Transcat Inc 10-Q for FY2022 Q3
Transcat Inc (TRNS)
About this 10-Q
Transcat Inc filed this 10-Q on February 2, 2022, covering the quarter ended December 25, 2021 (FY2022 Q3).
Headline figures
Quarter ended December 25, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $50.9M
- up 15.5% from $44.06M a year earlier
- Net income
- $1.63M
- down 7.5% from net income of $1.76M a year earlier
- Diluted EPS
- $0.21
- down 8.7% from $0.23 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM
|
(Mark one) | |
|
|
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|
| |
|
For the quarterly period ended: | |
|
| |
|
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:
(Exact name of registrant as specified in its charter)
|
|
| |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
|
| ||
|
| ||
|
(Address of principal executive offices) (Zip Code) | ||
|
| ||
|
( (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 |
|
|
|
|
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.
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).
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 ☐ |
|
|
|
|
Non-accelerated filer ☐ |
Smaller reporting company | |||
|
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The number of shares of common stock, par value $0.50 per share, of the registrant outstanding as of January 28, 2022 was
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
|
(Unaudited) |
(Unaudited) | |||||||||||||||
|
Third Quarter Ended |
Nine Months Ended | |||||||||||||||
|
December 25, |
December 26, |
December 25, |
December 26, | |||||||||||||
|
2021 |
2020 |
2021 |
2020 | |||||||||||||
|
Service Revenue |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
Distribution Sales |
|
|
|
| ||||||||||||
|
Total Revenue |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Cost of Service Revenue |
|
|
|
| ||||||||||||
|
Cost of Distribution Sales |
|
|
|
| ||||||||||||
|
Total Cost of Revenue |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Gross Profit |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Selling, Marketing and Warehouse Expenses |
|
|
|
| ||||||||||||
|
General and Administrative Expenses |
|
|
|
| ||||||||||||
|
Total Operating Expenses |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Operating Income |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Interest and Other Expense, net |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Income Before Income Taxes |
|
|
|
| ||||||||||||
|
Provision for Income Taxes |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Net Income |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
| ||||||||||||||||
|
Basic Earnings Per Share |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
Average Shares Outstanding |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Diluted Earnings Per Share |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
Average Shares Outstanding |
|
|
|
| ||||||||||||
See accompanying notes to consolidated financial statements.
1
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
|
(Unaudited) |
(Unaudited) | |||||||||||||||
|
Third Quarter Ended |
Nine Months Ended | |||||||||||||||
|
December 25, |
December 26, |
December 25, |
December 26, | |||||||||||||
|
2021 |
2020 |
2021 |
2020 | |||||||||||||
|
Net Income |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
| ||||||||||||||||
|
Other Comprehensive (Loss) Income: | ||||||||||||||||
|
Currency Translation Adjustment |
( |
) |
|
( |
) |
| ||||||||||
|
Other, net of tax effects |
|
|
|
| ||||||||||||
|
Total Other Comprehensive (Loss) Income |
( |
) |
|
( |
) |
| ||||||||||
|
| ||||||||||||||||
|
Comprehensive Income |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
See accompanying notes to consolidated financial statements.
2
TRANSCAT, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
|
(Unaudited) December 25, |
(Audited) March 27, | |||||||
|
2021 |
2021 | |||||||
|
ASSETS | ||||||||
|
Current Assets: | ||||||||
|
Cash |
$ |
|
$ |
| ||||
|
Accounts Receivable, less allowance for doubtful accounts of $ |
|
| ||||||
|
Other Receivables |
|
| ||||||
|
Inventory, net |
|
| ||||||
|
Prepaid Expenses and Other Current Assets |
|
| ||||||
|
Total Current Assets |
|
| ||||||
|
Property and Equipment, net |
|
| ||||||
|
Goodwill |
|
| ||||||
|
Intangible Assets, net |
|
| ||||||
|
Right to Use Assets, net |
|
| ||||||
|
Other Assets |
|
| ||||||
|
Total Assets |
$ |
|
$ |
| ||||
|
| ||||||||
|
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
|
Current Liabilities: | ||||||||
|
Accounts Payable |
$ |
|
$ |
| ||||
|
Accrued Compensation and Other Liabilities |
|
| ||||||
|
Income Taxes Payable |
|
| ||||||
|
Current Portion of Long-Term Debt |
|
| ||||||
|
Total Current Liabilities |
|
| ||||||
|
Long-Term Debt |
|
| ||||||
|
Deferred Tax Liabilities |
|
| ||||||
|
Lease Liabilities |
|
| ||||||
|
Other Liabilities |
|
| ||||||
|
Total Liabilities |
|
| ||||||
|
| ||||||||
|
Shareholders' Equity: | ||||||||
|
Common Stock, par value $ |
|
| ||||||
|
Capital in Excess of Par Value |
|
| ||||||
|
Accumulated Other Comprehensive Loss |
( |
) |
( |
) | ||||
|
Retained Earnings |
|
| ||||||
|
Total Shareholders' Equity |
|
| ||||||
|
Total Liabilities and Shareholders' Equity |
$ |
|
$ |
| ||||
See accompanying notes to consolidated financial statements.
3
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
|
(Unaudited) Nine Months Ended | ||||||||
|
December 25, |
December 26, | |||||||
|
2021 |
2020 | |||||||
|
Cash Flows from Operating Activities: | ||||||||
|
Net Income |
$ |
|
$ |
| ||||
|
Adjustments to Reconcile Net Income to Net Cash | ||||||||
|
Provided by Operating Activities: | ||||||||
|
Net Loss on Disposal of Property and Equipment |
|
| ||||||
|
Deferred Income Taxes |
|
| ||||||
|
Depreciation and Amortization |
|
| ||||||
|
Provision for Accounts Receivable and Inventory Reserves |
|
| ||||||
|
Stock-Based Compensation |
|
| ||||||
|
Changes in Assets and Liabilities: | ||||||||
|
Accounts Receivable and Other Receivables |
|
| ||||||
|
Inventory |
( |
) |
| |||||
|
Prepaid Expenses and Other Assets |
( |
) |
( |
) | ||||
|
Accounts Payable |
|
( |
) | |||||
|
Accrued Compensation and Other Liabilities |
( |
) |
| |||||
|
Income Taxes Payable |
( |
) |
| |||||
|
Net Cash Provided by Operating Activities |
|
| ||||||
|
| ||||||||
|
Cash Flows from Investing Activities: | ||||||||
|
Purchases of Property and Equipment |
( |
) |
( |
) | ||||
|
Proceeds from Sale of Property and Equipment |
|
| ||||||
|
Business Acquisitions, net of cash acquired |
( |
) |
( |
) | ||||
|
Net Cash Used in Investing Activities |
( |
) |
( |
) | ||||
|
| ||||||||
|
Cash Flows from Financing Activities: | ||||||||
|
Proceeds from (Repayments of) Revolving Credit Facility, net |
|
( |
) | |||||
|
Repayments of Term Loan |
( |
) |
( |
) | ||||
|
Issuance of Common Stock |
|
| ||||||
|
Repurchase of Common Stock |
( |
) |
( |
) | ||||
|
Net Cash Provided by (Used in) Financing Activities |
|
( |
) | |||||
|
| ||||||||
|
Effect of Exchange Rate Changes on Cash |
( |
) |
( |
) | ||||
|
| ||||||||
|
Net Increase in Cash |
|
| ||||||
|
Cash at Beginning of Period |
|
| ||||||
|
Cash at End of Period |
$ |
|
$ |
| ||||
|
| ||||||||
|
Supplemental Disclosure of Cash Flow Activity: | ||||||||
|
Cash paid during the period for: | ||||||||
|
Interest |
$ |
|
$ |
| ||||
|
Income Taxes, net |
$ |
|
$ |
| ||||
|
Supplemental Disclosure of Non-Cash Investing and Financing Activities: | ||||||||
|
Common stock issued for NEXA acquisition |
$ |
|
$ |
| ||||
|
Assets acquired and liabilities assumed in business combinations: | ||||||||
|
Accrued contingent consideration related to NEXA acquisition |
$ |
|
$ |
| ||||
See accompanying notes to consolidated financial statements.
4
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousands, Except Par Value Amounts)
(Unaudited)
|
Capital | |||||||||||||||||||||||
|
Common Stock |
In |
Accumulated | |||||||||||||||||||||
|
Issued |
Excess |
Other | |||||||||||||||||||||
|
$0.50 Par Value |
of Par |
Comprehensive |
Retained | ||||||||||||||||||||
|
Shares |
Amount |
Value |
Income (Loss) |
Earnings |
Total | ||||||||||||||||||
|
Balance as of March 28, 2020 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
| |||||||||||
|
Issuance of Common Stock |
|
|
|
- |
- |
| |||||||||||||||||
|
Repurchase of Common Stock |
( |
) |
( |
) |
( |
) |
- |
( |
) |
( |
) | ||||||||||||
|
Stock-Based Compensation |
|
|
|
- |
- |
| |||||||||||||||||
|
Other Comprehensive Income |
- |
- |
- |
|
- |
| |||||||||||||||||
|
Net Income |
- |
- |
- |
- |
|
| |||||||||||||||||
|
Balance as of June 27, 2020 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
| |||||||||||
|
| |||||||||||||||||||||||
|
Issuance of Common Stock |
|
|
|
- |
- |
| |||||||||||||||||
|
Stock-Based Compensation |
|
|
|
- |
- |
| |||||||||||||||||
|
Other Comprehensive Income |
- |
- |
- |
|
- |
| |||||||||||||||||
|
Net Income |
- |
- |
- |
- |
|
| |||||||||||||||||
|
Balance as of September 26, 2020 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
| |||||||||||
|
| |||||||||||||||||||||||
|
Issuance of Common Stock |
|
|
|
- |
- |
| |||||||||||||||||
|
Stock-Based Compensation |
- |
- |
|
- |
- |
| |||||||||||||||||
|
Other Comprehensive Income |
- |
- |
- |
|
- |
| |||||||||||||||||
|
Net Income |
- |
- |
- |
- |
|
| |||||||||||||||||
|
Balance as of December 26, 2020 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
| |||||||||||
See accompanying notes to consolidated financial statements.
5
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In Thousands, Except Par Value Amounts)
(Unaudited)
|
Capital | |||||||||||||||||||||||
|
Common Stock |
In |
Accumulated | |||||||||||||||||||||
|
Issued |
Excess |
Other | |||||||||||||||||||||
|
$0.50 Par Value |
of Par |
Comprehensive |
Retained | ||||||||||||||||||||
|
Shares |
Amount |
Value |
Income (Loss) |
Earnings |
Total | ||||||||||||||||||
|
Balance as of March 27, 2021 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
| |||||||||||
|
Issuance of Common Stock |
|
|
|
- |
- |
| |||||||||||||||||
|
Repurchase of Common Stock |
( |
) |
( |
) |
( |
) |
- |
( |
) |
( |
) | ||||||||||||
|
Stock-Based Compensation |
|
|
|
- |
- |
| |||||||||||||||||
|
Other Comprehensive Income |
- |
- |
- |
|
- |
| |||||||||||||||||
|
Net Income |
- |
- |
- |
- |
|
| |||||||||||||||||
|
Balance as of June 26, 2021 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
| |||||||||||
|
| |||||||||||||||||||||||
|
Issuance of Common Stock |
|
|
|
- |
- |
| |||||||||||||||||
|
Repurchase of Common Stock |
( |
) |
( |
) |
( |
) |
- |
( |
) |
( |
) | ||||||||||||
|
Stock-Based Compensation |
|
|
|
- |
- |
| |||||||||||||||||
|
Other Comprehensive Loss |
- |
- |
- |
( |
) |
- |
( |
) | |||||||||||||||
|
Net Income |
- |
- |
- |
- |
|
| |||||||||||||||||
|
Balance as of September 25, 2021 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
| |||||||||||
|
| |||||||||||||||||||||||
|
Issuance of Common Stock |
|
|
|
- |
- |
| |||||||||||||||||
|
Stock-Based Compensation |
|
- |
|
- |
- |
| |||||||||||||||||
|
Other Comprehensive Loss |
- |
- |
- |
( |
) |
- |
( |
) | |||||||||||||||
|
Net Income |
- |
- |
- |
- |
|
| |||||||||||||||||
|
Balance as of December 25, 2021 |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
| |||||||||||
See accompanying notes to consolidated financial statements.
6
TRANSCAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL
Description of Business: Transcat, Inc. (“Transcat,” “we,” “us,” “our” or the “Company”) is a leading provider of accredited calibration and laboratory instrument services and a value-added distributor of professional grade test, measurement and control instrumentation. The Company is focused on providing services and products to highly regulated industries, particularly the life science industry, which includes pharmaceutical, biotechnology, medical device and other FDA-regulated businesses. Additional industries served include industrial manufacturing; energy and utilities, including oil and gas; chemical manufacturing; FAA-regulated businesses, including aerospace and defense and other industries that require accuracy in their processes, confirmation of the capabilities of their equipment, and for which the risk of failure is very costly.
Basis of Presentation: Transcat’s unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 27, 2021 (“fiscal year 2021”) contained in the Company’s 2021 Annual Report on Form 10-K filed with the SEC.
Revenue Recognition: Distribution sales are recorded when an order’s title and risk of loss transfers to the customer. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. The majority of the Company’s revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue over time using the output method-time elapsed as this portrays the transfer of control to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for product shipped or services performed. Sales taxes and other taxes billed and collected from customers are excluded from revenue. The Company generally invoices its customers for freight, shipping, and handling charges. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data.
Revenue recognized from prior period performance obligations for the third quarter of the fiscal year ending March 26, 2022 (“fiscal year 2022”) was immaterial. As of December 25, 2021, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, the Company applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of December 25, 2021 and March 27, 2021 were immaterial. Payment terms are generally 30 to 45 days. See Note 4 for disaggregated revenue information.
Fair Value of Financial Instruments: Transcat has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Company to develop its own assumptions. The carrying amount of debt on the Consolidated Balance Sheets approximates fair value due to variable interest rate pricing, and the carrying amounts for cash, accounts receivable, other receivables, accounts payable and accrued compensation and other liabilities approximate fair value due to their short-term nature. Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds and are valued based on Level 1 inputs. At each of December 25, 2021 and March 27, 2021, investment assets totaled $
7
Stock-Based Compensation: The Company measures the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. The Company records compensation cost related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period of each award. Excess tax benefits for share-based award activity are reflected in the Consolidated Statements of Income as a component of the provision for income taxes. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. During the first nine months of each of fiscal year 2022 and fiscal year 2021, the Company did not capitalize any stock-based compensation costs as part of an asset. The Company estimates forfeiture rates based on its historical experience. During the first nine months of fiscal year 2022 and fiscal year 2021, the Company recorded non-cash stock-based compensation expense of $
Foreign Currency Translation and Transactions: The accounts of Cal OpEx Limited (d/b/a NEXA Enterprise Asset Management), an Irish company, and Transcat Canada Inc., both of which are wholly-owned subsidiaries of the Company, are maintained in the local currency, the Euro and the Canadian dollar, respectively, and have been translated to U.S. dollars. Accordingly, the amounts representing assets and liabilities have been translated at the period-end rates of exchange and related revenue and expense accounts have been translated at an average rate of exchange during the period. Gains and losses arising from translation of Cal OpEx Limited’s and Transcat Canada Inc.’s financial statements into U.S. dollars are recorded directly to the accumulated other comprehensive loss component of shareholders’ equity.
Transcat records foreign currency gains and losses on Irish and Canadian business transactions. The net foreign currency loss was less than $
Earnings Per Share: Basic earnings per share of common stock are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of stock options and unvested restricted stock units using the treasury stock method in periods in which they have a dilutive effect. In computing the per share effect of assumed conversion, funds which would have been received from the exercise of options and unvested restricted stock units and the related tax benefits are considered to have been used to purchase shares of common stock at the average market prices during the period, and the resulting net additional shares of common stock are included in the calculation of average shares of common stock outstanding.
For each of the third quarter of fiscal years 2022 and 2021, the net additional common stock equivalents had a ($
|
Third Quarter Ended |
Nine Months Ended | |||||||
|
December 25, |
December 26, |
December 25, |
December 26, | |||||
|
2021 |
2020 |
2021 |
2020 | |||||
|
Average Shares Outstanding – Basic |
|
|
|
| ||||
|
Effect of Dilutive Common Stock Equivalents |
|
|
|
| ||||
|
Average Shares Outstanding – Diluted |
|
|
|
| ||||
|
Anti-dilutive Common Stock Equivalents |
|
|
|
| ||||
8
Goodwill and Intangible Assets: Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value and whether it is necessary to perform the goodwill impairment process.
Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. The Company estimates the fair value of its reporting units using the fair market value measurement requirement. Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. A summary of changes in the Company’s goodwill and intangible assets is as follows (in thousands):
|
Goodwill |
Intangible Assets | ||||||||||||||||||
|
Distribution |
Service |
Total |
Distribution |
Service |
Total | ||||||||||||||
|
| |||||||||||||||||||
|
Net Book Value as of March 27, 2021 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
| |||||||
|
Additions |
|
|
|
|
|
| |||||||||||||
|
Amortization |
|
|
|
( |
) |
( |
) |
( |
) | ||||||||||
|
Currency Translation Adjustment |
|
( |
) |
( |
) |
|
( |
) |
( |
) | |||||||||
|
Net Book Value as of December 25, 2021 |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
| |||||||
Recently Issued Accounting Pronouncements: In June 2016, the Financial Accounting Standard Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU replaces the "incurred loss" model with an "expected credit loss" model that requires entities to estimate an expected lifetime credit loss on financial assets, including trade accounts receivable. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Allowance for doubtful accounts is the most significant item for the Company under this ASU. As credit losses from the Company's trade receivables have not historically been significant, the Company anticipates that the adoption of the ASU will not have a material impact on its consolidated financial statements.
NOTE 2 – LONG-TERM DEBT
On July 7, 2021, we entered into the Second Amended and Restated Credit Facility Agreement (the “2021 Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), that amended and restated in its entirety the Company’s Amended and Restated Credit Facility Agreement dated as of October 30, 2017, as amended by Amended and Restated Credit Facility Agreement Amendment 1 dated December 10, 2018 and Amended and Restated Credit Facility Agreement Amendment 2 (“Amendment Two”) dated May 18, 2020 (as amended, the “Prior Credit Agreement”).
The 2021 Credit Agreement increased the revolving credit commitment (the “Revolving Credit Commitment”) from $
In addition, the 2021 Credit Agreement provides that, assuming no event of default, restricted payments up to $
9
The 2021 Credit Agreement superseded in its entirety, the Prior Credit Agreement. Amendment Two to the Prior Credit Agreement had previously extended the term of the revolving credit facility to
Amendment Two had modified the definition of the applicable rate used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and it amended the definition of permitted acquisitions to amend borrowings available under the revolving credit facility for acquisitions. In addition, Amendment Two had amended the definition of restricted payments to exclude amounts up to $
As of December 25, 2021, $
As of December 25, 2021, $
Interest and Other Costs: Interest on outstanding borrowings under the revolving credit facility accrue, at Transcat’s election, at either the variable one-month LIBOR or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case (subject to a
Covenants: The 2021 Credit Agreement has certain covenants with which the Company must comply, including a fixed charge ratio covenant and a leverage ratio covenant. The Company was in compliance with all loan covenants and requirements during the third quarter of fiscal year 2022. Our leverage ratio was
Pursuant to the Prior Credit Agreement, we were required to comply with a fixed charge ratio covenant and a leverage ratio covenant, which were modified by the 2021 Credit Agreement. The allowable leverage ratio under the Prior Credit Agreement for the second, third and fourth fiscal quarter of fiscal year 2021 and the first quarter of fiscal year 2022 was a maximum multiple of
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.
10
NOTE 3 – STOCK-BASED COMPENSATION
In September 2021, the Transcat, Inc. 2021 Stock Incentive Plan (the “2021 Plan”) was approved by shareholders and became effective. The 2021 Plan replaced the Transcat, Inc. 2003 Incentive Plan (the “2003 Plan”). Shares available for grant under the 2021 Plan include any shares remaining available for issuance under the 2003 Plan and any shares that are subject to outstanding awards under the 2003 Plan that are subsequently canceled, expired, forfeited, or otherwise not issued or are settled in cash. The 2021 Plan provides for, among other awards, grants of restricted stock units and stock options to directors, officers and key employees at the fair market value at the date of grant. At December 25, 2021,
The Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete tax benefits related to share-based compensation and stock option activity during the first nine months of fiscal year 2022 and 2021 were $
Restricted Stock Units: The Company grants time-based and performance-based restricted stock units as a component of executive and key employee compensation. Expense for restricted stock unit grants is recognized on a straight-line basis for the service period of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock unit grants is the quoted market price for the Company’s common stock on the date of grant. These restricted stock units are either time vested, or vest following the third fiscal year from the date of grant subject to cumulative diluted earnings per share targets over the eligible period.
Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the unit that coincides with the actual outcome of the performance conditions. On an interim basis, the Company records compensation cost based on the estimated level of achievement of the performance conditions. The expense relating to the time vested restricted stock units is recognized on a straight-line basis over the requisite service period for the entire award.
The Company achieved
|
|
|
Total |
Grant Date |
Estimated | ||||||
|
Number |
Fair |
Level of | ||||||||
|
Date |
Measurement |
of Units |
Value |
Achievement at | ||||||
|
Granted |
Period |
Outstanding |
Per Unit |
December 25, 2021 | ||||||
|
October 2018 |
October 2018 – September 2027 |
|
$ |
|
Time Vested | |||||
|
March 2019 |
April 2019 – March 2022 |
|
$ |
|
| |||||
|
March 2019 |
April 2019 – March 2022 |
|
$ |
|
Time Vested | |||||
|
March 2020 |
April 2020 – March 2023 |
|
$ |
|
Time Vested | |||||
|
July 2020 |
July 2020 – March 2023 |
|
$ |
|
Time Vested | |||||
|
September 2020 |
September 2020 –July 2023 |
|
$ |
|
Time Vested | |||||
|
September 2020 |
September 2020 – September 2023 |
|
$ |
|
Time Vested | |||||
|
January 2021 |
January 2021 – January 2024 |
|
$ |
|
Time Vested | |||||
|
May 2021 |
May 2021 – May 2024 |
|
$ |
|
Time Vested | |||||
|
June 2021 |
June 2021 – May 2024 |
|
$ |
|
| |||||
|
June 2021 |
June 2021 – May 2024 |
|
$ |
|
Time Vested | |||||
|
September 2021 |
September 2021 – September 2024 |
|
$ |
|
Time Vested | |||||
|
September 2021 |
September 2021 – September 2022 |
|
$ |
|
Time Vested | |||||
Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $
11
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
The following table summarizes the Company’s options as of and for the first nine months of fiscal year 2022:
|
Weighted | |||||||||||
|
Weighted Average |
Average Remaining | ||||||||||
|
Number |
Exercise |
Contractual |
Aggregate | ||||||||
|
of |
Price Per |
Term (in |
Intrinsic | ||||||||
|
Shares |
Share |
years) |
Value | ||||||||
|
Outstanding as of March 27, 2021 |
|
$ |
| ||||||||
|
Granted |
|
$ |
| ||||||||
|
Exercised |
( |
) |
$ |
| |||||||
|
Forfeited |
( |
) |
$ |
| |||||||
|
Redeemed |
| ||||||||||
|
Outstanding as of December 25, 2021 |
|
$ |
|
|
$ |
| |||||
|
Exercisable as of December 25, 2021 |
|
$ |
|
|
$ |
| |||||
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of fiscal year 2022 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all holders exercised their options on December 25, 2021. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.
Total expense related to stock options was $
NOTE 4 – SEGMENT INFORMATION
Transcat has
|
Third Quarter Ended |
Nine Months Ended | |||||||||||||||
|
December 25, |
December 26, |
December 25, |
December 26, | |||||||||||||
|
2021 |
2020 |
2021 |
2020 | |||||||||||||
|
Revenue: | ||||||||||||||||
|
Service |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
Distribution |
|
|
|
| ||||||||||||
|
Total |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Gross Profit: | ||||||||||||||||
|
Service |
|
|
|
| ||||||||||||
|
Distribution |
|
|
|
| ||||||||||||
|
Total |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Operating Expenses: | ||||||||||||||||
|
Service (1) |
|
|
|
| ||||||||||||
|
Distribution (1) |
|
|
|
| ||||||||||||
|
Total |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Operating Income: | ||||||||||||||||
|
Service |
|
|
|
| ||||||||||||
|
Distribution |
|
|
|
| ||||||||||||
|
Total |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Unallocated Amounts: | ||||||||||||||||
|
Interest and Other Expense, net |
|
|
|
| ||||||||||||
|
Provision for Income Taxes |
|
|
|
| ||||||||||||
|
Total |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Net Income |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
|
(1) |
|
|
12
NOTE 5 – BUSINESS ACQUISITIONS
Tangent: Effective
The purchase price for Tangent was approximately $
NEXA: Effective
The total purchase price for NEXA was approximately $26.2 million and was paid with $
The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, working capital adjustments and true-up of the fair value of the contingent consideration, assets acquired and liabilities assumed. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of NEXA’s assets and liabilities acquired on August 31, 2021 (in thousands):
|
Goodwill |
$ |
|
| |||
|
Intangible Assets – Customer Base & Contracts |
| |||||
|
Intangible Assets – Backlog |
| |||||
|
Intangible Assets – Covenant Not to Compete |
| |||||
|
|
| |||||
|
Plus: |
Cash |
|
| |||
|
Accounts Receivable |
|
| ||||
|
Non-Current Assets |
| |||||
|
Less: |
Current Liabilities |
( |
) | |||
|
Deferred Tax Liability |
( |
) | ||||
|
Total Purchase Price |
$ |
|
| |||
13
From the date of acquisition, NEXA has contributed revenue of $
Upstate Metrology: Effective
The total purchase price for the assets of Upstate Metrology was approximately $0.9 million. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Upstate Metrology’s assets and liabilities acquired on April 29, 2021 (in thousands):
|
Goodwill |
$ |
|
| |||
|
Plus: |
Current Assets |
|
| |||
|
Non-Current Assets |
|
| ||||
|
Less: |
Current Liabilities |
( |
) | |||
|
Total Purchase Price |
$ |
|
| |||
BioTek: Effective
The total purchase price for the assets of BioTek was approximately $3.5 million. $
|
Goodwill |
$ |
|
| |||
|
Intangible Assets – Customer Base & Contracts |
| |||||
|
Intangible Assets – Covenant Not to Compete |
| |||||
|
| ||||||
|
Plus: |
Current Assets |
|
| |||
|
Non-Current Assets |
|
| ||||
|
Total Purchase Price |
$ |
|
| |||
14
The results of acquired businesses are included in Transcat’s consolidated operating results as of the dates the businesses were acquired. The following unaudited pro forma information presents the Company’s results of operations as if the acquisitions of NEXA, Upstate Metrology and BioTek had occurred at the beginning of fiscal year 2021. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transactions had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods.
|
(Unaudited) |
(Unaudited) | ||||||||
|
Quarter Ended |
Nine Months Ended | ||||||||
|
(in thousands except per share information) |
December 26, 2020 |
December 25, 2021 |
December 26, 2020 | ||||||
|
Total Revenue |
$ |
|
$ |
|
$ |
| |||
|
Net Income |
$ |
|
$ |
|
$ |
| |||
|
Basic Earnings Per Share |
$ |
|
$ |
|
$ |
| |||
|
Diluted Earnings Per Share |
$ |
|
$ |
|
$ |
| |||
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. As of December 25, 2021, $
During the first nine months of fiscal year 2022, acquisition costs of $
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, estimates, beliefs, assumptions and predictions of future events and are identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “projects,” “seek,” “strategy,” “target,” “intends,” “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, the impact of and our response to the COVID-19 pandemic, the highly competitive nature of the industries in which we compete and in the nature of our two business segments, cybersecurity risks, the risk of significant disruptions in our information technology systems, our inability to recruit, train and retain quality employees, skilled technicians and senior management, fluctuations in our operating results, competition in the rental market, the volatility of our stock price, our ability to adapt our technology, reliance on our enterprise resource planning system, technology updates, risks related to our acquisition strategy and the integration of the businesses we acquire, volatility in our customers’ industries, changes in vendor rebate programs, our vendors’ abilities to provide desired inventory, the risks related to current and future indebtedness, the relatively low trading volume of our common stock, foreign currency rate fluctuations and the impact of general economic conditions on our business. 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 this quarterly report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended March 27, 2021. 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 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 27, 2021.
RESULTS OF OPERATIONS
Executive Summary
During our third quarter of fiscal year 2022, we achieved consolidated revenue of $50.9 million. This represented an increase of $6.8 million or 15.5% versus the third quarter of fiscal year 2021. This increase was primarily due to the recently completed acquisitions, strong demand in our Service segment’s highly-regulated end markets and improved market conditions in our Distribution segment compared to the prior fiscal year period, which was impacted significantly by the COVID-19 pandemic.
Our third quarter of fiscal year 2022 gross profit was $13.6 million, an increase of $2.4 million or 21.3% versus the third quarter of fiscal year 2021. In addition, consolidated gross margin expanded by 130 basis points from 25.5% to 26.8%. This increase was largely the result of operating leverage on our fixed costs and accretive gross margins from recent acquisitions.
Total operating expenses were $11.3 million, an increase of $2.5 million or 29.2% as compared to the third quarter of fiscal year 2021. Included in operating expenses during the third quarter of fiscal year 2022 were incremental operating expenses related to acquired businesses, investments in technology and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were 22.2% in the third quarter of fiscal year 2022, up 240 basis points from 19.8% in the third quarter of fiscal year 2021. Operating income decreased by $0.2 million and operating margin decreased by 110 basis points in the third quarter of fiscal year 2022.
Net income was $1.6 million in the third quarter of fiscal year 2022, down 7.5% as compared to $1.8 million in the third quarter of fiscal year 2021. The decrease in net income was due to higher operating expenses, which included a higher level of intangibles amortization and other expenses from recently completed acquisitions.
16
The following table presents, for the third quarter and first nine months of fiscal years 2022 and 2021, the components of our Consolidated Statements of Income:
| (Unaudited) | (Unaudited) | ||||||
| Third Quarter Ended | Nine Months Ended | ||||||
| December 25, | December 26, | December 25, | December 26, | ||||
| 2021 | 2020 | 2021 | 2020 | ||||
| As a Percentage of Total Revenue: | |||||||
| Service Revenue | 59.4% | 56.2% | 58.6% | 58.0% | |||
| Distribution Sales | 40.6% | 43.8% | 41.4% | 42.0% | |||
| Total Revenue | 100.0% | 100.0% | 100.0% | 100.0% | |||
| Gross Profit Percentage: | |||||||
| Service Gross Profit | 29.7% | 27.9% | 31.4% | 28.9% | |||
| Distribution Gross Profit | 22.5% | 22.5% | 23.2% | 21.5% | |||
| Total Gross Profit | 26.8% | 25.5% | 28.0% | 25.8% | |||
| Selling, Marketing and Warehouse Expenses | 10.0% | 10.6% | 10.1% | 10.5% | |||
| General and Administrative Expenses | 12.2% | 9.2% | 11.4% | 10.0% | |||
| Total Operating Expenses | 22.2% | 19.8% | 21.5% | 20.5% | |||
| Operating Income | 4.6% | 5.7% | 6.5% | 5.3% | |||
| Interest and Other Expense, net | 0.2% | 0.5% | 0.4% | 0.6% | |||
| Income Before Income Taxes | 4.4% | 5.2% | 6.1% | 4.7% | |||
| Provision for Income Taxes | 1.2% | 1.2% | 0.5% | 1.0% | |||
| Net Income | 3.2% | 4.0% | 5.6% | 3.7% | |||
THIRD QUARTER ENDED DECEMBER 25, 2021 COMPARED TO THIRD QUARTER ENDED DECEMBER 26, 2020:
Revenue:
| Third Quarter Ended | Change | ||||||
| (dollars in thousands) | December 25, | December 26, | |||||
| 2021 | 2020 | $ | % | ||||
| Revenue: | |||||||
| Service | $ 30,237 | $ 24,776 | $ 5,461 | 22.0% | |||
| Distribution | 20,665 | 19,286 | 1,379 | 7.2% | |||
| Total | $ 50,902 | $ 44,062 | $ 6,840 | 15.5% | |||
Total revenue increased $6.8 million, or 15.5%, in our third quarter of fiscal year 2022 compared to the prior fiscal year third quarter.
Service revenue, which accounted for 59.4% and 56.2% of our total revenue in the third quarter of fiscal years 2022 and 2021, respectively, increased 22.0% from the third quarter of fiscal year 2021 to the third quarter of fiscal year 2022. This year-over-year increase included $2.9 million in revenue from acquisitions, and also included organic revenue growth of 10.2% driven by improvement in end market conditions and continued market share gains.
17
Our fiscal years 2022 and 2021 quarterly Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows:
| FY 2022 | FY 2021 | ||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||
| Service Revenue Growth | 22.0% | 20.3% | 20.0% | 15.8% | 12.2% | 4.5% | 2.5% | ||
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 an indication of the progress of this segment. The following table presents the trailing twelve-month Service segment revenue for each quarter in fiscal years 2022 and 2021 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period (dollars in thousands):
| FY 2022 | FY 2021 | |||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||
| Trailing Twelve-Month: | ||||||||||
| Service Revenue | $116,315 | $110,854 | $105,864 | $101,274 | $97,225 | $94,624 | $93,572 | |||
| Service Revenue Growth | 19.5% | 17.1% | 13.1% | 8.9% | 5.4% | 4.3% | 7.4% | |||
The growth in Service segment revenue during the third quarter of each of fiscal years 2022 and 2021 reflected both organic growth and acquisitions.
