759 | 599 | ||||||
Net Cash Provided by Operating Activities | 8,924 | 7,536 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchase of Property and Equipment | (3,674 | ) | (2,767 | ) | ||||
Business Acquisitions, net of cash acquired | (15,953 | ) | (2,869 | ) | ||||
Sales of Marketable Securities | 15,533 | - | ||||||
Net Cash Used in Investing Activities | (4,094 | ) | (5,636 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Repayment of Revolving Credit Facility, net | - | (204 | ) | |||||
Repayments of Term Loan | (576 | ) | (553 | ) | ||||
Issuance of Common Stock, net of direct costs | 260 | 199 | ||||||
Repurchase of Common Stock | (1,619 | ) | (301 | ) | ||||
Net Cash Used in Financing Activities | (1,935 | ) | (859 | ) | ||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | 116 | (423 | ) | |||||
Net Increase in Cash and Cash Equivalents | 3,011 | 618 | ||||||
Cash and Cash Equivalents at Beginning of Period | 19,646 | 1,531 | ||||||
Cash and Cash Equivalents at End of Period | $ | 22,657 | $ | 2,149 | ||||
Supplemental Disclosure of Cash Flow Activity: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 259 | $ | 816 | ||||
Income Taxes, net | $ | 63 | $ | 107 | ||||
Supplemental Disclosure of Non-Cash Investing and Financing Activities: | ||||||||
Common stock issued for acquisitions | $ | 32,781 | $ | 6,831 | ||||
Assets acquired and liabilities assumed in business combinations: | ||||||||
Accrued holdback and contingent consideration related to acquisitions | $ | 1,250 | $ | - | ||||
Contingent consideration treated as equity related to acquisitions | $ | 750 | $ | - | ||||
Balance Sheet Reclassification of Property and Equipment, net to Inventory | $ | 410 | $ | 230 | ||||
See accompanying notes to consolidated financial statements.
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 | (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 | ||||||||||||
Capital | ||||||||||||||||||||||||
Common Stock | In | Accumulated | ||||||||||||||||||||||
Issued | Excess | Other | ||||||||||||||||||||||
$0.50 Par Value | of Par | Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Value | (Loss) | Earnings | Total | |||||||||||||||||||
Balance as of March 30, 2024 | 8,839 | $ | 4,420 | $ | 141,624 | $ | (949 | ) | $ | 80,074 | $ | 225,169 | ||||||||||||
Issuance of Common Stock | 302 | 151 | 32,888 | - | - | 33,039 | ||||||||||||||||||
Contingent Consideration Classified as Equity | - | - | 750 | - | - | 750 | ||||||||||||||||||
Repurchase of Common Stock | (13 | ) | (7 | ) | (652 | ) | - | (961 | ) | (1,620 | ) | |||||||||||||
Stock-Based Compensation | 16 | 8 | 689 | - | - | 697 | ||||||||||||||||||
Other Comprehensive Loss | - | - | - | (155 | ) | - | (155 | ) | ||||||||||||||||
Net Income | - | - | - | - | 4,408 | 4,408 | ||||||||||||||||||
Balance as of June 29, 2024 | 9,144 | $ | 4,572 | $ | 175,299 | $ | (1,104 | ) | $ | 83,521 | $ | 262,288 | ||||||||||||
See accompanying notes to consolidated financial statements.
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, cost control and optimization services, and distribution and rental of value-added 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 30, 2024 (“fiscal year 2024”) contained in the Company’s Annual Report on Form 10-K for fiscal year 2024 filed with the SEC.
Use of Estimates: The preparation of Transcat’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States ("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 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.
Marketable Securities: Marketable securities consist of highly liquid investments with an original maturity when purchased of more than three months and are stated at fair value on the Consolidated Balance Sheets. These securities are considered trading securities. Earnings on the marketable securities are included in interest income in the Consolidated Statements of Income.
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 time-elapsed output method 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 time-elapsed output method 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. 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.
Revenue recognized from prior period performance obligations for the first quarter of the fiscal year ending March 29, 2025 (“fiscal year 2025”) was immaterial. As of June 29, 2024, 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 June 29, 2024 and March 30, 2024 were immaterial. See Note 4 for disaggregated revenue information.
% of Total Net Sales | ||||||||
June 29, | June 24, | |||||||
2024 | 2023 | |||||||
Point-in-Time | 85.6 | % | 90.7 | % | ||||
Over Time - Output Method | 14.4 | % | 9.3 | % | ||||
Total | 100.0 | % | 100.0 | % | ||||
Fair Value of Financial Instruments: Transcat has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Company to develop its own assumptions. The carrying amount of debt on the Consolidated Balance Sheets approximates fair value due to variable interest rate pricing on a portion of the debt with the balance bearing an interest rate approximating current market rates, and the carrying amounts for cash and cash equivalents, marketable securities, 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 June 29, 2024 and March 30, 2024, investment assets totaled $0.1 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 for 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 quarter of fiscal year 2025 and fiscal year 2024, the Company recorded non-cash stock-based compensation cost of $0.7 million and $0.9 million, respectively, in the Consolidated Statements of Income.