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 each quarter during fiscal years 2022 and 2021:
| FY 2022 | FY 2021 | |||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||
| Percent of Service Revenue: | ||||||||||
| In-House | 84.1% | 83.2% | 83.1% | 83.6% | 83.1% | 83.7% | 82.9% | |||
| Outsourced | 14.4% | 15.3% | 15.4% | 14.9% | 15.3% | 14.7% | 15.6% | |||
| Freight Billed to Customers | 1.5% | 1.5% | 1.5% | 1.5% | 1.6% | 1.6% | 1.5% | |||
| 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | ||||
Our Distribution sales accounted for 40.6% of our total revenue in the third quarter of fiscal year 2022 and 43.8% of our total revenue in the third quarter of fiscal year 2021. During the third quarter of fiscal year 2022, Distribution segment sales increased 7.2% to $20.7 million. This increase was due to increased orders in the third quarter of fiscal year 2022 and an easier comparison to the third quarter of fiscal year 2021, which was adversely impacted by the COVID-19 pandemic.
Our fiscal years 2022 and 2021 Distribution sales growth (decline), in relation to prior fiscal year quarter comparisons, was as follows:
| FY 2022 | FY 2021 | ||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||
| Distribution Sales Growth (Decline) | 7.2% | 22.2% | 27.0% | (4.6%) | (8.6%) | (6.6%) | (20.3%) | ||
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. 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
18
management review prior to shipment. We believe pending product shipments is an important measure of trends in demand in the Distribution segment.
Our total pending product shipments at the end of the third quarter of fiscal year 2022 were $8.9 million, an increase of $3.3 million versus the end of the third quarter of fiscal year 2021 and an increase of $2.6 million since March 27, 2021. The year-over-year increase in pending product shipments was a result of the COVID-19 pandemic and its disruptive impact to the supply of products in the third quarter of fiscal year 2022 as well as overall increased demand.
The following table presents our total pending product shipments and the percentage of total pending product shipments that were backorders at the end of each quarter of fiscal years 2022 and 2021:
| (dollars in thousands) | FY 2022 | FY 2021 | |||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||
| Total Pending Product Shipments | $8,854 | $7,612 | $8,173 | $6,287 | $5,533 | $4,251 | $3,890 | ||
| % of Pending Product Shipments | |||||||||
| that were Backorders | 81.3% | 78.1% | 78.4% | 77.6% | 79.3% | 76.6% | 75.8% | ||
Gross Profit:
| Third Quarter Ended | Change | |||||||||||||||
| (dollars in thousands) | December 25, | December 26, | ||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Gross Profit: | ||||||||||||||||
| Service | $ | 8,983 | $ | 6,915 | $ | 2,068 | 29.9 | % | ||||||||
| Distribution | 4,653 | 4,330 | 323 | 7.5 | % | |||||||||||
| Total | $ | 13,636 | $ | 11,245 | $ | 2,391 | 21.3 | % | ||||||||
Total gross profit for the third quarter of fiscal year 2022 was $13.6 million, an increase of $2.4 million or 21.3% versus the third quarter of fiscal year 2021. Total gross margin was 26.8% in the third quarter of fiscal year 2022, up from 25.5% in the third quarter of fiscal year 2021, a 130 basis point expansion.
Service gross profit in the third quarter of fiscal year 2022 increased $2.1 million, or 29.9%, from the third quarter of fiscal year 2021. Service gross margin was 29.7% in the third quarter of fiscal year 2022 versus 27.9% in the third quarter of fiscal year 2021, a 180 basis point increase. This increase in gross margin was the result of operating leverage on our fixed costs and accretive gross margins from recent acquisitions.
The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:
| FY 2022 | FY 2021 | ||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||
| Service Gross Margin | 29.7% | 32.9% | 31.8% | 33.9% | 27.9% | 32.2% | 26.4% | ||
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.
19
The following table reflects the quarterly historical trend of our Distribution gross margin as a percent of Distribution sales:
| FY 2022 | FY 2021 | ||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||
| Distribution Gross Margin | 22.5% | 23.5% | 23.6% | 21.0% | 22.5% | 21.1% | 21.0% | ||
Distribution segment gross margin was 22.5% in both the third quarter of fiscal year 2022 and the third quarter of fiscal year 2021.
Operating Expenses:
| Third Quarter Ended | Change | |||||||||||||||
| (dollars in thousands) | December 25, | December 26, | ||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Selling, Marketing and Warehouse | $ | 5,051 | $ | 4,675 | $ | 376 | 8.0 | % | ||||||||
| General and Administrative | 6,224 | 4,051 | 2,173 | 53.6 | % | |||||||||||
| Total | $ | 11,275 | $ | 8,726 | $ | 2,549 | 29.2 | % | ||||||||
Total operating expenses were $11.3 million in the third quarter of fiscal year 2022 versus $8.7 million during the third quarter of fiscal year 2021. The year-over-year increase in selling, marketing and warehouse expenses is due to higher performance-based sales incentives and direct marketing costs. The increase in general and administrative expenses is due to one-time transaction related expenses related to the business acquisitions, incremental expenses related to acquired companies, increased payroll costs from new employees and continued investments in technology.
Provision for Income Taxes:
| Third Quarter Ended | Change | |||||||
| (dollars in thousands) | December 25, | December 26, | ||||||
| 2021 | 2020 | $ | % | |||||
| Provision for Income Taxes | $ 596 | $ 539 | $ 57 | 10.6% | ||||
Our effective tax rates for the third quarter of fiscal years 2022 and 2021 were 26.8% and 23.4%, respectively. The increase in the tax provision is due to increases in non-deductible expenses. Our quarterly provision for income taxes is affected by discrete items that may occur in any given year but are not consistent from year to year. The discrete benefits related to share-based compensation activity in both the third quarter of fiscal years 2022 and 2021 was less than $0.1 million.
We continue to evaluate our tax provision on a quarterly basis and adjust, as deemed necessary, our effective tax rate given changes in facts and circumstances expected for the entire fiscal year. We expect our total fiscal year 2022 effective tax rate to be approximately 14% to 15%.
Net Income:
| Third Quarter Ended | Change | |||||||
| (dollars in thousands) | December 25, | December 26, | ||||||
| 2021 | 2020 | $ | % | |||||
| Net Income | $ 1,629 | $ 1,761 | $ (132) | (7.5%) | ||||
Net income for the third quarter of fiscal year 2022 decreased $0.1 million from the third quarter of fiscal year 2021 primarily due to the lower operating income and a higher provision for income taxes.
20
Adjusted EBITDA:
In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, non-cash stock compensation expense, acquisition related transaction expenses, non-cash loss on sale of building, and restructuring expense), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, stock-based compensation expense and other items, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.
Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.
| Third Quarter Ended | ||||
| (dollars in thousands) | December 25, | December 26, | ||
| 2021 | 2020 | |||
| Net Income | $ 1,629 | $ 1,761 | ||
| + Interest Expense | 194 | 203 | ||
| + Other Expense (Income) | (58) | 16 | ||
| + Tax Provision | 596 | 539 | ||
| Operating Income | 2,361 | 2,519 | ||
| + Depreciation & Amortization | 2,368 | 1,861 | ||
| + Transaction Expense | 55 | - | ||
| + Other (Expense) Income | 58 | (15) | ||
| + Non-cash Stock Compensation | 624 | 197 | ||
| Adjusted EBITDA | $ 5,466 | $ 4,562 | ||
Total Adjusted EBITDA for the third quarter of fiscal year 2022 was $5.5 million, an increase of $0.9 million or 19.8% versus the third quarter of fiscal year 2021. As a percentage of revenue, Adjusted EBITDA increased to 10.7% for the third quarter of fiscal year 2022 versus 10.4% for the third quarter of fiscal year 2021. The increase in Adjusted EBITDA during the third quarter of fiscal year 2022 was primarily driven by increases in depreciation and amortization expense and non-cash stock compensation expense which offset the lower net income.
NINE MONTHS ENDED DECEMBER 25, 2021 COMPARED TO NINE MONTHS ENDED DECEMBER 26, 2020:
Revenue:
| Nine Months Ended | Change | |||||||||||||||
| (dollars in thousands) | December 25, | December 26, | ||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Revenue: | ||||||||||||||||
| Service | $ | 87,338 | $ | 72,297 | $ | 15,041 | 20.8 | % | ||||||||
| Distribution | 61,741 | 52,276 | 9,465 | 18.1 | % | |||||||||||
| Total | $ | 149,079 | $ | 124,573 | $ | 24,506 | 19.7 | % | ||||||||
21
Service revenue, which accounted for 58.6% and 58.0% of our total revenue during the first nine months of fiscal years 2022 and 2021, respectively, increased $15.0 million, or 20.8%, from the first nine months of fiscal year 2021 compared to the first nine months of fiscal year 2022. This year-over-year increase reflected increased demand from the life sciences and other highly-regulated end markets and included $5.3 million of incremental revenue from acquisitions.
Our Distribution sales accounted for 41.4% and 42.0% of our total revenue in the first nine months of fiscal years 2022 and 2021, respectively. For the first nine months of fiscal year 2022, Distribution sales increased $9.5 million, or 18.1%, compared to the first nine months of fiscal year 2021. This increase in sales was due to increased orders in the first nine months of fiscal year 2022 and an easier comparison to the first nine months of fiscal year 2021, which was adversely impacted by the COVID-19 pandemic.
Gross Profit:
| Nine Months Ended | Change | |||||||||||||||
| (dollars in thousands) | December 25, | December 26, | ||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Gross Profit: | ||||||||||||||||
| Service | $ | 27,447 | $ | 20,884 | $ | 6,563 | 31.4 | % | ||||||||
| Distribution | 14,320 | 11,264 | 3,056 | 27.1 | % | |||||||||||
| Total | $ | 41,767 | $ | 32,148 | $ | 9,619 | 29.9 | % | ||||||||
Total gross profit for the first nine months of fiscal year 2022 was $41.8 million, an increase of $9.6 million or 29.9% versus the first nine months of fiscal year 2021. Total gross margin was 28.0%, a 220 basis points increase compared to 25.8% in the first nine months of fiscal year 2021. This increase in gross margin was primarily due to operating leverage on our fixed cost base, accretive margins from recent acquisitions and continued strong technician productivity in the Service segment and a favorable mix of products sold in the Distribution segment.
Operating Expenses:
| Nine Months Ended | Change | |||||||||||||||
| (dollars in thousands) | December 25, | December 26, | ||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Selling, Marketing and Warehouse | $ | 15,022 | $ | 13,040 | $ | 1,982 | 15.2 | % | ||||||||
| General and Administrative | 17,117 | 12,547 | 4,570 | 36.4 | % | |||||||||||
| Total | $ | 32,139 | $ | 25,587 | $ | 6,552 | 25.6 | % | ||||||||
Total operating expenses for the first nine months of fiscal year 2022 were $32.1 million, an increase of $6.6 million or 25.6% versus the first nine months of fiscal year 2021. The year-over-year increase in selling, marketing and warehouse expenses was due to higher performance-based sales incentives and direct marketing costs. The increase in general and administrative expenses includes $0.9 million of one-time transaction related expenses related to business acquisitions, incremental expenses related to acquired companies, increased payroll costs from new employees and continued investments in technology. As a percentage of total revenue, operating expenses during the first nine months of fiscal year 2022 were 21.6%, compared to 20.5% in the first nine months of fiscal year 2021, an increase of 110 basis points.
Provision for Income Taxes:
| Nine Months Ended | Change | |||||||
| (dollars in thousands) | December 25, | December 26, | ||||||
| 2021 | 2020 | $ | % | |||||
| Provision for Income Taxes | $ 715 | $ 1,199 | $ (484) | (40.4%) | ||||
22
Our effective tax rates for the first nine months of fiscal years 2022 and 2021 were 7.9% and 20.7%, respectively. The decrease in our tax rate is due to the increased discrete tax benefits from share-based compensation activity. Our provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the first nine months of fiscal years 2022 and 2021 were $1.7 million and $0.3 million, respectively.
Net Income:
| Nine Months Ended | Change | |||||||
| (dollars in thousands) | December 25, | December 26, | ||||||
| 2021 | 2020 | $ | % | |||||
| Net Income | $ 8,332 | $ 4,583 | $ 3,749 | 81.8% | ||||
Net income for the first nine months of fiscal year 2022 was $8.3 million, an increase of $3.7 million versus the first nine months of fiscal year 2021. The year over year increase in net income was due to the higher operating income and lower provision for income taxes.
Adjusted EBITDA:
In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, non-cash stock compensation expense, acquisition related transaction expenses, non-cash loss on sale of building, and restructuring expense), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, stock-based compensation expense and other items, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.
Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.
| Nine Months Ended | ||||||||
| (dollars in thousands) | December 25, | December 26, | ||||||
| 2021 | 2020 | |||||||
| Net Income | $ | 8,332 | $ | 4,583 | ||||
| + Interest Expense | 552 | 660 | ||||||
| + Other Expense | 29 | 119 | ||||||
| + Tax Provision | 715 | 1,199 | ||||||
| Operating Income | 9,628 | 6,561 | ||||||
| + Depreciation & Amortization | 6,499 | 5,596 | ||||||
| + Restructuring Expense | - | 360 | ||||||
| + Transaction Expense | 876 | - | ||||||
| + Other (Expense) Income | (29) | (119) | ||||||
| + Non-cash Stock Compensation | 1,681 | 875 | ||||||
| Adjusted EBITDA | $ | 18,655 | $ | 13,273 | ||||
23
During the first nine months of fiscal year 2022, Adjusted EBITDA was $18.7 million, an increase of $5.4 million or 40.5% versus the first nine months of fiscal year 2021. As a percentage of revenue, Adjusted EBITDA was 12.5% for the first nine months of fiscal year 2022 and 10.7% for the first nine months of fiscal year 2021. The increase in Adjusted EBITDA during the first nine months of fiscal year 2022 was primarily driven by the increase in net income, depreciation and amortization expense, non-cash stock compensation expense and acquisition transaction expenses.
LIQUIDITY AND CAPITAL RESOURCES
We expect that foreseeable liquidity and capital resource requirements will be met through 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.
On July 7, 2021, we entered into the Second Amended and Restated Credit Facility Agreement (the “2021 Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), that amended and restated in its entirety the Company’s Amended and Restated Credit Facility Agreement dated as of October 30, 2017, as amended by Amended and Restated Credit Facility Agreement Amendment 1 dated December 10, 2018 and Amended and Restated Credit Facility Agreement Amendment 2 (“Amendment Two”) dated May 18, 2020 (as amended, the “Prior Credit Agreement”).
The 2021 Credit Agreement increased the revolving credit commitment (the “Revolving Credit Commitment”) from $40.0 million to $80.0 million, with a letter of credit subfacility increased from $2.0 million to $10.0 million, and extended the term of the Revolving Credit Commitment to June 2026. The 2021 Credit Agreement amended the definition of Applicable Margin (formerly Applicable Rate under the Prior Credit Agreement), which is based upon the Company’s then current leverage ratio and is used to determine interest charges on outstanding and unused borrowings under the revolving credit facility; the amendments reduced the Applicable Margins payable at the two highest leverage ratio levels. The 2021 Credit Agreement also amended the definition of Permitted Acquisitions, that is, acquisitions which are permitted under, and may be financed with proceeds of, the revolving credit facility, including increasing the aggregate purchase price for acquisitions consummated in any fiscal year from $1.0 million to $65.0 million during the current fiscal year and $50.0 million during any subsequent fiscal year, and adding an aggregate purchase price of $40.0 million for acquisitions consummated at any time during the term of the 2021 Credit Agreement related to businesses with a principal place of business located in the United Kingdom or the European Union.
In addition, the 2021 Credit Agreement provides that, assuming no event of default, restricted payments up to $25.0 million (increased from $10.0 million in the Prior Credit Agreement) in the aggregate and $10.0 million (increased from $3.0 million in the Prior Credit Agreement) in any single fiscal year may be used by us to repurchase our shares and pay dividends. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply. The 2021 Credit Agreement also reduced the LIBOR floor from 1.0% to 0.25% and included a mechanism for adoption of a different benchmark rate upon the discontinuation of LIBOR. The 2021 Credit Agreement also reduced the fixed interest rate on our term loan in the amount of $15.0 million (the “2018 Term Loan”) from 4.15% to 3.90%.
The 2021 Credit Agreement superseded in its entirety, the Prior Credit Agreement. Amendment Two to the Prior Credit Agreement had previously extended the term of the revolving credit facility to October 20, 2022 and increased the revolving credit commitment to $40 million.
Amendment Two also had modified the definition of the applicable rate used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and it amended the definition of permitted acquisitions to amend borrowings available under the revolving credit facility for acquisitions. In addition, Amendment Two had amended the definition of restricted payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain employee tax obligations associated with share-based payment and stock option activity, and modified certain restrictions to the Company’s ability to repurchase its shares and pay dividends. Amendment Two also had modified the leverage ratio and fixed charge coverage ratio covenants with which the Company was required to comply and limited capital expenditures to $5.5 million for the fiscal year 2021.
24
Amendment Two also had established a LIBOR floor of 1.0% and included a mechanism for adoption of a different benchmark rate in the event LIBOR was discontinued.
As of December 25, 2021, $80.0 million was available under the revolving credit facility, of which $31.7 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. During the first nine months of fiscal year 2022, we used $20.9 million for business acquisitions.
As of December 25, 2021, $9.1 million was outstanding on the 2018 Term Loan, of which $2.1 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $0.2 million per month through December 2025.
Pursuant to the Prior Credit Agreement, we were required to comply with a fixed charge ratio covenant and a leverage ratio covenant, which were modified by the 2021 Credit Agreement. The allowable leverage ratio under the Prior Credit Agreement for the second, third and fourth fiscal quarter of fiscal year 2021 and the first quarter of fiscal year 2022 was a maximum multiple of 5.0, 5.5, 7.0 and 4.0, respectively, of total debt outstanding compared to EBITDA and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. The Prior Credit Agreement also had provided that the trailing twelve-month pro forma EBITDA of an acquired business was included in the allowable leverage calculation. After the first quarter of fiscal 2022, pursuant to the 2021 Credit Agreement, the allowable leverage ratio is a maximum multiple of 3.0. We were in compliance with all loan covenants and requirements during the third quarter of fiscal year 2022. Our leverage ratio was 1.47 at December 25, 2021, as defined in the 2021 Credit Agreement, compared with 0.94 at March 27, 2021, as defined in the Prior Credit Agreement.
Interest on the revolving credit facility continues to accrue, at our election, at either the variable one-month LIBOR (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods) or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case, plus a margin. Interest on outstanding borrowings of the 2018 Term Loan accrued at a fixed rate of 3.90% over the term of the loan during the third quarter of fiscal year 2022 with principal and interest payments made monthly. Unused fees accrued based on the average daily amount of unused credit available under the revolving credit facility. Interest rate margins and unused fees were determined on a quarterly basis based upon our calculated leverage ratio.
Cash Flows: The following table is a summary of our Consolidated Statements of Cash Flows (in thousands):
| Nine Months Ended | ||||||||
| December 25, | December 26, | |||||||
| 2021 | 2020 | |||||||
| Cash Provided by (Used in): | ||||||||
| Operating Activities | $ | 12,378 | $ | 15,647 | ||||
| Investing Activities | $ | (26,759) | $ | (7,742) | ||||
| Financing Activities | $ | 16,900 | $ | (6,619) | ||||
Operating Activities:
Net cash provided by operating activities was $12.4 million during the first nine months of fiscal year 2022 compared to $15.6 million during the first nine months of fiscal year 2021. The year-over-year decrease in cash provided by operations is primarily the result of changes in net working capital (defined as current assets less current liabilities). The significant working capital fluctuations were as follows:
| · | Accounts Receivable: Accounts receivable increased by a net amount of $0.8 million during the first nine months of fiscal year 2022, inclusive of $2.6 million of accounts receivable acquired during the period. Accounts receivable decreased by a net amount of $0.4 million during the first nine months of fiscal year 2021, inclusive of $0.4 million of accounts receivable acquired during the period. The year-over-year variation reflects the impact of acquisitions and changes in the timing of collections. The following table illustrates our days sales outstanding as of December 25, 2021 and December 26, 2020 (dollars in thousands): |
25
| December 25, | December 26, | |||
| 2021 | 2020 | |||
| Net Sales, for the last two fiscal months | $ 34,743 | $ 30,819 | ||
| Accounts Receivable, net | $ 34,702 | $ 30,562 | ||
| Days Sales Outstanding | 63 | 62 | ||
| · | 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 $2.2 million during the first nine months of fiscal year 2022. Inventory decreased $1.7 million during the first nine months of fiscal year 2021. |
| · | 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 $0.7 million during the first nine months of fiscal year 2022. Accounts payable decreased by $2.1 million during the first nine months of fiscal year 2021. |
| · | Accrued Compensation and Other Liabilities: Accrued compensation and other liabilities include, among other things, amounts to be 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, but not limited to, changes in expected performance levels, the performance measurement period, and timing of payments to employees. During the first nine months of fiscal year 2022, accrued compensation and other liabilities decreased by $1.1 million largely due to payments of incentive based compensation accruals. During the first nine months of fiscal year 2021, accrued compensation and other liabilities increased by $0.9 million, due primarily to increased accrued incentives and payroll related expense. |
| · | Income Taxes Payable: In any given period, net working capital may be affected by the timing and amount of income tax payments. During the first nine months of fiscal year 2022, income taxes payable decreased by $0.4 million whereas in the first nine months of fiscal year 2021, income taxes payable increased by $0.2 million. The year-over-year difference is due to timing of income tax payments. |
Investing Activities:
During the first nine months of fiscal year 2022, we invested $5.9 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and the Company’s rental business.
During the first nine months of fiscal year 2021, we invested $4.3 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and the Company’s rental business.
During the first nine months of fiscal year 2022, we used $20.9 million for business acquisitions. During the first nine months of fiscal year 2021, we used $3.4 million for a business acquisition.
Financing Activities:
During the first nine months of fiscal year 2022, $22.8 million was borrowed from our revolving line of credit and $1.4 million in cash was generated from the issuance of common stock. In addition, we used $1.6 million for scheduled repayments of our term loan and $5.6 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 2022, which is shown as a repurchase of shares of our common stock on our Consolidated Statements of Cash Flows.
26
During the first nine months of fiscal year 2021, $0.6 million in cash was generated from the issuance of our common stock. In addition, we repaid $4.5 million of our revolving credit facility, we used $1.5 million for scheduled repayments of our term loan and used $1.3 million for the “net” award of certain share awards to cover tax-withholding obligations for share award and stock option activity in fiscal year 2021, which is shown as a repurchase of shares of our common stock on our Consolidated Statements of Cash Flows.
OUTLOOK
For the fourth quarter of fiscal year 2022, which is historically the strongest quarter of our fiscal year due to the seasonality of our Service business, we expect Service revenue growth to be in the high-teens. We expect Service gross margin in the fourth quarter of fiscal year 2022 to be in the range of 35% as we expect to benefit from a seasonally higher level of volume. Distribution revenue is expected to grow in the high single-digits in the fourth quarter of fiscal year 2022. Total operating expenses in the fourth quarter of fiscal year 2022 are expected to increase approximately $0.5 million sequentially from the third quarter and will include expenses associated with our recent acquisition of Tangent Labs, LLC.
We expect our income tax rate to range between 14% and 15% for full fiscal year 2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATES
Our exposure to changes in interest rates results from our borrowing activities. In the event interest rates were to move by 1%, our yearly interest expense would increase or decrease by approximately $0.2 million assuming our average borrowing levels remained constant. As of December 25, 2021, $80.0 million was available under our revolving credit facility, of which $31.7 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. As described above under “Liquidity and Capital Resources,” we also have a $15.0 million (original principal) term loan. The 2018 Term Loan is considered a fixed interest rate loan. As of December 25, 2021, $9.1 million was outstanding on 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.
At our option, we borrow from our revolving credit facility at the variable one-month LIBOR or at a fixed rate for a designated period at the LIBOR (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods) corresponding to such period, in each case, plus a margin. Our interest rate margin is determined on a quarterly basis based upon our calculated leverage ratio. Our interest rate during the first nine months of fiscal year 2022 for our revolving credit facility ranged from 1.0% to 2.2%. Interest on outstanding borrowings on the 2018 Term Loan accrued at a fixed rate of 4.15% over the term of the loan during the first quarter of fiscal year 2022 and 3.90% over the term of the loan for subsequent periods. On December 25, 2021, we had no hedging arrangements in place for our revolving credit facility to limit our exposure to upward movements in interest rates.
FOREIGN CURRENCY
Approximately 90% of our total revenues for each of the first nine months of fiscal years 2022 and 2021 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. and Canadian currencies and the U.S. and Euro currencies 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 gain of less than $0.1 million during the first nine months of fiscal year 2022 and a gain of $0.1 million during the first nine months of fiscal year 2021, was recognized as a component of other expense in the Consolidated Statements of Income. The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated
27
in Canadian dollars being hedged. On December 25, 2021, we had a foreign exchange contract, which matured in January 2022, outstanding in the notional amount of $2.6 million. The foreign exchange contract was renewed in January 2022 and continues to be in place. We do not use hedging arrangements for speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Our principal executive officer and our principal financial officer evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of such date.
Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this quarterly report (our third fiscal quarter of fiscal year 2022) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
28
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
INDEX TO EXHIBITS
| 10.1* | Membership Unit Purchase Agreement, dated as of December 31, 2021, by and among Transcat, Inc., Kevin M. Broderick and Andrea Broderick | |
| (31) | Rule 13a-14(a)/15d-14(a) Certifications | |
| 31.1* | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| (32) | Section 1350 Certifications | |
| 32.1** | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| (101) | Interactive Data File | |
| 101.INS** | XBRL Instance Document | |
| 101.SCH** | XBRL Taxonomy Extension Schema Document | |
| 101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB** | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document | |
| (104) | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
* Filed herewith
** Furnished herewith
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TRANSCAT, INC.
| Date: February 2, 2022 | /s/ Lee D. Rudow |
| Lee D. Rudow | |
|
President and Chief Executive Officer (Principal Executive Officer) | |
| Date: February 2, 2022 | /s/ Mark A. Doheny |
| Mark A. Doheny | |
|
Vice President of Finance and Chief Financial Officer (Principal Financial Officer) |
30
EXECUTION VERSION
Exhibit 10.1
|
MEMBERSHIP UNIT PURCHASE AGREEMENT among TRANSCAT, INC., KEVIN M. BRODERICK, and Andrea Broderick
|
Dated December 31, 2021
Table of Contents
2
MEMBERSHIP Unit PURCHASE AGREEMENT
THIS MEMBERSHIP UNIT PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of December 31, 2021, by and among TRANSCAT, INC., an Ohio corporation (“Buyer”), and KEVIN M. BRODERICK (the “Key Seller”) and ANDREA BRODERICK (together with the Key Seller, each, a “Seller” and, collectively, “Sellers”). Buyer and Sellers are referred to herein, individually, as a “Party” and together as the “Parties”.
RECITALS
A. Sellers own, in the aggregate, all of the issued and outstanding membership units (the “Company Units”) of Tangent Labs, LLC, an Indiana limited liability company (the “Company”), which Company Units represent a 100% membership interest in the Company.
B. Sellers desire to sell to Buyer, and Buyer desires to purchase from Sellers, the Company Units in exchange for the consideration and on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties agree as follows:
Article I.
THE TRANSACTION
1.1 Purchase Transaction. On and subject to the terms and conditions of this Agreement, at Closing, Buyer shall purchase from Sellers, and Sellers shall sell to Buyer, free and clear of all Encumbrances, the Company Units in exchange for the Purchase Price. The Company Units owned by Sellers and transferred to Buyer hereunder shall constitute all of the issued and outstanding membership units of (and a 100% membership interest in) the Company on the Closing Date.
1.2 Purchase Price; Payment.
(a) Purchase Price. Subject to the provisions of this Agreement (including, without limitation, the adjustments set forth in Section 1.3 and Section 1.6), the total purchase price (the “Purchase Price”) for the Company Units shall be $9,000,000. Subject to adjustment as provided in this Agreement including, without limitation, Section 1.3, Section 1.4 and Section 1.5), the Purchase Price shall be payable to Sellers in accordance with the provisions of Section 1.2(b).
(b) Payments at Closing. In payment of the Purchase Price, at Closing, Buyer shall:
(i) pay and deliver to Sellers, pro rata based on their respective ownership of the Company Units, an amount equal to the Estimated Adjusted Purchase Price, by wire transfer of immediately available funds to one or more accounts that have been designated in writing by Sellers;
(ii) pay to HSBC Bank USA, as escrow agent (the “Escrow Agent”), by wire transfer of immediately available funds to the account designated in writing by the Escrow Agent, the sum of $1,000,000 (the “Escrow Amount”), as further described in Section 1.5;
(iii) pay, or cause to be paid, on behalf of Sellers or the Company, the Estimated Closing Indebtedness, in accordance with Section 1.4; and
(iv) pay, or cause to be paid, on behalf of Sellers or the Company, the Estimated Closing Transaction Expenses, in accordance with Section 1.4.
1.3 Closing Statement; Adjustment.
(a) Estimated Closing Statement. On the Closing Date, Sellers shall deliver to Buyer a written statement (the “Estimated Closing Statement”) in form and substance reasonably satisfactory to Buyer, setting forth Sellers’ good faith estimate as of the Closing of, and the components and calculation of, (i) the estimated Closing Cash (“Estimated Closing Cash”), (ii) the Closing Working Capital (the “Estimated Closing Working Capital”), (iii) the Closing Indebtedness (the “Estimated Closing Indebtedness”), and (iv) the Closing Transaction Expenses (the “Estimated Closing Transaction Expenses”). The Estimated Closing Statement, and the Estimated Closing Cash, Estimated Closing Working Capital, Estimated Closing Indebtedness, and Estimated Closing Transaction Expenses shall each be calculated on a basis consistent with GAAP, and shall be adjusted as necessary on the Closing Date to reflect any adjustments reasonably requested by Buyer and satisfactory to Sellers in their reasonable discretion.
(b) Delivery of Closing Statement. Within 90 days after the Closing Date, Buyer shall cause to be prepared and shall deliver to Sellers a statement (the “Final Closing Statement”) setting forth in reasonable detail (i) Buyer’s calculation of (A) the Closing Cash, (B) the Closing Working Capital, (C) the Closing Indebtedness, and (D) the Closing Transaction Expenses, and (ii) the calculation of the Final Adjusted Purchase Price based thereon.
(c) Cooperation. Buyer and each Seller shall, and shall use reasonable efforts to cause their respective Affiliates, agents and representatives to, cooperate and assist in the preparation of the Final Closing Statement and the calculation of the Closing Cash, Closing Working Capital, Closing Indebtedness and Closing Transaction Expenses and in the conduct of the reviews and dispute resolution process referred to in this Section 1.3.
(d) Review Period. During the 30-day period following Sellers’ receipt of the Final Closing Statement, Sellers shall be permitted to review the working papers of Buyer relating to the Final Closing Statement. The Final Closing Statement and the calculation of the Closing Cash, Closing Working Capital, Closing Indebtedness and Closing Transaction Expenses shall become final and binding upon the Parties for purposes of this Section 1.3 on the 30th day following delivery thereof, unless Sellers give written notice of their disagreement with the Final Closing Statement (“Notice of Disagreement”) to Buyer on or prior to such date, which notice, to be valid, must comply in all material respects with this Section 1.3. Any Notice of Disagreement shall (i) specify in reasonable detail the nature of any disagreement so asserted, and include all supporting schedules, analyses, working papers and other documentation, (ii)
2
include only disagreements based on Closing Cash, Closing Working Capital, Closing Indebtedness or Closing Transaction Expenses not being calculated in accordance with this Section 1.3, (iii) specify the line item or items in the calculation of Closing Cash, Closing Working Capital, Closing Indebtedness or Closing Transaction Expenses with which Sellers disagree and the amount of each such line item or items as calculated by Sellers, and (iv) include Sellers’ calculation of the Closing Cash, Closing Working Capital, Closing Indebtedness or Closing Transaction Expenses, as applicable. Sellers and Buyer shall be deemed to have agreed with all items and amounts included in the calculation of the Closing Cash, Closing Working Capital, Closing Indebtedness or Closing Transaction Expenses delivered pursuant to Section 1.3(b) except such items that are specifically disputed in the Notice of Disagreement.
(e) Resolution of Disputes. If Sellers deliver, in a timely manner, a Notice of Disagreement pursuant to Section 1.3(d), then the Final Closing Statement (as revised in accordance with this Section 1.3(e)), and the resulting calculation of the Closing Cash, Closing Working Capital, Closing Indebtedness and Closing Transaction Expenses resulting therefrom, shall become final and binding upon the Parties for purposes of this Section 1.3 on the earlier of (i) the date any and all matters specified in the Notice of Disagreement are finally resolved in writing by Sellers and Buyer and (ii) the date any and all matters specified in the Notice of Disagreement not resolved by Sellers and Buyer are finally resolved in writing by the Independent Accountant. The Final Closing Statement shall be revised to the extent necessary to reflect any resolution by Sellers and Buyer and any final resolution made by the Independent Accountant in accordance with this Section 1.3(e). During the 30-day period following the delivery of a timely Notice of Disagreement or such longer period as Sellers and Buyer shall mutually agree, Sellers and Buyer shall seek in good faith to resolve in writing any differences that they may have with respect to the matters specified in the Notice of Disagreement. If, at the end of such 30-day period (or such longer period as mutually agreed by Sellers and Buyer), Sellers and Buyer have not so resolved such differences, Sellers and Buyer shall submit the dispute for resolution to BDO USA LLP or such other firm of accountants as the Parties shall otherwise agree upon in writing (the “Independent Accountant”) for review and resolution of any and all matters which remain in dispute and which were included in the Notice of Disagreement in accordance with this Section 1.3. The determination of the Independent Accountant shall be based solely on the provisions of this Agreement and shall be final and binding upon the Parties. The Parties shall be entitled to have judgment entered upon the determination of the Independent Accountant in any court having jurisdiction over the Party against which such determination is to be enforced. The fees, costs, and expenses of the Independent Accountant shall be borne by Buyer and Sellers in proportion to the manner in which the amount that is subject to dispute is determined in favor of, or adversely to, each Party. Each of Buyer and Sellers shall bear all expenses of its or their own independent accountants incurred in connection with the preparation or review of the Final Closing Statement and any Notice of Disagreement.