Foreign Currency Translation and Transactions: The accounts of Cal OpEx Limited (d/b/a Transcat Ireland), an Irish company, and Transcat Canada Inc., both of which are wholly-owned subsidiaries of the Company, are maintained in their 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 quarter of fiscal year 2025 and fiscal year 2024. 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 during each of the first quarter of fiscal years 2025 and 2024, 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 June 29, 2024, the Company had a foreign exchange contract, which matured in July 2024, outstanding in the notional amount of $1.8 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.
For the first quarter of each of fiscal years 2025 and 2024, 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):
First Quarter Ended | ||||||||
June 29, | June 24, | |||||||
2024 | 2023 | |||||||
Average Shares Outstanding – Basic | 9,064 | 7,622 | ||||||
Effect of Dilutive Common Stock Equivalents | 132 | 140 | ||||||
Average Shares Outstanding – Diluted | 9,196 | 7,762 | ||||||
Anti-dilutive Common Stock Equivalents | 35 | 57 | ||||||
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. The allocation of goodwill and intangible assets by segment for the fiscal year 2025 additions are preliminary. 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 30, 2024 | $ | 38,216 | $ | 67,369 | $ | 105,585 | $ | 6,993 | $ | 12,994 | $ | 19,987 | ||||||||||||
Additions | 21,746 | 10,876 | 32,622 | 5,360 | 2,680 | 8,040 | ||||||||||||||||||
Amortization | - | - | - | (665 | ) | (1,108 | ) | (1,773 | ) | |||||||||||||||
Currency Translation Adjustment | - | (61 | ) | (61 | ) | - | - | - | ||||||||||||||||
Net Book Value as of June 29, 2024 | $ | 59,962 | $ | 78,184 | $ | 138,146 | $ | 11,688 | $ | 14,566 | $ | 26,254 | ||||||||||||
Other Liabilities: A summary of other current and non-current liabilities is as follows (amounts in thousands):
(Unaudited) | (Audited) | |||||||
June 29, | March 30, | |||||||
2024 | 2024 | |||||||
Current Liabilities: | ||||||||
Accrued Payroll and Employee Benefits | $ | 4,074 | $ | 5,508 | ||||
Accrued Incentives | 986 | 4,182 | ||||||
Current Portion of Lease Liabilities | 3,177 | 2,510 | ||||||
Accrued Acquisition Holdbacks | 3,216 | 2,577 | ||||||
Accrued Sales Tax | 727 | 813 | ||||||
Accrued Contingent Consideration | - | 529 | ||||||
Other Current Liabilities | 497 | 620 | ||||||
Accrued Compensation and Other Current Liabilities | $ | 12,677 | $ | 16,739 | ||||
Non-Current Liabilities: | ||||||||
Postretirement Benefit Obligation | $ | 1,130 | $ | 1,134 | ||||
Accrued Acquisition Holdbacks | 1,647 | 1,647 | ||||||
Accrued Contingent Consideration | 750 | - | ||||||
Other Non-Current Liabilities | 130 | 122 | ||||||
Other Liabilities | $ | 3,657 | $ | 2,903 | ||||
Recent Accounting Guidance Not Yet Adopted: In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280). The ASU requires disclosures, on an annual and interim basis, of significant segment expenses and other segment items that are regularly provided to the Chief Operating Decision Maker ("CODM") as well as the title and position of the CODM. ASU 2023-07 is effective for annual periods beginning in fiscal 2025 with early adoption permitted. The adoption of this ASU is expected to impact the Company's financial statement disclosures but have no material impact on our results of operations, cash flows or financial condition.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU expands the income tax disclosure requirements, principally related to the rate reconciliation table and income taxes paid. ASU 2023-09 is effective for annual periods beginning in fiscal 2026, with early adoption permitted. The adoption of the ASU is not expected to have a material impact on the Company’s financial statement disclosures.
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 facility”) 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 facility 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 facility.
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 June 29, 2024, $80.0 million was available for borrowing under the revolving credit facility. As of June 29, 2024, there were no amounts outstanding under the revolving credit facility.
As of June 29, 2024, $3.6 million was outstanding on the 2018 Term Loan, of which $2.4 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 quarter of fiscal year 2025 was 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 three months of fiscal year 2025. The Company's leverage ratio, as defined in the Credit Agreement, was 0.08 at June 29, 2024, compared with 0.10 at March 30, 2024.
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 June 29, 2024, 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 quarter of fiscal year 2025 and fiscal year 2024 were $0.6 million and $0.1 million, respectively.