(f) Purchase Price Adjustment.
(i) If the Final Adjusted Purchase Price is greater than the Estimated Adjusted Purchase Price, then within five Business Days of the determination of the Final Closing Statement, Buyer shall pay Sellers, pro rata based on their respective ownership of the Company Units, an aggregate amount equal to such excess by wire transfer of immediately
3
available funds to one or more accounts designated in writing by Sellers prior to the date when such payment is due.
(ii) If the Final Adjusted Purchase Price is less than the Estimated Adjusted Purchase Price, then within five Business Days of the determination of the Final Closing Statement, Sellers, jointly and severally, shall pay or cause to be paid to Buyer an amount equal to such deficiency by wire transfer of immediately available funds to an account or accounts designated in writing by Buyer prior to the date when such payment is due. If Sellers fail to pay when due any amount due from Sellers pursuant to this Section 1.3(f)(ii), then, in addition to any other rights and remedies available to Buyer, Buyer shall have the right to receive such amount from the Escrow Amount, subject to and in accordance with the terms of this Agreement and the Escrow Agreement (and, upon the request of Buyer, Sellers will sign and deliver joint instructions to the Escrow Agent directing the Escrow Agent to pay such amount to Buyer).
1.4 Payment of Indebtedness and Company Transaction Expenses. Sellers shall deliver with the Estimated Closing Statement delivered pursuant to Section 1.3(a): (i) with respect to the Estimated Closing Indebtedness, the name of each Person to which any Estimated Closing Indebtedness is owed and the amount owed to each such Person, and pay-off letters (including wire instructions for payment) in form and substance reasonably satisfactory to Buyer executed at or prior to the Closing by all such Persons, and (ii) with respect to the Estimated Closing Transaction Expenses, the name of each Person to which any payment of any Estimated Closing Transaction Expenses is owed and the amount owed to each such Person, and copies of each invoice reflecting the Estimated Closing Transaction Expenses (including wire instructions for payment). Sellers hereby authorize and direct Buyer to pay at the Closing, on behalf of Sellers and the Company (and apply to the payment of the Purchase Price the amount of), the Estimated Closing Indebtedness and the Estimated Closing Transaction Expenses, in accordance with the payoff statements, invoices and wire instructions so provided by Sellers. The Parties shall cooperate in arranging for the repayment of the Estimated Closing Indebtedness and Estimated Closing Transaction Expenses at the Closing. Sellers shall cause the Company to facilitate such repayment and the release, in connection with such repayment, of any Encumbrances securing the Closing Indebtedness.
1.5 Escrow. On the Closing Date, pursuant to Section 1.2(b)(ii), Buyer shall pay the Escrow Amount to the Escrow Agent. The Escrow Agent shall hold the Escrow Amount pursuant to an escrow agreement among Buyer, Sellers and the Escrow Agent in a form acceptable to Buyer and Sellers and delivered at the Closing (the “Escrow Agreement”), for the one year period immediately following the Closing Date (or as otherwise set forth in this Agreement or the Escrow Agreement, the “Escrow Period”), as security for the potential adjustments to the Purchase Price set forth in Section 1.3 and Section 1.6 and for the indemnification obligations of Sellers set forth in this Agreement. Subject to the provisions of Section 1.6(c) and Section 7.4, upon termination of the Escrow Period, the balance of the Escrow Amount remaining in escrow shall be distributed to Sellers (pro rata based on their respective ownership of the Company Units), subject to and in accordance with the terms of the Escrow Agreement and this Agreement.
4
1.6 Key Employee Retention Adjustment.
(a) Retention Adjustment Amount. Sellers acknowledge that the continued employment, after the Closing, of John Edmundson (the “Key Employee”) was an essential factor in Buyer’s decision to acquire the Company Units and it its evaluation of the Purchase Price that it will pay for the Company Units. If the Key Employee terminates his employment with the Company prior to the first anniversary of the Closing Date, then the Purchase Price will be reduced by (i) $500,000, if such termination occurs on or before June 30, 2022, and (b) $300,000, if such termination occurs after June 30, 2022, but prior to the first anniversary of the Closing Date (such amount, as applicable, the “Retention Adjustment Amount”), and, within 10 days after such termination of employment, Sellers, jointly and severally, shall pay or cause to be paid to Buyer the Retention Adjustment Amount by wire transfer of immediately available funds to an account designated in writing by Buyer.
(b) Payment from Escrow. If Sellers fail to pay when due the Retention Adjustment Amount or any portion thereof, then, in addition to any other rights and remedies available to Buyer, Buyer shall have the right to receive the Retention Adjustment Amount from the Escrow Amount, subject to and in accordance with the terms of this Agreement and the Escrow Agreement (and, upon the request of Buyer, Sellers will sign and deliver joint instructions to the Escrow Agent directing the Escrow Agent to pay the Retention Adjustment Amount to Buyer).
(c) Partial Release of Escrow. Subject to the provisions of Section 7.4, if (i) the Retention Adjustment Amount has not become due on or before June 30, 2022 (the “First Release Date”) or (ii) if the Retention Adjustment Amount did come due on or before the First Release Date but was paid in full by Sellers to Buyer (directly, and not from the Escrow Fund), then Buyer and Sellers shall cause the Escrow Agent to distribute to Sellers (pro rata based on their respective ownership of the Company Units), from the Escrow Amount, $200,000 (the “First Release Amount”), subject to and in accordance with the terms of the Escrow Agreement and this Agreement. In such event, within two Business Days after the First Release Date, Buyer and Sellers will sign and deliver joint instructions to the Escrow Agent directing the Escrow Agent to pay the First Release Amount to Sellers.
(d) Limitations. For the avoidance of doubt, the Purchase Price will not be reduced pursuant to this Section 1.6 if, prior to the first anniversary of the Closing Date, (i) the Company terminates the Key Employee’s employment for any reason, or (ii) the Key Employee’s employment with the Company is terminated as a result of the death or permanent disability of the Key Employee. The provisions of this Section 1.6 shall not create any third party beneficiary or rights in the Key Employee (including any dependent or beneficiary thereof), and the provisions of this Section 1.6 are not intended to and shall not modify or amend the at-will nature of the Key Employee’s employment with the Company, or create any employment agreement or commitment to employ the Key Employee for any specified period of time.
1.7 Use of Leased Vehicles following Closing. Prior to the Closing, each Seller used a vehicle leased by the Company (collectively, the “Leased Vehicles”). The full remaining balance to repay in full the leases for the Leased Vehicles, as of the Closing, shall be included in the Closing Indebtedness and paid in accordance with Section 1.4. Following the Closing, Buyer
5
shall cause the Company to allow each Seller to continue to have access to, and use, the Leased Vehicle currently used by such Seller, in each case until the expiration of the lease term for such Leased Vehicle; provided, however, that Sellers, jointly and severally, shall (i) be responsible for all costs and expenses including, without limitation, maintenance, repairs, and fuel costs, associated with the Leased Vehicles, (ii) pay or reimburse the Company for all costs including, without limitation, insurance, incurred by the Company with respect to the Leased Vehicles, and (iii) indemnify Buyer, pursuant to Section 7.2(a), with respect to all Losses incurred by Buyer or the Company with respect to the Leased Vehicles or Seller’s use thereof after the Closing. Seller shall return each Leased Vehicle to the lessor or other designated party, in accordance with the applicable terms of its lease agreement, on or before the date required under such lease agreement.
Article II.
CLOSING
2.1 Closing Date. The closing of the transactions contemplated hereby (the “Closing”) shall take place at such place as is agreed in writing by Buyer and Sellers, or via electronic transmittal of documents, on the date hereof (the “Closing Date”). For financial accounting and tax purposes, to the extent permitted by Law, the Closing shall be deemed to have become effective as of 11:59 p.m. on the Closing Date (the “Effective Time”). This Agreement and all other agreements, certificates, documents and instruments furnished in connection with this Agreement or the other agreements, certificates, documents and instruments at the Closing shall be deemed to be delivered simultaneously on the Closing Date and may be delivered by means of an exchange of executed documents by facsimile or an attachment in “pdf” or similar format to an electronic mail message.
2.2 Closing Deliveries.
(a) Deliveries by Buyer. At the Closing, Buyer shall deliver or cause to be delivered the following to Sellers or other Persons as specified below:
(i) the amounts set forth in Section 1.2(b), in accordance therewith;
(ii) the Escrow Agreement, duly executed by Buyer;
(iii) a Lease Agreement, in a form acceptable to Buyer, with respect to the Indianapolis Property (the “New Lease Agreement”), duly executed by the Company, together with written confirmation of the termination of all prior leases between the Company and the Indianapolis Landlord with respect to the Indianapolis Property; and
(iv) such other agreements, certificates and documents as may be reasonably requested by Sellers to effectuate or evidence the transactions contemplated hereby.
(b) Deliveries by Sellers. At the Closing, Sellers shall deliver or cause to be delivered the following to Buyer:
6
(i) certificates, if any, evidencing the Company Units, duly endorsed by Sellers or accompanied by assignments or other instruments of transfer duly executed by Sellers for transfer to Buyer, free and clear of all Encumbrances;
(ii) written tenders of resignation of all managers and officers of the Company;
(iii) the Escrow Agreement, duly executed by Sellers;
(iv) the New Lease Agreement, duly executed by the Indianapolis Landlord;
(v) a certificate of the Secretary (or equivalent officer) of the Company certifying that attached thereto are true and complete copies of (A) the articles of organization of the Company, and all amendments thereto, as certified by the Secretary of State of Indiana; and (B) the operating agreement of the Company, and all amendments thereto;
(vi) a certificate of existence dated not more than 10 days prior to the Closing Date from (A) the Secretary of State of the State of Indiana, attesting to the existence in Indiana of the Company, and (B) the secretary of state of each other state attesting to the good standing of the Company in each other state where the Company is qualified to do business;
(vii) the Estimated Closing Statement (together with all payoff statements and other documents that Sellers are required to deliver pursuant to Section 1.4 with respect to the Estimated Closing Indebtedness and the Estimated Closing Transaction Expenses);
(viii) the consents from Authorities or other Persons, if any, set forth on Schedule 3.3 in forms reasonably acceptable to Buyer;
(ix) the original unit ledgers and minute books for the Company ;
(x) such lien releases or other written evidence reasonably satisfactory to Buyer, evidencing the release of all Encumbrances on the assets of the Company that are not Permitted Encumbrances;
(xi) written confirmation of the termination, effective immediately prior to the Closing, of the Designated Benefit Plan, in accordance with Section 5.6; and
(xii) such other agreements, certificates and documents as may be reasonably requested by Buyer to effectuate or evidence the transactions contemplated hereby.
7
Article III.
REPRESENTATIONS AND WARRANTIES OF SELLERS
The Key Seller makes the representations and warranties set forth in this Article III to Buyer (provided that each Seller makes the representations and warranties set forth in Section 3.1 and Section 3.3 to Buyer):
3.1 Authority; Execution and Delivery. Each Seller has all necessary power and authority, and the full legal capacity, to enter into and deliver this Agreement and each of the other agreements, certificates, instruments and documents contemplated hereby (collectively, the “Ancillary Agreements”) to which such Seller is a party, to carry out his or her obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. This Agreement and each Ancillary Agreement to which either Seller is a party has been duly authorized, executed and delivered by such Seller and constitutes a legal, valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms and conditions, except as enforcement may be limited by General Enforceability Exceptions.
3.2 Organization. The Company is a limited liability company duly organized and validly existing under the laws of the State of Indiana. The Company has all requisite power and authority to carry on the Business. The Company is duly qualified to do business and is in good standing as a foreign corporation in all jurisdictions where the nature of the property owned or leased by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified can be cured without material expense and will not render any Material Contract of the Company unenforceable. Schedule 3.2 sets for a list of (i) all jurisdictions in which the Company is authorized to transact business, and (ii) all managers and officers of the Company. Sellers have provided to Buyer true and complete copies of the Organizational Documents of the Company, all as amended to date.
3.3 No Conflict; Consents. The execution, delivery and performance by each Seller of this Agreement and each Ancillary Agreement to which each Seller is a party, and the consummation by each Seller of the transactions contemplated hereby and thereby does not and will not, with or without the giving of notice or the lapse of time, or both, (a) violate any provision of any Law or Governmental Order to which any Seller or the Company is subject, (b) violate any provision of the Organizational Documents of the Company, or (c) except as set forth on Schedule 3.3, violate or result in a breach of or constitute a default (or an event which might, with the passage of time or the giving of notice, or both, constitute a default), or require the consent of any third party, under any Contract or Permit to which any Seller or the Company is a party or by which any Seller or the Company may be bound or affected, or result in or permit the termination or amendment of any provision of any such Contract or Permit. Except as set forth on Schedule 3.3, no consent, approval, or authorization of, or exemption by, or filing with, any Authority or other Person is required to be obtained or made by any Seller or the Company in connection with the execution, delivery, and performance by Sellers of this Agreement or any Ancillary Agreement to which any Seller is a party, or the taking by any Seller or the Company of any other action contemplated hereby or thereby.
3.4 Capitalization; Title to Company Units.
8
(a) All of the Company Units have been duly authorized, are validly issued, fully paid and non-assessable, and Sellers are the record and beneficial owner of all Company Units, as set forth on Schedule 3.4(a), free and clear of all Encumbrances. The Company Units constitute all of the issued and outstanding membership units of, and a 100% membership interest in, the Company. Upon the consummation of the transactions contemplated herein, Buyer will acquire good and valid legal and beneficial title to the Company Units, free and clear of all Encumbrances.
(b) There are no outstanding or authorized options, warrants, convertible securities or other rights, agreements, arrangements or commitments of any character relating to the equity interests of the Company or obligating any Seller or the Company to issue or sell any membership units of, or any other interest in, the Company. The Company does not have any outstanding or authorized any unit appreciation, phantom units, profit participation or similar rights. There are no voting trusts, member agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any of the Company Units.
3.5 Subsidiaries. The Company does not (i) directly or indirectly own any stock of, equity interest in, or other investment in any other corporation, joint venture, partnership, trust or other Person or (ii) have any subsidiaries or any predecessors in interest by merger, liquidation, reorganization, acquisition or similar transaction.
3.6 Financial Statements; Undisclosed Liabilities. The books of account and related records of the Company fairly reflect the Company’s assets, Liabilities and transactions. Sellers have delivered to Buyer true and current copies of the following financial statements (the “Financial Statements”): (a) the balance sheets of the Company as of December 31, 2020, December 31, 2019 and December 31, 2018 and the related statements of income and stockholder’s equity and cash flows for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, and (b) the balance sheet of the Company as of the Interim Balance Sheet Date, and the related statement of income for the nine (9) month period ended on the Interim Balance Sheet Date (the “Interim Financial Statements”). The Financial Statements fairly present the financial position of the Company and the results of its operations and cash flows as of the respective dates and for the respective periods indicated therein and have been prepared on a consistent basis in accordance with the historic practices of the Company. Neither the Financial Statements nor the Interim Financial Statements include disclosures normally made in footnotes. The Financial Statements have been prepared from and are in accordance with the books and records of the Company. The Company does not have any Liabilities except for (a) Liabilities reflected on or accrued and reserved against in the Interim Balance Sheet, or (b) Liabilities incurred in the Ordinary Course of Business after the Interim Balance Sheet Date (none of which is material or results from, arises out of, or relates to any material breach or violation of, or default under, a Contract or requirement of Law).
3.7 Absence of Certain Changes or Events. Except as set forth on Schedule 3.7, since December 31, 2020, the Company has conducted its business only in the Ordinary Course of Business and there has not been a Material Adverse Effect. Without limiting the foregoing, except as set forth on Schedule 3.7, since December 31, 2020, the Company has not (a) issued, purchased or redeemed any of its equity securities, or granted or issued any option, warrant or other right to purchase or acquire any such equity securities, (b) incurred or discharged any
9
Liabilities, except Liabilities incurred or discharged in the Ordinary Course of Business, (c) encumbered any of its properties or assets, tangible or intangible, except for Encumbrances incurred in the Ordinary Course of Business, (d) (i) granted any increase in the salaries (other than normal increases for employees averaging not in excess of five percent per annum made in the Ordinary Course of Business) or other compensation or benefits payable or to become payable to, or any advance (excluding advances for ordinary business expenses consistent with past practice) or loan to, any officer, director, shareholder, member, partner, employee or independent contractor of the Company, (ii) made any payments to any pension, retirement, profit-sharing, bonus or similar plan except payments in the Ordinary Course of Business made pursuant to the Benefit Plans, (iii) granted or made any other payment of any kind to or on behalf of any officer, director, member, partner, shareholder, employee or independent contractor other than payment of base compensation and reimbursement for reasonable expenses in the Ordinary Course of Business, or (iv) except as contemplated by Section 5.6, adopted, amended or terminated any employee benefit plan (including any Benefit Plan) or any stay bonus, retention bonus, transaction bonus or change in control bonus plan or arrangement, other than, in any case, amendments required by applicable Law, (e) suffered any change or, to the knowledge of the Key Seller, received any threat of any change in any of its relations with, or any loss or, to the knowledge of the Key Seller, threat of loss of, any of the suppliers, clients, distributors, customers or employees that are material to the Business, including any loss or change which may result from the transactions contemplated by this Agreement, (f) disposed of or failed to keep in effect any rights in, to or for the use of any Permit material to the Business, (g) changed any method of keeping of its books of account or accounting practices, (h) disposed of or failed to keep in effect any rights in, to or for the use of any of the Intellectual Property material to the Business, (i) sold, transferred or otherwise disposed of any assets, properties or rights of the Business with a value in excess of $25,000, except inventory sold in the Ordinary Course of Business, (j) entered into any transaction or Contract outside the Ordinary Course of Business or with any partner, shareholder, member, officer, director or other Affiliate of the Company or any Seller, (k) made or authorized any single capital expenditure in excess of $25,000, or capital expenditures in excess of $50,000 in the aggregate, (l) changed or modified in any manner its existing credit, collection and payment policies, procedures and practices with respect to accounts receivable and accounts payable, respectively, including acceleration of collections of receivables, failure to make or delay in making collections of receivables (whether or not past due), acceleration of payment of payables or failure to pay or delay in payment of payables, (m) incurred any material damage, destruction, theft, loss or business interruption, (n) made any declaration, payment or setting aside for payment of any distribution (whether in equity or property) with respect to any securities or interests of the Company, (o) made (except as consistent with past practice) or revoked any Tax election or settled or compromised any material Liability for Taxes with any Taxing Authority, (p) waived or released any material right or claim of the Company or incurred any modifications, amendments or terminations of any Contracts which are in the aggregate materially adverse to the Company or the Business, or (q) instituted any material change in its conduct of the Business or any material change in its accounting practices or methods of cash management.
3.8 Title, Condition and Sufficiency of Assets.
(a) The Company has good and valid title to, or a valid leasehold interest in, all property and other assets used by it in the operation of its Business, reflected in the Financial
10
Statements or acquired after the Interim Balance Sheet Date, other than properties and assets sold, consumed or otherwise disposed of in the Ordinary Course of Business since the Interim Balance Sheet Date, free and clear of all Encumbrances, except for Permitted Encumbrances. Neither Seller owns or uses, or has any rights to own or use, any real or personal property, tangible or intangible, or any other assets, used in the operation of the Business.
(b) The buildings, plants, structures, fixtures, machinery, equipment, vehicles and other items of tangible personal property of the Company are structurally sound, are in good condition and repair (except for ordinary wear and tear and routine maintenance in the Ordinary Course of Business), are adequate for the purposes for which they are presently used in the conduct of the Business, and comply with all applicable Laws. The buildings, plants, structures, fixtures, machinery, equipment, vehicles and other items of tangible personal property of the Company currently owned or leased by the Company constitute all of the assets, properties and rights necessary for the operation of the Business by the Company as the Business is currently conducted. No Person other than the Company owns any assets, properties and rights used in the Business, other than assets owned by third parties and used in the Business pursuant to a Material Contract identified on Schedule 3.12(a).
3.9 Real Property.
(a) The Company does not own, and has never owned, any real property.
(b) Schedule 3.9(b) sets forth the address of each parcel of real property leased by the Company (collectively, the “Leased Real Property”). All of the Leased Real Property is leased pursuant to valid, binding and enforceable leases listed on Schedule 3.9(b) (the “Real Property Leases”). The Leased Real Property comprises all of the real property used by the Company in the operation of the Business. Except as set forth on Schedule 3.9(b), with respect to each parcel of Leased Real Property, (i) there are no pending or, to the knowledge of the Key Seller, threatened condemnation proceedings or Actions relating to it, (ii) other than the Real Property Leases, there are no other leases, subleases, licenses or concessions, written or oral, granting to any Person the right to use or occupy any portion of the Leased Real Property, (iii) to the knowledge of the Key Seller, the Company’s possession and quiet enjoyment of the Leased Real Property has not been disturbed and there are no disputes with respect to the Real Property Leases; (iv) no other party to such Real Property Lease is an Affiliate of, or otherwise has any economic interest in, the Company; (v) the Company has not collaterally assigned or granted any Encumbrance (other than Permitted Encumbrances) in such Real Property Lease or any interest therein; (vi) there are no construction liens or similar Encumbrances with respect to the Leased Real Property; and (vii) no security deposit or portion thereof deposited with respect to such Real Property Lease has been applied in respect of a breach of or default under such Real Property Lease that has not been redeposited in full. The Company does not owe, nor will it owe in the future, any brokerage commissions or finder’s fees with respect to any of the Real Property Leases. Schedule 3.9(b) lists all amendments, modifications, estoppels, subordination, non-disturbance and attornment agreements and any other agreements or understandings related to the Leased Real Property or the Real Property Leases.
11
(c) None of Sellers or the Company has received written notice of any condemnation, expropriation or other proceeding in eminent domain affecting any parcel of Leased Real Property or any portion thereof or interest therein.
(d) To the knowledge of the Key Seller, the Leased Real Property is in compliance with all applicable building, planning, zoning, subdivision, health and safety (including fire regulations), land use and other applicable Laws, and all insurance requirements affecting the Leased Real Property. The Company has not received any written notice of violation of any applicable Law or insurance requirements affecting the Leased Real Property and, to the knowledge of the Key Seller, there is no basis for the issuance of any such notice or the taking of any action for such violation.
(e) The current use and occupancy of the Leased Real Property and the operation of the Business of the Company as currently conducted thereon do not violate in any respect any easement, covenant, condition, restriction or similar provision in any instrument of record or other unrecorded agreement affecting such Leased Real Property.
3.10 Accounts Receivable.
(a) All of the Company’s accounts and notes receivable reflected on the Interim Balance Sheet and the accounts and notes receivable arising after the Interim Balance Sheet Date (collectively, the “Accounts Receivable”) represent amounts receivable for products actually delivered or services actually provided (or, in the case of non-trade accounts or notes represent amounts receivable in respect of other bona-fide business transactions), have arisen in the Ordinary Course of Business and have been or will be billed and are generally due within 45 days after such billing. Except as set forth on Schedule 3.10(a), all of the Accounts Receivable are and will be fully collectible within 45 days after billing, net of the reserves shown on the Interim Balance Sheet (or in the books of the Company, if such Accounts Receivable were created after the Interim Balance Sheet Date); provided, however, that Sellers do not guarantee the actual collection of the Accounts Receivable. To the knowledge of the Key Seller, there is no contest, claim, or right of set-off under any Contract with any obligor of a material Account Receivable relating to the amount or validity of such Account Receivable.
(b) Except as set forth on Schedule 3.10(b), since December 31, 2019, there have not been any write-offs as uncollectible of the Company’s accounts receivable except for write-offs in the Ordinary Course of Business and not in excess of $10,000 in the aggregate.
3.11 Intellectual Property.
(a) Schedule 3.11(a)(i) contains a true and complete listing of all the material items of Intellectual Property owned by the Company and other material intangible assets and properties owned by the Company, including, without limitation, each patent and registration which has been issued to the Company, and each pending application or application for registration made by the Company, with respect to the Intellectual Property of the Company (collectively, the “Material Owned Intellectual Property”). Schedule 3.11(a)(ii) contains a true and complete listing of all material items of Intellectual Property and other material intangible assets and properties owned by a third party which the Company has a right to use pursuant to a
12
license, sublicense, agreement or permission (the “Licensed Intellectual Property”), other than Off-the-Shelf Software. The Material Owned Intellectual Property and the Licensed Intellectual Property constitute all material Intellectual Property and other intangible assets and properties used in connection with the conduct of the Business by the Company
(b) Except as set forth on Schedule 3.11(b), each item of Intellectual Property owned by the Company, including the Material Owned Intellectual Property, is valid and in full force and effect and is owned by the Company free and clear of all Encumbrances and other claims, including any claims of joint ownership or inventorship. All issuance, renewal, maintenance and other payments that are or have become due as of the date hereof with respect to the Material Owned Intellectual Property have been timely paid by or on behalf of the Company.
(c) Except as set forth on Schedule 3.11(c): (i) the Company owns or possesses adequate licenses or other valid rights to use all Intellectual Property used by it in the conduct of the Business, (ii) to the knowledge of the Key Seller, the conduct of the Business of the Company does not infringe, misappropriate, dilute or conflict with, and has not conflicted with any Intellectual Property of any other Person, (iii) none of Sellers or the Company has received any notices alleging that the conduct of the Business, including the marketing, sale and distribution of the products and services of the Business, infringes, dilutes, misappropriates or otherwise violates any Person’s Intellectual Property, (iv) no current or former employee of the Company and no other Person owns or has any proprietary, financial or other interest, direct or indirect, in whole or in part, and including any rights to royalties or other compensation, in any of Intellectual Property owned or purported to be owned by the Company, (v) there is no agreement or other contractual restriction affecting the use by the Company of any of the Intellectual Property owned or purported to be owned by the Company, and (vi) Sellers do not have any knowledge of any present infringement, dilution, misappropriation or other violation of any of the Intellectual Property owned or purported to be owned by the Company by any Person, and the Company has not asserted or threatened any claim or objection against any Person for any such infringement or misappropriation.
(d) Except as set forth on Schedule 3.11(d), the information technology systems owned, leased, licensed or otherwise used in the conduct of the Business, including all computer software, hardware, firmware, process automation systems and telecommunications systems used by the Company in the Business (the “IT Systems”) are in good working condition and are sufficient for the operation of the Company’s business as currently conducted and perform reliably and in material conformance with the documentation and specifications for such systems. In the past three years, there has been no malfunction, failure, continued substandard performance, denial-of-service, or other cyber incident, including any cyberattack, or other impairment of the IT Systems. The IT Systems do not contain any viruses, “worms,” disabling or malicious code, or other anomalies that would materially impair the functionality of the IT Systems. The Company has taken commercially reasonable steps to provide for the backup, archival and recovery of the critical business data of the Company. The Company has taken commercially reasonable measures to maintain the confidentiality and value of all of its trade secrets.
13
3.12 Material Contracts.
(a) Schedule 3.12(a) contains a complete and accurate list of all Material Contracts (classified (i) through (xv), as applicable, based on the definition of Material Contracts). As used in this Agreement, “Material Contracts” means all Contracts of the following types to which the Company is a party or by which the Company or any of its properties or assets is bound: (i) any real property leases; (ii) any labor or employment-related agreements; (iii) any joint venture and limited partnership agreements; (iv) mortgages, indentures, loan or credit agreements, security agreements and other agreements and instruments relating to the borrowing of money or extension of credit; (v) agreements for the sale of goods or products or performance of services by or with any vendor or customer (or any group of related vendors or customers); (vi) lease agreements for machinery and equipment, motor vehicles, or furniture and office equipment or other personal property by or with any vendor (or any group of related vendors); (vii) agreements restricting in any manner the right of the Company to compete with any other Person, or restricting the right of the Company to sell to or purchase from any other Person; (viii) agreements between the Company and any of its Affiliates; (ix) guaranties, performance, bid or completion bonds, surety and appeal bonds, return of money bonds, and surety or indemnification agreements; (x) custom bonds and standby letters of credit; (xi) any license agreement or other agreements to which the Company is a party regarding any Intellectual Property of others, excluding any Off-the-Shelf Software; (xii) other agreements, contracts and commitments which (A) cannot be terminated by the Company on notice of 30 days or less or (B) require payment by the Company of $5,000 or more upon termination; (xiii) powers of attorney; (xiv) any agreements or arrangements with any employees, sales representatives, consultants, independent contractors, agents or other representatives of the Company (including sales commission agreements or arrangements); and (xv) each other agreement or contract to which the Company is a party or by which the Company or their respective assets are otherwise bound which is material to its Business, operation, financial condition or prospects.
(b) Each Material Contract is valid, binding and enforceable against the Company, as applicable, and the other parties thereto in accordance with its terms and is in full force and effect, except as enforcement may be limited by General Enforceability Exceptions. The Company, and, to the knowledge of the Key Seller, each of the other parties thereto, have performed all obligations required to be performed by them under, and are not in default under, any of such Contracts and no event has occurred which, with notice or lapse of time, or both, would constitute such a default. The Company has not received any written claim from any other party to any Contract that the Company has breached any obligations to be performed by it thereunder, or is otherwise in default or delinquent in performance thereunder. Sellers have furnished to Buyer a true and complete copy of each Material Contract required to be disclosed on Schedule 3.12(a).
3.13 Litigation. Except as set forth on Schedule 3.13, there is no, and during the last five years there has not been any, claim, action, suit, proceeding, arbitration, audit or investigation (collectively, “Action”) pending before any Authority or, to the knowledge of the Key Seller, threatened against the Company, any of its properties or assets or, to the extent the Company may have an obligation to provide indemnification or may otherwise become liable, any of the Company’s shareholders, members, officers, directors or employees. The Company is
14
not a party to or bound by any outstanding Governmental Order with respect to or affecting the properties, assets, personnel or Business of the Company. Sellers have provided Buyer with a list setting forth a general description of settlements occurring since January 1, 2018 regarding actual or threatened Action binding on the Company.
3.14 Compliance with Laws; Permits. The Company is, and for the past five years has been, in compliance with all applicable Laws. Set forth on Schedule 3.14 are all governmental or other industry permits, registrations, certificates, certifications, exemptions, licenses, franchises, consents, approvals and authorizations (“Permits”) necessary for the conduct of the Business of the Company as presently conducted, each of which the Company validly possesses and is in full force and effect. No notice, citation, summons or order has been issued, no complaint has been filed and served, no penalty has been assessed and notice thereof given, and no investigation or review is pending or, to the knowledge of the Key Seller, threatened with respect to the Company, by any Authority with respect to any alleged (a) violation in any material respect by the Company of any Law, or (b) failure by the Company to have, or comply with, any Permit required in connection with the conduct of its Business.
3.15 Environmental Matters. The Company is conducting, and for the past five years has conducted, its operations and the Business, and has occupied and operated the Leased Real Property in compliance with all Environmental Laws. The Company holds and is in compliance with all Permits required under Environmental Laws for its operation and the conduct of its Business, and all such Permits are in full force and effect. There is no Action relating to or arising under Environmental Laws that is pending or, to the knowledge of the Key Seller, threatened against or affecting the Company or any real property currently or, to the knowledge of the Key Seller, formerly owned, operated or leased by the Company. The Company has not received any written or other notice of, or entered into or assumed by Contract or operation of laws or otherwise, any obligation, Liability, order, settlement, judgment, injunction or decree relating to or arising under Environmental Laws, and no facts, circumstances or conditions exist with respect to the Company or any property currently or formerly owned, operated or leased by the Company or any property to or at which the Company transported or arranged for the disposal or treatment of Hazardous Materials that would reasonably be expected to result in the Company incurring Environmental Liabilities. No authorization, notification, recording, filing, consent, waiting period, remediation, or approval is required under any Environmental Laws in order to consummate the transaction contemplated hereby.
3.16 Taxes.
(a) Except as set forth on Schedule 3.16(a), (i) Sellers and the Company have timely filed or caused to be filed with the appropriate federal, state, local and foreign governmental entity or other authority (individually or collectively, “Taxing Authority”) all Tax Returns required to be filed with respect to the Company, and the Company has timely paid or remitted in full or caused to be paid or remitted in full all Taxes required to be paid with respect to the Company (whether or not shown due on any Tax Return); (ii) all Tax Returns are true, correct and complete; and (iii) there are no liens for Taxes upon the Company or its assets, except liens for current Taxes not yet due and payable. Neither the Company nor any Seller has granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any Taxes with respect to the Company. Sellers disclosed on their Tax
15
Returns all positions taken therein with respect to the Company that could give rise to a substantial understatement of Tax within the meaning of Section 6662 of the Code.