Restricted Stock Units: The Company grants time-based and performance-based restricted stock units as a component of executive and key employee compensation. Expense for restricted stock unit grants is recognized on a straight-line basis for the service period of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock unit grants is the quoted market price for the Company’s common stock on the date of grant. These restricted stock units are either time vested, or vest following the third fiscal year from the date of grant subject to cumulative diluted earnings per share 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 June 29, 2024 (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 | June 29, 2024 | ||||||
October 2018 | October 2018 – September 2028 | 5 | $ | 20.81 | Time Vested | |||||
September 2021 | September 2021 – September 2024 | 4 | $ | 67.76 | Time Vested | |||||
March 2022 | March 2022 – March 2025 | 1 | $ | 76.31 | Time Vested | |||||
May 2022 | May 2022 – March 2025 | 8 | $ | 63.17 | 55% of target level | |||||
May 2022 | May 2022 – March 2025 | 9 | $ | 63.17 | Time Vested | |||||
August 2022 | August 2022 – August 2025 | 1 | $ | 78.04 | Time Vested | |||||
December 2022 | December 2022 – December 2025 | 1 | $ | 67.48 | Time Vested | |||||
May 2023 | May 2023 – March 2026 | 8 | $ | 89.70 | 150% of target level | |||||
May 2023 | May 2023 – March 2026 | 8 | $ | 89.70 | Time Vested | |||||
May 2023 | May 2023 – May 2026 | 13 | $ | 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 | |||||
April 2024 | April 2024 - April 2027 | 2 | $ | 107.13 | Time Vested | |||||
April 2024 | April 2024 - April 2027 | 1 | $ | 108.04 | Time Vested | |||||
May 2024 | May 2024 - May 2027 | 1 | $ | 119.45 | Time Vested | |||||
May 2024 | May 2024 - May 2027 | 1 | $ | 124.12 | Time Vested | |||||
May 2024 | May 2024 - March 2027 | 9 | $ | 124.12 | 100% of target level | |||||
May 2024 | May 2024 - March 2027 | 10 | $ | 124.12 | Time Vested | |||||
Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $0.3 million and $0.6 million in the first quarter of fiscal year 2025 and fiscal year 2024, respectively. As of June 29, 2024, unearned compensation, to be recognized over the grants’ respective service periods, totaled $4.8 million based on estimated achievement levels as of June 29, 2024. If the maximum performance levels were achieved, the unearned compensation could be a maximum of $5.8 million.
Stock Options: The Company grants stock options to employees and directors with an exercise price equal to the quoted market price of the Company’s stock at the date of the grant. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Expense for stock options is recognized on a straight-line basis over the requisite service period for each award. Options vest either immediately or over a period of up to five years using a straight-line basis and expire either five years or ten years from the date of grant.
We calculate the fair value of the stock options granted using the Black-Scholes model. The following weighted-average assumptions were used to value options granted during the first quarter of fiscal year 2025 and fiscal year 2024:
First Quarter Ended | ||||||||
June 29, | June 24, | |||||||
2024 | 2023 | |||||||
Risk-Free Interest Rate | 4.74 | % | 3.43 | % | ||||
Volatility Factor | 41.41 | % | 37.16 | % | ||||
Expected Term (in Years) | 4.00 | 6.19 | ||||||
Annual Dividend Rate | 0.00 | % | 0.00 | % | ||||
We calculate expected volatility for stock options by taking an average of historical volatility over the expected term. The computation of expected term was determined based on safe harbor rules, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield in effect at the time of grant. We assume no expected dividends. Under FASB ASC Topic 718, Compensation – Stock Compensation, the Company has elected to account for forfeitures as they occur.
During the first quarter of fiscal year 2025, the Company granted options for 4,000 shares of common stock in the aggregate to Company employees that vest over three years.
During the first quarter of fiscal year 2024, the Company granted options for 6,000 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 $0.4 million in the first three months of fiscal year 2025 and $0.3 million in the first three months of fiscal year 2024.
The following table summarizes the Company’s options as of and for the first quarter ended June 29, 2024 (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 30, 2024 | 234 | $ | 63.43 | |||||||||||||
Granted | 4 | $ | 108.04 | |||||||||||||
Exercised | (4 | ) | $ | 24.30 | ||||||||||||
Forfeited | (12 | ) | $ | 52.64 | ||||||||||||
Outstanding as of June 29, 2024 | 222 | $ | 64.91 | 5 | $ | 12,159 | ||||||||||
Exercisable as of June 29, 2024 | 63 | $ | 36.21 | 5 | $ | 4,750 | ||||||||||
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first quarter of fiscal year 2025 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all holders exercised their options on June 29, 2024. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.
Total unrecognized compensation cost related to non-vested stock options as of June 29, 2024 was $2.3 million, which is expected to be recognized over a period of three years. The aggregate intrinsic value of stock options exercised during the first quarter of fiscal year 2025 was $0.4 million and during the first quarter of fiscal year 2024 was $0.2 million. Cash received from the exercise of options in each of the first quarter of fiscal year 2025 and fiscal year 2024 was less than $0.1 million.
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 first quarter of fiscal year 2025 and fiscal year 2024 (dollars in thousands):
First Quarter Ended | ||||||||
June 29, | June 24, | |||||||
2024 | 2023 | |||||||
Revenue: | ||||||||
Service | $ | 43,778 | $ | 39,853 | ||||
Distribution | 22,929 | 20,745 | ||||||
Total | 66,707 | 60,598 | ||||||
Gross Profit: | ||||||||
Service | 14,883 | 12,971 | ||||||
Distribution | 7,772 | 5,739 | ||||||
Total | 22,655 | 18,710 | ||||||
Operating Expenses: | ||||||||
Service (1) | 10,793 | 9,779 | ||||||
Distribution (1) | 6,763 | 4,291 | ||||||
Total | 17,556 | 14,070 | ||||||
Operating Income: | ||||||||
Service | 4,090 | 3,192 | ||||||
Distribution | 1,009 | 1,448 | ||||||
Total | 5,099 | 4,640 | ||||||
Unallocated Amounts: | ||||||||
Interest and Other (Income)/Expense, net | (129 | ) | 878 | |||||
Provision for Income Taxes | 820 | 813 | ||||||
Total | 691 | 1,691 | ||||||
Net Income | $ | 4,408 | $ | 2,949 | ||||
Geographic Data: | ||||||||
Revenues to Unaffiliated Customers (2) | ||||||||
United States (3) | $ | 60,741 | $ | 54,257 | ||||
Canada | 4,472 | 4,247 | ||||||
Other International | 1,494 | 2,094 | ||||||
Total | $ | 66,707 | $ | 60,598 | ||||
(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
Becnel: Effective April 15, 2024, the Company acquired Becnel Rental Tools, LLC, a privately-held Louisiana limited liability company (“Becnel”), pursuant to an Agreement and Plan of Merger (the “Becnel agreement”), by and among the Company, Becnel and the other parties thereto. Becnel is an ISO 9001:2015 certified provider of rental tools and services primarily utilized in the decommissioning and maintenance of oil wells. 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 and rental capabilities.
The Becnel goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. The goodwill and intangible assets relating to the Becnel acquisition have preliminarily been allocated to both the Service and Distribution segment. Intangible assets related to the Becnel acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to eleven years and are deductible for tax purposes. Amortization of goodwill related to the Becnel acquisition is deductible for income tax purposes.
The total purchase price for Becnel was approximately $49.9 million and will be up to $17.5 million in cash and the issuance of our common stock valued at $32.3 million. Pursuant to the Becnel agreement, the Company held back approximately $2.5 million of the purchase price for certain potential post-closing adjustments. This includes $0.5 million withheld for ordinary post-closing adjustments and $2.0 million withheld that is subject to revenue target achievement.
Pursuant to the Becnel agreement, the purchase price is subject to reduction by $2.0 million if certain revenue targets are not met through April 15, 2026. As of April 15, 2024 and June 29, 2024, the estimated fair value of this contingent consideration, classified as Level 3 in the fair value hierarchy, was approximately $1.5 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 11.00%, 2) risk-free interest rate of 5.00%, 3) asset volatility of 30.00%, and 4) forecasted revenue. 50% of this contingent consideration is payable in cash and 50% of this contingent consideration is payable in 9,283 shares of Transcat common stock. The cash portion of the contingent consideration is classified as a liability and is recorded in other liabilities in the Consolidated Balance Sheets. The stock portion of the contingent consideration is classified as equity and is recorded in shareholders equity in the Consolidated Balance Sheets. The contingent consideration payout will either be $0 or $2.0 million depending on the revenue target achievement.
This cash portion of the contingent consideration is remeasured quarterly. If, as a result of remeasurement, the value of the cash portion 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 stock portion of the contingent consideration is remeasured quarterly. If, as a result of the measurement, the value of the stock portion of the contingent consideration changes. any changes will be included in the Consolidated Balance Sheets as a component of shareholders equity.
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, liabilities assumed and consideration transferred. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Becnel's assets and liabilities acquired on April 15, 2024 (in thousands):
Goodwill | $32,659 | ||||
Intangible Assets – Customer Base & Contracts | 7,200 | ||||
Intangible Assets – Trademarks and Tradenames | 840 | ||||
| 40,699 | |||||
Plus: | Cash | 197 | |||
Accounts Receivable | 3,041 | ||||
Property and Equipment | 6,122 | ||||
Other Current Assets | 95 | ||||
Less: | Current Liabilities | (253 | ) | ||
Total Purchase Price | $ | 49,901 | |||
From the date of acquisition through the end of the first quarter of fiscal year 2025, Becnel has contributed revenue of $2.7 million and operating income of $0.6 million, which includes the negative impact of amortization of the acquired intangible assets.
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 $38.7 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 following is a summary of the 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 | $ | 26,758 | |||
Intangible Assets – Customer Base & Contracts | 7,900 | ||||
| 34,658 | |||||
Plus: | Cash | 161 | |||
Accounts Receivable | 925 | ||||
Inventory | 1,796 | ||||
Other Current Assets | 40 | ||||
Property and Equipment | 4,965 | ||||
Less: | Current Liabilities | (579 | ) | ||
Deferred Tax Liability | (3,242 | ) | |||
Total Purchase Price | $ | 38,724 | |||
During the first quarter of fiscal year 2025, Axiom 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.
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.
The following is a summary of the 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 | $ | 2,175 | |||
Intangible Assets – Customer Base & Contracts | 1,062 | ||||
Intangible Assets – Covenant Not to Compete | 392 | ||||
Intangible Assets – Sales Backlog | 95 | ||||
| 3,724 | |||||
Plus: | Accounts Receivable | 666 | |||
Less: | Current Liabilities | (211 | ) | ||
Deferred Tax Liability | (395 | ) | |||
Total Purchase Price | $ | 3,784 | |||
During the first quarter of fiscal year 2025, SteriQual has contributed revenue of $0.5 million and operating loss of less than $0.1 million, which includes the negative impact of amortization of the acquired intangible assets.
TIC-MS: Effective March 27, 2023, Transcat purchased all of the outstanding capital stock of TIC-MS, Inc. (“TIC-MS”), a Missouri based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities.
The TIC-MS goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the TIC-MS acquisition has been allocated to the Service segment. Intangible assets related to the TIC-MS acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are not deductible for tax purposes. Amortization of goodwill related to the TIC-MS acquisition is not deductible for tax purposes.
The total purchase price for TIC-MS was approximately $9.7 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 was subject to reduction by up to $0.5 million if a key customer relationship is not retained through March 27, 2024. This key customer relationship was retained and, in the first quarter of fiscal year 2025 the $0.5 million in escrow was released and paid.