(b) Except as set forth on Schedule 3.16(b), there is no Action now pending against the Company or any Seller, in respect of any Tax with respect to the Company, and no notification of an intention to examine, request for information related to Tax matters or notice of deficiency or proposed adjustment for any amount of Tax has been received by the Company or any Seller. No Taxing Authority with which the Company or any Seller does not file Tax Returns has claimed that the Company or any Seller is or may be subject to taxation by that Taxing Authority with respect to the Company. The Company has not commenced activities in any jurisdiction that will result in an initial filing of any Tax Return with respect to Taxes imposed by a Taxing Authority that the Company had not previously been required to file in the immediately preceding taxable period.
(c) The Company has withheld and paid to the proper Taxing Authority all Taxes that it was required to withhold and pay, and has properly completed and timely filed all information returns or reports, including IRS Forms 1099 and W-2, that are required to be filed and has accurately reported all information required to be included on such returns or reports. Except as set forth on Schedule 3.16(c), all Taxes associated with taxable fringe benefits, that the Company is (or was) required by Law to withhold or collect in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, member or other third party have been duly withheld or collected, and have been timely paid over to the proper Taxing Authority to the extent due and payable.
(d) There is no Tax sharing or allocation agreement, arrangement or Contract with any Person pursuant to which the Company would have liability for Taxes of another Person following the Closing. The Company (i) has not been a member of an affiliated group under Section 1504(a) of the Code or any similar group defined under a similar provision of state, local, or non-U.S. law, or (ii) does not have any liability for Taxes of another Person under Section 1.1502-6 of the Treasury Regulations (or any similar provision or state, local, or non-U.S. law), as a transferee or successor, by contract, or otherwise.
(e) Neither the Company nor any Seller is or has been a party to any “listed transaction,” as defined in Section 6707A(e)(2) of the Code and Section 1.6011-4(b)(2) of the Treasury Regulations.
(f) The Company will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any: (A) change in method of accounting for a taxable period (or portion thereof) ending on or prior to the Closing Date; (B) “closing agreement,” as described in Code Section 7121 (or any corresponding provision of state, local, or non-U.S. income Tax law); (C) intercompany transaction, as defined in Section 1.1502-13 of the Treasury Regulations, or any excess loss account, as defined in Section 1.1502-19 of the Treasury Regulations, (or any corresponding provision of state, local or non-U.S. income Tax law); (D) installment sale or open transaction made on or prior to the Closing Date; (E) prepaid amount received on or prior to the Closing Date; or (F) election under Code Section 108(i).
16
(g) The Company has collected all sales Tax in the ordinary course of business and remitted such sales Tax amount to the applicable Authority, or has collected sales tax exemption certificates from all entities from which the Company does not collect sales Tax.
(h) The Company has not distributed the stock of another Person, or had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Code Section 355 or Code Section 361.
(i) The Company has never (i) had a permanent establishment (as defined in any applicable treaty or convention between any country and the United States), in any country other than the United States or (ii) except as set forth on Schedule 3.16(i), engaged in activities in any jurisdiction other than the jurisdiction under the Law of which it is organized that would subject it to taxation by such jurisdiction.
(j) Neither the Company nor any Seller has entered into any closing agreement or requested any private letter ruling, technical advice memoranda or similar agreements or rulings relating to Taxes or Tax items with any Taxing Authority with respect to the Company.
(k) Neither the Company nor any Seller is a “foreign person” as that term is used in Treasury Regulation Section 1.1445-2.
(l) Except as set forth in Schedule 3.16(l), neither the Company nor any Seller has received, directly or indirectly, any Tax credits, grants, subsidies, loan guarantees, or other forms of preferential treatment or assistance from any Authority with respect to the Company. The consummation of the transaction contemplated by this Agreement will not result in the loss of any Tax holiday, Tax abatement or similar Tax benefit.
3.17 Employee Relations.
(a) Schedule 3.17(a) sets forth a true and complete list setting forth the name, position, job location, salary or wage rate, commission status, date of hire, full- or part-time status, active or leave status and “exempt” or “non-exempt” status, for each employee or individual service provider of the Company as of the date hereof (including any individual absent due to short-term disability, family or medical leave, military leave or other approved absence). Except as set forth on Schedule 3.17(a), the Company is not a party to any management, employment, consulting or other agreements or understandings with any individual providing for employment for a defined period of time or on an other than “at-will” basis or for termination or severance benefits.
(b) The Company is not: (i) a party to or otherwise bound by any collective bargaining or other type of union agreement, (ii) a party to, involved in or, to the knowledge of the Key Seller, threatened by, any material labor dispute or material unfair labor practice charge, or (iii) currently negotiating any collective bargaining agreement, and the Company has not experienced any work stoppage during the last three years. To the knowledge of the Key Seller, no organizational effort is presently being made or is currently threatened by or on behalf of any labor union with respect to any group of employees of the Company.
17
(c) The Company is, and for the past five years has been, in compliance with all applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours, unemployment insurance, worker’s compensation, equal employment opportunity, employment discrimination and immigration control. Except as disclosed on Schedule 3.17(c), there are no outstanding claims against the Company or the Benefit Plans (other than routine claims for benefits under such plans), whether under Law, regulation, Contract, policy or otherwise, asserted or threatened in writing by or on behalf of any present or former employee or job applicant of the Company on account of or for (i) overtime pay, other than overtime pay for work done in the current payroll period, (ii) wages or salary for a period other than the current payroll period, (iii) any amount of vacation pay (including paid time off) or pay in lieu of vacation time off (including paid time off), other than vacation time off or pay (including paid time off) in lieu thereof earned in or in respect of the current fiscal year, (iv) any amount of severance pay or similar benefits, (v) unemployment insurance benefits, (vi) workers’ compensation or disability benefits, (vii) any violation of any Law relating to employment terminations, layoffs, or discipline, (viii) any violation of any Law relating to employee “whistleblower” or “right-to-know” rights and protections, (ix) any violation of any Law relating to the employment obligations of federal contractors or subcontractors, (x) any violation of any Law relating to minimum wages or maximum hours of work, or (xi) unfair labor practices, and Sellers are not aware of any such claims which have not been asserted. No Person (including any Authority) has asserted or threatened in writing any claims against the Company or any of its predecessors under or arising out of any regulation relating to equal opportunity employment, discrimination, harassment, or occupational safety in employment or employment practices.
(d) The Company has properly classified all employees, leased employees, consultants, independent contractors and all other Persons providing services to the Company for all purposes (including, without limitation, for all Tax purposes and for purposes related to eligibility to participate in or accrue a benefit under the Benefit Plans), and has withheld and paid all applicable Taxes and made all appropriate filings in connection with services provided by such Persons to the Company. The Company has properly classified all employees as “exempt” or “non-exempt” under the Fair Labor Standards Act and similar state or local Law.
(e) The Company has not conducted any mass layoffs or plant closings as defined by the Worker Adjustment and Retraining Notification Act of 1988, as amended, or any similar foreign, state or local Law.
3.18 Employee Benefit Matters.
(a) Schedule 3.18(a) lists all “employee benefit plans,” as defined in Section 3(3) of ERISA and all other retirement, pension, profit sharing, stock bonus, stock, restricted stock, stock option, stock purchase, equity-based, profits interest, phantom equity, employment, service, retainer, compensation, consulting, change in control, welfare, health (including medical, dental and vision), life, disability, group insurance, savings, deferred compensation, bonus or incentive compensation, paid time off, severance, salary continuation, retention, indemnification and fringe benefit and perquisite (including but not limited to benefits relating to automobiles, clubs, vacation, child care, parenting, sabbatical, sick leave, and tuition reimbursement) agreements, arrangements, plans, programs, Contracts, policies, or practices
18
maintained, contributed to, or required to be contributed to by the Company or any ERISA Affiliate for the benefit of any current or former employee, officer, director, member, partner or independent contractor of the Company or with respect to which the Company or any ERISA Affiliate may have any Liability, whether contingent or otherwise (the “Benefit Plans”). In the case of each “employee welfare benefit plan” as defined in Section 3(1) of ERISA, Schedule 3.18(a) discloses whether such plan is (i) unfunded, (ii) funded through a “welfare benefit fund,” as such term is defined in Code Section 419(e), or other funding mechanism or (iii) insured.
(b) As applicable, with respect to each Benefit Plan, Sellers have delivered or made available to Buyer true and complete copies of (i) all plan documents (including all amendments and modifications thereof) and in the case of an unwritten Benefit Plan, a written description thereof, (ii) the current summary plan description and each summary of material modifications thereto, (iii) the most recent IRS determination, advisory or opinion letter, (iv) all funding and administrative arrangement documents, including trust agreements, insurance contracts, custodial agreements, investment manager agreements and service agreements, (v) for the three most recent years, the filed Form 5500 for each Benefit Plan required to file Form 5500; and (vi) all communications, records, notices and filings received from or sent to the IRS, Department of Labor or Pension Benefit Guaranty Corporation.
(c) The Company and each ERISA Affiliate are in compliance with the provisions of ERISA, the Code and all other Laws applicable to the Benefit Plans (including all applicable aspects of the Patient Protection and Affordable Care Act, as amended, and the Health Insurance Portability and Accountability Act of 1996, as amended). Each Benefit Plan has been maintained, operated and administered in compliance with its terms and any related documents or agreements and the applicable provisions of ERISA, the Code and all other Laws. Neither the Company nor any ERISA Affiliate has incurred and none could reasonably be expected to incur an employer shared responsibility penalty under Section 4980H of the Code. The Company and each ERISA Affiliate have timely and accurately satisfied their reporting obligations under Sections 6055 and 6056 of the Code.
(d) Except as set forth on Schedule 3.18(d), no Benefit Plan provides for or continues medical or health benefits, or life insurance or other welfare benefits (through insurance or otherwise) for any Person or any dependent or beneficiary of any Person beyond termination of service or retirement other than coverage mandated by Law, and neither the Company nor any ERISA Affiliate has made a written or oral promise, or any communication that could reasonably be expected to promise, to any Person to provide any such benefits.
(e) No Benefit Plan is (or at any time has been), and neither the Company nor any ERISA Affiliate has ever contributed to, or has been required to contribute to, or has any liability (contingent or otherwise) under or with respect to, and no current or former employees of the Company or any ERISA Affiliate currently participate or ever have participated in (with respect to their employment with the Company or an ERISA Affiliate) any employee benefit plan that is (i) subject to Part 3, Subtitle B of Title I of ERISA, Title IV of ERISA or Code Section 412, (ii) a “multiemployer plan” (as defined in Section 3(37) of ERISA), (iii) a “multiple employer plan” as described in Section 413(e) of the Code, (iv) a “voluntary employees’ beneficiary association” (as defined in Section 501(e)(9) of the Code), or (v) a “multiple employer welfare arrangement” (as defined in Section 3(40)(A) of ERISA).
19
(f) All Benefit Plans which are “employee pension benefit plans” within the meaning of Section 3(2) of ERISA and which are intended to meet the qualification requirements of Code Section 401(a) now meet, and at all times since their inception have met, the requirements for such qualification, and the related trusts are now, and at all times since their inception have been, exempt from taxation under Code Section 501(a). Each Benefit Plan that is intended to be qualified under Code Section 401(a) has received a favorable determination letter (or an opinion or advisory letter on which it is entitled to rely) from the IRS that such Benefit Plan is qualified under Code Section 401(a). No event has occurred that will or could give rise to the revocation of any applicable determination letter or the loss of the right to rely on any applicable opinion or advisory letter, or the disqualification or loss of tax-exempt status of any such Benefit Plan or trust under Code Sections 401(a) or 501(a).
(g) All contributions (including all employer contributions and employee salary reduction contributions) and premium payments which are or have been due have been paid to or with respect to each Benefit Plan within the time required by Law. All required or discretionary (in accordance with historical practices) payments, premiums, contributions, reimbursements, or accruals for all periods ending prior to or as of the Closing Date shall have been made or properly accrued on the Interim Balance Sheet or will be properly accrued on the books and records of the Company and each ERISA Affiliate as of the Closing Date. None of the Benefit Plans has any unfunded Liabilities which are not reflected on the Interim Balance Sheet. Neither the Company nor any ERISA Affiliate has any assets subject to (or expected to be subject to) a lien for unpaid contributions to any Benefit Plan.
(h) Sellers’ execution of, and performance of the transactions contemplated by, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) (i) constitute an event under any Benefit Plan or related agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting (other than vesting required due to the termination of tax-qualified retirement plans, which shall not require an additional contribution to such plans), distribution, increase in benefits, or other obligation to fund benefits with respect to any Person or (ii) result in the triggering or imposition or any restrictions or limitations on the right of the Company or any ERISA Affiliate to amend or terminate any Benefit Plan (or result in any adverse consequence for so doing). The execution of this Agreement, and performance of the transactions contemplated hereby, will not (either alone or upon the occurrence of any additional or subsequent events) result in any payment or benefit that will or may be made by the Company that may be characterized as “excess parachute payment,” within the meaning of Section 280G(b)(1) of the Code. The Company does not have any Liability or obligation to make a payment that is not or will not be deductible under Code Section 280G. No Person is entitled to receive any additional payment (including any tax gross-up or other payment) as a result of the imposition of the excise taxes required by Code Section 4999.
(i) There are no pending or, to the knowledge of the Key Seller, threatened Actions by or on behalf of any Benefit Plan, any employee or beneficiary covered under any Benefit Plan, any Authority with respect to a Benefit Plan, or otherwise involving any Benefit Plan (other than routine claims for benefits). No Benefit Plan is under audit or investigation by any Authority and, to the knowledge of the Key Seller, no such audit or investigation is threatened.
20
(j) Each of the Benefit Plans can be terminated at any time in the sole discretion of the plan sponsor, without any additional contribution to such Benefit Plan or the payment of any additional compensation or amount or acceleration of any benefits (other than accelerated vesting with respect to tax-qualified retirement plans, which shall not require any additional contribution to be made). Nothing prohibits the prompt distribution of all amounts under any Benefit Plan subject to Section 401(a), 403(a) or 403(b) of the Code, provided that such Benefit Plan is terminated by the plan sponsor prior to Closing.
(k) Each Benefit Plan that constitutes a “non-qualified deferred compensation plan” within the meaning of Code Section 409A, complies (and has at all relevant times complied) in both form and operation with the requirements of Code Section 409A so that no amount paid pursuant to any such Benefit Plan is or will be subject to tax under Code Section 409A; and neither the Company nor any ERISA Affiliate is or has been required to report any Taxes due as a result of a failure of a Benefit Plan to comply with Code Section 409A. With respect to each Benefit Plan, neither the Company nor any ERISA Affiliate has any indemnity obligation for any Taxes or interest imposed or accelerated under Code Section 409A.
3.19 Transactions with Related Parties. Except as described on Schedule 3.19, since January 1, 2018, no member, stockholder, officer, manager or director of the Company, nor any Affiliate of the Company or of any such Person, has or had:
(a) any contractual or other claims, express or implied, of any kind whatsoever against the Company;
(b) any interest in any property or assets used by the Company;
(c) any direct or indirect ownership or other interest in any competitor of the Company; or
(d) engaged in any other material transaction with the Company (other than employment relationships at the salaries disclosed in the Schedules to this Agreement).
Except as described on Schedule 3.19, no stockholder, officer or director of the Company, nor any Affiliate of such Person, has outstanding any loan, guarantee or other obligation of borrowed money made to or from the Company.
3.20 Insurance.
(a) The Company maintains insurance with respect to its properties and Business against loss or damages of the kinds customarily insured against by companies engaged in the same or similar businesses as the Company, in such amounts that are commercially reasonable and customarily carried under similar circumstances by such other companies.
(b) Schedule 3.20(b)(i) contains a complete and correct list of all policies and Contracts for insurance (including coverage amounts and expiration dates) of which the Company is the owner, insured or beneficiary, or covering the Company’s properties or assets. All such policies are outstanding and in full force and effect. The Company is not in default with respect to any provision contained in any such policy, nor has the Company failed to give any
21
notice or present any claim under any such policy in a timely fashion or in the manner or detail required by the policy. Except as set forth on Schedule 3.20(b)(ii): (i) all of such coverages are provided on a “claims made” (as opposed to “occurrence”) basis; (ii) there are no outstanding claims under such policies; (iii) there are no premiums or claims due under such policies which remain unpaid; (iv) no notice of cancellation or non-renewal with respect to, or disallowance (other than reservation of rights by the insurer) of any material claim under, any such policy has been received; and (v) the Company has not been refused any insurance, nor have any of its coverages been limited by any insurance carrier to which it has applied for insurance or with which has carried insurance.
3.21 Relationship with Significant Customers. The Company has not received any written or oral communication or notice from any Significant Customer stating that, or otherwise has any reason the believe that, any Significant Customer (a) has ceased, or will cease, to use the products or services of the Company, (b) has substantially reduced, or will substantially reduce, the use of such products or services at any time, or (c) will otherwise materially and adversely modify its business relationship with the Company (whether as a result of the consummation of the transactions contemplated hereby or otherwise). “Significant Customer” means, with respect to the Company, the top 10 customers of the Company, as applicable, by dollar volume of sales, for the nine-month period ended on September 30, 2021 and the fiscal year ended December 31, 2020, as set forth on Schedule 3.21.