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 | $ | 7,218 | |||
Intangible Assets – Customer Base & Contracts | 2,303 | ||||
Intangible Assets – Covenant Not to Compete | 132 | ||||
| 9,653 | |||||
Plus: | Accounts Receivable | 502 | |||
Property and Equipment | 356 | ||||
Less: | Current Liabilities | (124 | ) | ||
Deferred Tax Liability | (712 | ) | |||
Total Purchase Price | $ | 9,675 | |||
During the first quarter of fiscal year 2025, TIC-MS has contributed revenue of $0.9 million and operating income of $0.4 million, which includes the negative impact of amortization of the acquired intangible assets.
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 Becnel, Axiom, SteriQual and TIC-MS had occurred at the beginning of fiscal year 2024. 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) | ||||||||
First Quarter Ended | ||||||||
(in thousands except per share information) | June 29, 2024 | June 24, 2023 | ||||||
Total Revenue | $ | 66,727 | $ | 68,374 | ||||
Net Income | $ | 4,420 | $ | 3,790 | ||||
Basic Earnings Per Share | $ | 0.49 | $ | 0.50 | ||||
Diluted Earnings Per Share | $ | 0.48 | $ | 0.49 | ||||
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 June 29, 2024, $3.2 million of other holdback amounts unpaid are reflected in current liabilities on the Consolidated Balance Sheets and $0.8 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 quarter of fiscal year 2025, $0.5 million was paid to settle the earn-out obligation due to Cal OpEx Limited (d/b/a NEXA Enterprise Asset Management)(“NEXA”) for calendar 2023. This amount was paid in 4,320 shares of Transcat common stock. During the first quarter of fiscal year 2024, no contingent consideration and $0.3 million of other holdback amounts were paid.
During the first quarter of fiscal year 2025 and fiscal year 2024, acquisition costs of $0.4 million and $0.2 million, respectively, were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, estimates, beliefs, assumptions and predictions of future events and are identified by words such as “anticipate,” “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 and changes in interest rates, 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, natural disasters or widespread public health crises, 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 30, 2024. 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 30, 2024.
RESULTS OF OPERATIONS
Executive Summary
During our first quarter of fiscal year 2025, we had consolidated revenue of $66.7 million. This represented an increase of $6.1 million or 10.1% versus the first quarter of fiscal year 2024. This increase was primarily due to acquisitions, strong demand in our Service segment’s highly-regulated end markets and increased rental sales, which includes incremental revenue from acquisitions. See Note 5 – “Business Acquisitions” to our unaudited consolidated financial statements in this report for more information about the impact of our acquisitions.
Our first quarter of fiscal year 2025 gross profit was $22.7 million. This was an increase of $3.9 million or 21.1% versus the first quarter of fiscal year 2024. In addition, consolidated gross margin was 34.0%, an increase of 310 basis points versus the first quarter of fiscal year 2024. 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 $17.6 million in the first quarter of fiscal year 2025, an increase of $3.5 million or 24.8% when compared to the prior fiscal year first quarter. Included in operating expenses during the first quarter of fiscal year 2025 were incremental operating expenses from the acquisitions of Becnel, Axiom and SteriQual, investments in technology and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were 26.3% in the first quarter of fiscal year 2025, up 310 basis points from 23.2% in the first quarter of fiscal year 2024. Operating income was $5.1 million, an increase of $0.5 million, or 9.9% and operating margin decreased from 7.7% to 7.6% in the first quarter of fiscal year 2025.
Net income was $4.4 million in the first quarter of fiscal year 2025 versus $2.9 million in the first quarter of fiscal year 2024. The increase was primarily due to higher operating income and lower interest expense.
The following table presents, for the first quarter of fiscal year 2025 and fiscal year 2024, the components of our Consolidated Statements of Income:
(Unaudited) | ||||||||
First Quarter Ended | ||||||||
June 29, | June 24, | |||||||
2024 | 2023 | |||||||
As a Percentage of Total Revenue: | ||||||||
Service Revenue | 65.6 | % | 65.8 | % | ||||
Distribution Sales | 34.4 | % | 34.2 | % | ||||
Total Revenue | 100.0 | % | 100.0 | % | ||||
Gross Profit Percentage: | ||||||||
Service Gross Profit | 34.0 | % | 32.5 | % | ||||
Distribution Gross Profit | 33.9 | % | 27.7 | % | ||||
Total Gross Profit | 34.0 | % | 30.9 | % | ||||
Selling, Marketing and Warehouse Expenses | 11.7 | % | 10.7 | % | ||||
General and Administrative Expenses | 14.6 | % | 12.5 | % | ||||
Total Operating Expenses | 26.3 | % | 23.2 | % | ||||
Operating Income | 7.6 | % | 7.7 | % | ||||
Interest and Other (Income)/Expense, net | (0.2 | )% | 1.4 | % | ||||
Income Before Income Taxes | 7.8 | % | 6.2 | % | ||||
Provision for Income Taxes | 1.2 | % | 1.3 | % | ||||
Net Income | 6.6 | % | 4.9 | % | ||||
FIRST QUARTER ENDED June 29, 2024 COMPARED TO FIRST QUARTER ENDED June 24, 2023 (dollars in thousands):
Revenue:
First Quarter Ended | Change | |||||||||||||||
June 29, | June 24, | |||||||||||||||
2024 | 2023 | $ | % | |||||||||||||
Revenue: | ||||||||||||||||
Service | $ | 43,778 | $ | 39,853 | $ | 3,925 | 9.8 | % | ||||||||
Distribution | 22,929 | 20,745 | 2,184 | 10.5 | % | |||||||||||
Total | $ | 66,707 | $ | 60,598 | $ | 6,109 | 10.1 | % | ||||||||
Total revenue was $66.7 million, an increase of $6.1 million, or 10.1%, in our fiscal year 2025 first quarter compared to the prior fiscal year first quarter.
Service revenue, which accounted for 65.6% and 65.8% of our total revenue in the first quarter of fiscal years 2025 and 2024, respectively, increased $3.9 million or 9.8% from the first quarter of fiscal year 2024 to the first quarter of fiscal year 2025. This year-over-year increase included $1.3 million in revenue from the acquisitions of SteriQual and Becnel, and also included organic revenue growth of 6.4% driven by strong end-market demand and continued market share gains.
Our fiscal years 2025 and 2024 Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows:
FY 2025 | FY 2024 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Service Revenue Growth | 9.8 | % | 17.5 | % | 15.4 | % | 17.5 | % | 17.6 | % | ||||||||||
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 quarter of fiscal year 2025 and each quarter in fiscal year 2024 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period:
FY 2025 | FY 2024 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Trailing Twelve-Month: | ||||||||||||||||||||
Service Revenue | $ | 173,450 | $ | 169,525 | $ | 162,556 | $ | 157,024 | $ | 150,860 | ||||||||||
Service Revenue Growth | 15.0 | % | 17.0 | % | 16.3 | % | 17.1 | % | 17.6 | % | ||||||||||
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 quarter of fiscal year 2025 and for each quarter during fiscal year 2024:
FY 2025 | FY 2024 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Percent of Service Revenue: | ||||||||||||||||||||
In-House | 86.9 | % | 87.0 | % | 86.2 | % | 85.8 | % | 87.3 | % | ||||||||||
Outsourced | 12.0 | % | 11.9 | % | 12.6 | % | 13.0 | % | 11.6 | % | ||||||||||
Freight Billed to Customers | 1.1 | % | 1.1 | % | 1.2 | % | 1.2 | % | 1.1 | % | ||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
Our Distribution sales accounted for 34.4% of our total revenue in the first quarter of fiscal year 2025 and 34.2% of our total revenue in the first quarter of fiscal year 2024. During the first quarter of fiscal year 2025, Distribution segment sales were $22.9 million which was an increase of 10.5% or $2.2 million. This increase was due to $4.4 million of incremental revenue from the acquisitions of Axiom and Becnel offset by slower demand for our non-rental products.
The following table presents the quarterly historical trend of Distribution sales in fiscal years 2025 and 2024 compared to the prior year fiscal quarter:
FY 2025 | FY 2024 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Distribution Sales Growth (Decline) | 10.5 | % | 8.4 | % | 10.4 | % | 0.9 | % | (0.2 | )% | ||||||||||
The Distribution segment sales increase for the first quarter of fiscal year 2025 versus the first quarter of fiscal year 2024 was due to sales from the acquisitions of Axiom and Becnel.
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 quarter of fiscal year 2025 and each quarter of fiscal year 2024:
FY 2025 | FY 2024 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Total Pending Product Shipments | $ | 4,713 | $ | 5,079 | $ | 4,652 | $ | 6,332 | $ | 7,109 | ||||||||||
% of Pending Product | ||||||||||||||||||||
Shipments that were Backorders | 78.4 | % | 88.8 | % | 82.0 | % | 87.4 | % | 85.0 | % | ||||||||||
Our total pending product shipments at the end of the first quarter of fiscal year 2025 were $4.7 million, a decrease of $2.4 million versus the end of the first quarter of fiscal year 2024 and a decrease of $0.4 million since March 30, 2024. The decrease in pending product shipments and backorders was a result of improved fulfillment of existing orders.
Gross Profit:
First Quarter Ended | Change | |||||||||||||||
June 29, | June 24, | |||||||||||||||
2024 | 2023 | $ | % | |||||||||||||
Gross Profit: | ||||||||||||||||
Service | $ | 14,883 | $ | 12,971 | $ | 1,912 | 14.7 | % | ||||||||
Distribution | 7,772 | 5,739 | 2,033 | 35.4 | % | |||||||||||
Total | $ | 22,655 | $ | 18,710 | $ | 3,945 | 21.1 | % | ||||||||
Total gross profit for the first quarter of fiscal year 2025 was $22.7 million, an increase of $3.9 million or 21.1% versus the first quarter of fiscal year 2024. Total gross margin was 34.0% in the first quarter of fiscal year 2025, up from 30.9% in the first quarter of fiscal year 2024, a 310 basis point increase.
Service gross profit in the first quarter of fiscal year 2025 increased $1.9 million, or 14.7%, from the first quarter of fiscal year 2024. Service gross margin was 34.0% in the first quarter of fiscal year 2025, a 150 basis point increase versus the 32.5% in the first quarter of fiscal year 2024. This increase in Service gross margin was the result of increased revenue, which allows us to leverage our fixed-costs, and increases in technician productivity and automation.
The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:
FY 2025 | FY 2024 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Service Gross Margin | 34.0 | % | 35.7 | % | 32.5 | % | 34.0 | % | 32.5 | % | ||||||||||
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 2025 | FY 2024 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Distribution Gross Margin | 33.9 | % | 30.3 | % | 31.5 | % | 28.3 | % | 27.7 | % | ||||||||||
Distribution segment gross margin was 33.9% in the first quarter of fiscal year 2025 versus 27.7% in the first quarter of fiscal year 2024, a 620 basis point increase. The increase in Distribution gross margin was due to increased sales from higher-margin rental sales, which now includes the acquisitions of Axiom and Becnel.
Operating Expenses:
First Quarter Ended | Change | |||||||||||||||
June 29, | June 24, | |||||||||||||||
2024 | 2023 | $ | % | |||||||||||||
Operating Expenses: | ||||||||||||||||
Selling, Marketing and Warehouse | $ | 7,801 | $ | 6,469 | $ | 1,332 | 20.6 | % | ||||||||
General and Administrative | 9,755 | 7,601 | 2,154 | 28.3 | % | |||||||||||
Total | $ | 17,556 | $ | 14,070 | $ | 3,486 | 24.8 | % | ||||||||
Total operating expenses were $17.6 million in the first quarter of fiscal year 2025 versus $14.1 million during the first quarter of fiscal year 2024. 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 26.3% in the first quarter of fiscal year 2025 and 23.2% in the first quarter of fiscal year 2024, an increase of 310 basis points.
Income Taxes:
First Quarter Ended | Change | |||||||||||||||
June 29, | June 24, | |||||||||||||||
2024 | 2023 | $ | % | |||||||||||||
Provision for Income Taxes | $ | 820 | $ | 813 | $ | 7 | 0.9 | % | ||||||||
Our effective tax rate for the first quarter of fiscal years 2025 and 2024 was 15.7% and 21.6%, respectively. The tax provision is impacted by higher operating income and lower interest expense. The decrease in effective tax rate is due to the increase in our discrete items. 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 first quarter of fiscal years 2025 and 2024 was $0.6 million and less than $0.1 million, respectively.
Net Income:
First Quarter Ended | Change | |||||||||||||||
June 29, | June 24, | |||||||||||||||
2024 | 2023 | $ | % | |||||||||||||
Net Income | $ | 4,408 | $ | 2,949 | $ | 1,459 | 49.5 | % | ||||||||
Net income for the first quarter of fiscal year 2025 increased from the first quarter of fiscal year 2024 primarily due to higher operating income and lower interest expense.
Adjusted EBITDA:
Total Adjusted EBITDA, a non-GAAP measure, for the first quarter of fiscal year 2025 was $10.2 million, an increase of $1.7 million or 20.4% versus the first quarter of fiscal year 2024. 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 15.3% for the first quarter of fiscal year 2025 from 14.0% for the first quarter of fiscal year 2024. The increase in Adjusted EBITDA during the first quarter of fiscal year 2025 was primarily driven by increases in operating income, depreciation and amortization expense and acquisition transaction expenses.
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, and other 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.
First Quarter Ended | ||||||||
(dollars in thousands) | June 29, | June 24, | ||||||
2024 | 2023 | |||||||
Net Income | $ | 4,408 | $ | 2,949 | ||||
+ Interest (Income) Expense | (260 | ) | 814 | |||||
+ Other Expense | 131 | 64 | ||||||
+ Tax Provision | 820 | 813 | ||||||
Operating Income | 5,099 | 4,640 | ||||||
+ Depreciation & Amortization | 4,113 | 2,790 | ||||||
+ Transaction Expense | 434 | 185 | ||||||
+ Other (Expense) | (131 | ) | (64 | ) | ||||
+ Noncash Stock Compensation | 697 | 930 | ||||||
Adjusted EBITDA | $ | 10,212 | $ | 8,481 | ||||
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 and acquisition amortization of backlog; 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.
First Quarter Ended | ||||||||
June 29, | June 24, | |||||||
2024 | 2023 | |||||||
Net Income | $ | 4,408 | $ | 2,949 | ||||
+ Amortization of Intangible Assets | 1,749 | 1,093 | ||||||
+ Acquisition Amortization of Backlog | 24 | - | ||||||
+ Acquisition Deal Costs | 434 | 367 | ||||||
+ Acquisition Stock Expense | 234 | - | ||||||
+ Income Tax Effect @ 25% | (610 | ) | (365 | ) | ||||
Adjusted Net Income | 6,239 | 4,044 | ||||||
Average Diluted Shares Outstanding | 9,196 | 7,762 | ||||||
Diluted Earnings Per Share – GAAP | $ | 0.48 | $ | 0.38 | ||||
Adjusted Diluted Earnings Per Share | $ | 0.68 | $ | 0.52 | ||||
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 three months of fiscal year 2025 was 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 three months of fiscal year 2025. Our leverage ratio, as defined in the Credit Agreement, was 0.08 at June 29, 2024, compared with 0.10 at March 30, 2024.
As of June 29, 2024, $80.0 million was available for borrowing under the revolving credit facility. As of June 29, 2024, there were no amounts outstanding under the revolving credit facility. During the first quarter of fiscal year 2025 , we used $16.0 million, drawn from cash and cash equivalents on hand for a business acquisition. During the first quarter of fiscal year 2024, we used $2.9 million, drawn from the revolving credit facility for a business acquisition.
As of June 29, 2024, $3.6 million was outstanding on the 2018 Term Loan, of which $2.4 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):
Three Months Ended | ||||||||
June 29, | June 24, | |||||||
2024 | 2023 | |||||||
Cash Provided by (Used in): | ||||||||
Operating Activities | $ | 8,924 | $ | 7,536 | ||||
Investing Activities | $ | (4,094 | ) | $ | (5,636 | ) | ||
Financing Activities | $ | (1,935 | ) | $ | (859 | ) | ||
Operating Activities: Net cash provided by operating activities was $8.9 million during the first quarter of fiscal year 2025 compared to $7.5 million of net cash provided by operating activities during the first quarter of fiscal year 2024. The year-over-year increase in cash provided by operating activities 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 $0.3 million during the first quarter of fiscal year 2025 inclusive of $3.1 million of accounts receivable acquired during the period. During the first quarter of fiscal year 2024, accounts receivable decreased $2.3 million inclusive of $0.5 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 June 29, 2024 and June 24, 2023 (dollars in thousands): |
June 29, | June 24, | |||||||
2024 | 2023 | |||||||
Net Sales, for the last two fiscal months | $ | 47,789 | $ | 43,430 | ||||
Accounts Receivable, net | $ | 48,156 | $ | 42,356 | ||||
Days Sales Outstanding | 63 | 61 | ||||||
● | 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 increased $0.6 million during the first quarter of fiscal year 2025. Our inventory balance decreased by $1.8 million during the first quarter of fiscal year 2024 due to strategic inventory purchases during the first three months of the prior 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 increased $1.5 million during the first quarter of fiscal year 2025. Accounts payable decreased $1.2 million during the first quarter of fiscal year 2024. 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 quarter of fiscal year 2025, accrued compensation and other current liabilities decreased by $4.1 million, inclusive of $0.1 million from assumed liabilities, contingent consideration and purchase price holdbacks from acquisition transactions. During the first quarter of fiscal year 2024, accrued compensation and other current liabilities decreased by $0.9 million. The change from the first quarter of fiscal year 2024 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 quarter of fiscal year 2025 income taxes payable increased by $0.8 million. During the first quarter of fiscal year 2024, income taxes payable increased by $0.6 million. |
Investing Activities: During the first quarter of fiscal years 2025 and 2024, we invested $3.7 million and $2.8 million, respectively, in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and our rental business.
During the first quarter of fiscal years 2025 and 2024, we used $16.0 million and $2.9 million, respectively, for business acquisitions.
During the first quarter of fiscal year 2025, we paid $0.5 million of contingent consideration relating to business acquisitions. During the first quarter of fiscal year 2024, we paid $0.3 million of other holdbacks related to business acquisitions.
Financing Activities: During the first quarter of fiscal year 2025, $0.3 million in cash was generated from the issuance of common stock. In addition, we used $0.6 million for scheduled repayments of our term loan and $1.6 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 2025, which are shown as a repurchase of shares of our common stock.
During the first quarter of fiscal year 2024, $0.2 million in cash was generated from the issuance of common stock. In addition, we used $0.6 million for scheduled repayments of our term loan, $0.2 million to repay our revolving line of credit and $0.3 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.
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. 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 expect another year of organic Service revenue growth in the high single-digit to low double-digit range when normalized for the extra week in fiscal 2024 and gross margin expansion. Automation of our calibration processes and overall process improvement will continue to be key enablers of future margin expansion. We will continue to leverage our expertise and proven track record of successful acquisitions to drive synergistic growth opportunities with a sharp focus on integration. Our robust and diverse acquisition pipeline enables strategic, accretive acquisitions that will be a key component of our go-forward strategy.
We expect our income tax rate to range between 24% and 26% for full fiscal year 2025. 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. During the first quarter of fiscal year 2025, we had no borrowings under our revolving credit facility. In the event interest rates were to move by 1%, our yearly interest expense would increase or decrease by approximately $0.4 million assuming borrowings of approximately $40 million under our revolving credit facility. As of June 29, 2024, $80.0 million was available for borrowing under the revolving credit facility. As of June 29, 2024, 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 June 29, 2024, $3.6 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 through December 2025.
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 three months of fiscal year 2025 for our revolving credit facility was 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 June 29, 2024, 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 quarter of fiscal year 2025 and 2024 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 in both the first quarter of fiscal years 2025 and 2024, 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 June 29, 2024, we had a foreign exchange contract, which matured in July 2024, outstanding in the notional amount of $1.8 million. The foreign exchange contract was renewed in July 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 first quarter of fiscal year 2025) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
INDEX TO EXHIBITS
(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. |
| # | Management contract or compensatory plan or arrangement |
| ^ | Schedules and similar attachments have been omitted pursuant to Item 601 (a)(5) of Regulation S-K. The Company will furnish a copy of any omitted |
| schedule or similar attachment to the Securities and Exchange Commission upon request. |
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: August 7, 2024 | /s/ Lee D. Rudow | |
Lee D. Rudow | ||
President and Chief Executive Officer (Principal Executive Officer) | ||
Date: August 7, 2024 | /s/ Thomas L. Barbato | |
Thomas L. Barbato | ||
Senior Vice President of Finance and Chief Financial Officer (Principal Financial Officer) |