3.22 Relationship with Significant Suppliers. The Company has not received any written or oral communication or notice from any Significant Supplier stating that, or otherwise has any reason the believe that, any Significant Supplier, (a) will stop, materially decrease the rate of, or materially and adversely change the terms (whether related to payment, price or otherwise) with respect to, supplying materials, products or services to the Company (whether as a result of the consummation of the transactions contemplated hereby or otherwise) or (b) will otherwise materially and adversely modify its business relationship with the Company. “Significant Supplier” means, with respect to the Company, the top 10 suppliers to the Company, as applicable, by dollar volume of purchase, for the nine-month period ended on September 30, 2021 and for the fiscal year ended December 31, 2020, as set forth on Schedule 3.22.
3.23 Anti-Corruption Laws. Without limiting the generality of Section 3.14, since January 1, 2018, none of Sellers, the Company or, to the knowledge of the Key Seller, anyone acting on the Company’s behalf has: (i) violated, or engaged in any activity, practice or conduct which would violate, any Anti-Corruption Law; (ii) used corporate funds or assets for any unlawful contribution, gift, entertainment or other unlawful expense, or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment; or (iii) directly, or indirectly through its agents, representatives or any other person authorized to act on its behalf, offered, promised, paid, given, or authorized the payment or giving of money or anything else of value; in each case, to any Government Official or Person while knowing or having reason to believe that some portion or all of the payment or thing of value will be offered, promised, or given, directly or indirectly, to a Government Official or another Person; for the purpose of (x) influencing any act or decision of such Government Official or such Person in his, her or its official capacity, including a decision to do or omit to do any act in violation of his, her or its lawful duties or proper performance of functions, (y) inducing such Government Official or such person or entity to use his, her or its influence or position with any Governmental Authority or
22
other person or entity to influence any act or decision, or (z) in order to obtain or retain business for, direct business to, or secure an improper advantage for, the Company.
3.24 Privacy Laws. Without limiting the generality of Section 3.14, the Company has complied in all respects with all applicable Privacy Laws. There are no restrictions on the collection, use, disclosure and retention of Personal Information by the Company except as provided by Privacy Laws. There are no Actions, whether statutory or otherwise, pending, ongoing, or to the knowledge of the Key Seller, threatened with respect to the collection, use, disclosure or retention of Personal Information by the Company, and there are no facts or circumstances that could reasonably be expected to give rise to any such Action. No decision, judgment, order or award, whether statutory or otherwise is pending or has been made and no notice has been given pursuant to any Privacy Laws requiring the Company to take or refrain from taking any action with respect to Personal Information. In the past three years, the Company has not experienced any actual, alleged, or suspected data breach or other security incident involving Personal Information in its possession or control.
3.25 Product and Service Warranties. Except as set forth on Schedule 3.25 and except for warranties arising under applicable Law (if any), (a) there are no warranties, express or implied, written or oral, with respect to the products and services of the Company, and (b) there are no pending or, to the knowledge of the Key Seller, threatened claims with respect to any such warranties.
3.26 Banking Relationships. Schedule 3.26 sets forth (a) a list of each account, lock box or safe deposit box of the Company (including any necessary identifying information), and (b) the name of each Person authorized to draw thereon or to have access thereto and the name of each Person or entity, if any, holding powers of attorney with respect thereto or any other powers of attorney.
3.27 Brokers. Neither the Company nor any Seller has retained, nor is the Company or any Seller obligated for any commission, fee or expense to, any broker, finder or investment banking firm to act on their behalf in connection with the transactions contemplated by this Agreement or the Ancillary Agreements and, to the knowledge of the Key Seller, no other Person is entitled to receive any brokerage commission, finder’s fee or other similar compensation in connection with the transactions contemplated by this Agreement and the Ancillary Agreements.
3.28 Exclusivity of Representations and Warranties. Neither Sellers nor any other Person is making any representation or warranty of any kind or nature whatsoever, oral or written, express or implied, relating to Sellers or the Company (including any relating to financial condition, results of operations, assets or liabilities of the Company), except as expressly set forth in this Article III, and Sellers hereby disclaim any such other representations or warranties.
Article IV.
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer makes the following representations and warranties to Sellers:
23
4.1 Organization. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Ohio, and has all requisite corporate power and authority to carry on its business as it is now being conducted, and to execute, deliver, and perform this Agreement and each Ancillary Agreement to which it is a party, and to consummate the transactions contemplated hereby and thereby.
4.2 Authority. The execution, delivery, and performance by Buyer of this Agreement and each Ancillary Agreement to which Buyer is a party, and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement and each Ancillary Agreement to which Buyer is a party has been duly and validly executed and delivered by Buyer and constitutes the valid and binding obligation of Buyer, enforceable against Buyer in accordance with their respective terms, except as enforcement may be limited by General Enforceability Exceptions.
4.3 No Conflict. The execution, delivery, and performance by Buyer of this Agreement and each Ancillary Agreement to which Buyer is a party, and the consummation by Buyer of the transactions contemplated hereby and thereby, does not and will not, with or without the giving of notice or the lapse of time, or both, (i) violate any provision of Law to which Buyer is subject, (ii) violate any provision of the certificate of incorporation, bylaws, or other governance documents of Buyer, or (iii) violate or result in a breach of or constitute a default (or an event which might, with the passage of time or the giving of notice, or both, constitute a default) under, or require the consent of any third party under, or result in or permit the termination or amendment of any provision of, or result in or permit the acceleration of the maturity or cancellation of performance of any obligation under, or result in the creation or imposition of any Encumbrance of any nature whatsoever upon any assets or property or give to others any interests or rights therein under any indenture, deed of trust, mortgage, loan or credit agreement, license, Permit, Contract, lease, or other agreement, instrument or commitment to which Buyer is a party or by which either may be bound or affected; except, in each case, for violations, breaches, defaults, required consents, terminations, accelerations, Encumbrances or rights that in the aggregate would not materially hinder or impair the ability of Buyer to perform its obligations hereunder or the consummation of the transactions contemplated hereby.
4.4 Consents. No consent, approval, or authorization of, or exemption by, or filing with, any Authority is required to be obtained or made by Buyer in connection with the execution, delivery and performance by Buyer of this Agreement or any Ancillary Agreement to which Buyer is a party or the taking by Buyer of any other action contemplated hereby or thereby.
4.5 Litigation. Except as described in the reports, registrations, documents, filings, statements, schedules and submissions together with any required amendments thereto filed with the SEC prior to the date of this Agreement, there is no Action pending or, to the knowledge of Buyer, threatened (a) against Buyer which, if adversely determined, would have a material adverse effect on the assets, business or financial condition of Buyer or (b) which seeks to prohibit, restrict or delay consummation of the transactions contemplated by this Agreement. There is no Governmental Order outstanding or, to the knowledge of Buyer, threatened (i) against Buyer or its assets or business, or (ii) which seeks to prohibit, restrict or delay consummation of the transactions contemplated by this Agreement.
24
4.6 Brokers. Buyer has not retained, nor is Buyer obligated for any commission, fee or expense to, any broker, finder or investment banking firm to act on its behalf in connection with the transactions contemplated by this Agreement or the Ancillary Agreements and, to the knowledge of Buyer, no other Person is entitled to receive any brokerage commission, finder’s fee or other similar compensation in connection with the transactions contemplated by this Agreement and the Ancillary Agreements.
4.7 Exclusivity of Representations and Warranties. Neither Buyer nor any of Buyer’s Affiliates or representatives or any other Person is making any representation or warranty on behalf of Buyer of any kind or nature whatsoever, oral or written, express or implied, except as expressly set forth in this Article IV and Buyer hereby disclaims any such other representations or warranties.
Article V.
COVENANTS
5.1 Confidentiality. Each Seller shall keep confidential and not disclose to any other Person or use for his own benefit or the benefit of any other Person any confidential or proprietary information, technology, know-how, trade secrets (including all results of research and development), product formulas, industrial designs, franchises, inventions or other intellectual property regarding Buyer, the Company, or any of their respective businesses and operations including, without limitation, any such information regarding the Business (“Confidential Information”) in its or his possession or control. The obligations of each Seller under this Section 5.1 shall not apply to Confidential Information which (i) is or becomes generally available to the public without breach of the commitment provided for in this Section; or (ii) is required to be disclosed by Law; provided, however, that, in any such case, the applicable Seller shall notify Buyer as early as reasonably practicable prior to disclosure to allow Buyer to take appropriate measures to preserve the confidentiality of such Confidential Information.
5.2 Restrictive Covenants.
(a) During the period beginning on the Closing Date and ending on the fifth anniversary of the Closing Date (the “Restricted Period”), each Seller covenants and agrees not to, and shall cause his or her Affiliates not to, directly or indirectly and anywhere in the Restricted Territory, conduct, manage, operate, engage in, or have an ownership interest in any business or enterprise engaged in (i) the Business, or (ii) any activities that are otherwise similar to, or competitive with, the Business. Notwithstanding the provisions of this Section 5.2(a), the beneficial ownership of less than five percent of the shares of stock or other equity interests of any corporation or other entity having a class of equity securities actively traded on a national securities exchange or over-the-counter market and not formed for the purpose of circumventing this Agreement shall not be deemed to violate the provisions of this Section 5.2(a).
(b) During the Restricted Period, each Seller covenants and agrees not to, and shall cause his or her Affiliates not to, directly or indirectly, call-on, solicit or induce, or attempt to solicit or induce, any Person which is or was a past, present or prospective customer or other business relation of the Company as of the Closing Date for the provision of products or services
25
related to the Business or in any other manner that would otherwise interfere with business relationships between Buyer and such customers and other business relations.
(c) During the Restricted Period, each Seller covenants and agrees not to, and shall cause his or her Affiliates not to, directly or indirectly, call-on, solicit or induce, or attempt to solicit or induce, any Person who was employed or engaged as an independent contractor by the Company on or at any time before the Closing Date, to leave the employ or engagement of the Company or its Affiliates (including Buyer) for any reason whatsoever.
(d) Sellers acknowledge and agree that the provisions of this Section 5.2 are reasonable and necessary to protect the legitimate business interests of Buyer and its acquisition of the Company Units. Neither Seller shall contest that Buyer’s remedies at law for any breach or threat of breach by any Seller or any of their respective Affiliates of the provisions of this Section 5.2 may be inadequate, and that Buyer shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Section 5.2 and to enforce specifically such terms and provisions, in addition to any other remedy to which Buyer may be entitled at law or equity. The restrictive covenants contained in this Section 5.2 are covenants independent of any other provision of this Agreement or any other agreement between the Parties hereunder and the existence of any claim which any Seller may allege against Buyer under any other provision of the Agreement or any other agreement will not prevent the enforcement of these covenants.
(e) If any of the provisions contained in this Section 5.2 shall for any reason be held to be excessively broad as to duration, scope, activity or subject, then such provision shall be construed by limiting and reducing it, so as to be valid and enforceable to the extent compatible with the applicable Law or the determination by a court of competent jurisdiction.
5.3 Nondisparagement. Each Party agrees that it shall not, and shall cause each of its Affiliates not to, at any time, in any written or oral communications with the press or other media, any customer, client, stakeholder, investor or supplier of the other Party, or its Affiliate, or any other Person, criticize, ridicule, or make or encourage any other Person to make any statement that disparages, is derogatory of, or is negative toward the personal or business reputation, conduct or practices of the other Party, any of its Affiliates, or any of their then current or former respective officers, directors, employees, representatives, agents or attorneys.
5.4 Further Assurances. From time to time after the Closing, Buyer shall, at the request of Sellers, execute and deliver any further instruments or documents and take all such further action as Sellers may reasonably request in order to evidence the consummation of the transactions contemplated hereby. From time to time after the Closing, each Seller shall, at the request of Buyer, execute and deliver any further instruments or documents and take all such further action as Buyer may reasonably request in order to evidence the consummation of the transactions contemplated hereby.
5.5 Release. Effective as of the Closing, each Seller, on behalf of such Seller and his or her Affiliates and their respective past, present or future predecessors or successors (each, a “Releasing Party”), hereby irrevocably waives, releases, remises, and forever discharges each of the Company, Buyer and their respective Affiliates and their respective past, present or future shareholders, partners, members and representatives and each of their respective successors from
26
any and all actions, promises, agreements, rights to payment, rights to any equitable remedy, rights to any equitable subordination, demands, debts, Liabilities, express or implied contractual obligations, obligations of payment or performance, rights of offset or recoupment, accounts, Losses or expenses (including, without limitation, attorneys’ fees and other professional fees and expenses), whether known or unknown, matured or unmatured, suspected or unsuspected, liquidated or unliquidated, absolute or contingent, direct or derivative, which such Releasing Party or any of its Affiliates may have against such party as of the date hereof (collectively, the “Claims”), other than claims arising under this Agreement or the other Ancillary Agreements. Each Seller understands that the released Claims include not only Claims presently known to such Seller, but also include all unknown or unanticipated Claims, rights, demands, actions, obligations, liabilities, and causes of action of every kind and character that would otherwise come within the scope of the released Claims as described above. Each Seller understands that such Seller may hereafter discover facts different from what it now believes to be true, which if known, could have materially affected this release, but it nevertheless waives any Claims or rights based on different or additional facts
5.6 Termination of Designated Benefit Plans. Effective immediately prior to the Closing, Sellers shall cause the Company to terminate its 401(k) plan (the “Designated Benefit Plan”), subject to and in accordance with the terms of the Designated Benefit Plan.
Article VI.
Tax Matters
6.1 Tax Indemnification. Sellers, jointly and severally, shall indemnify, defend and hold harmless the Company and Buyer from and against the entirety of any Losses the Company or Buyer may suffer resulting from, arising out of, relating to, in the nature of or caused by each and all of the following: (a) any and all Taxes (or the non-payment thereof) of the Company for all taxable periods ending on or before the Closing Date, and the portion through the end of the Closing Date for any taxable period that includes (but does not end on) the Closing Date (the “Pre-Closing Tax Period”), (b) any and all Taxes of any member of an affiliated, consolidated, combined or unitary group of which the Company (or any predecessor of the Company) is or was a member on or prior to the Closing Date, including pursuant to Section 1.1502-6 of the Treasury Regulations or any analogous or similar state, local or foreign Law or regulation, and (c) any and all Taxes of any Person (other than the Company) imposed on the Company as a transferee or successor, by contract or pursuant to any law, rule or regulation, which Taxes relate to an event or transaction occurring before Closing; provided, however, that in the case of clauses (a), (b) and (c) above, Sellers shall be liable only to the extent that such Taxes are in excess of the amount, if any, taken into account in determining the Final Adjusted Purchase Price.
6.2 Straddle Period. In the case of any taxable period that includes (but does not end on) the Closing Date (a “Straddle Period”), the amount of any Taxes based on or measured by income or receipts of the Company for the Pre-Closing Tax Period shall be determined based on an interim closing of the books as of the close of business on the Closing Date (and for such purpose, the taxable period of any partnership or other pass-through entity in which the Company holds a beneficial interest shall be deemed to terminate at such time), and the amount of other Taxes of the Company for a Straddle Period that relates to the Pre-Closing Tax Period shall be deemed to be the amount of such Tax for the entire taxable period multiplied by a
27
fraction the numerator of which is the number of days in the taxable period ending on the Closing Date and the denominator of which is the number of days in such Straddle Period
6.3 Transfer Taxes. Buyer shall be responsible for and pay 100% of all sales taxes, transfer taxes, stamp taxes, conveyance taxes, intangible taxes, documentary recording taxes, license and registration fees, recording fees and any similar taxes or fees incurred in connection with the consummation of the transactions contemplated by this Agreement (the “Transfer Taxes”). Buyer shall file all necessary Tax Returns and other documentation with respect to Transfer Taxes (except to the extent such Tax Returns are required by law to be filed by Sellers), and Sellers shall cooperate with Buyer in the filing of any such Tax Returns, including promptly supplying any information in its possession that is reasonably necessary to complete such Tax Returns. Buyer and Sellers shall cooperate with each other in any mutually agreeable, reasonable and lawful arrangement designed to minimize any applicable Transfer Taxes.
6.4 Cooperation on Tax Matters. Buyer and Sellers agree to furnish or cause to be furnished to each other, upon request, as promptly as is practicable, such information and assistance relating to the Company (including without limitation access to books and records) as is reasonably necessary for the filing of all Tax Returns, the making of any election relating to Taxes, the preparation for any audit by any Taxing Authority, and the prosecution or defense of any claim, suit or proceeding relating to any Tax. Buyer and Sellers shall retain all books and records with respect to Taxes (including income related Taxes) for any period up to and including the Closing Date, pertaining to the Company, for at least three years following the Closing Date. At the end of such period, each Party shall provide the others with at least 30 days prior written notice before destroying such books and records, during which period the Party receiving such notice can elect to take possession, at its own expense, of such books and records. Buyer and Sellers further agree, upon request, to use their best efforts to obtain any certificate or other document from any Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). Buyer and Sellers further agree, upon request, to provide the other with all information that either may be required to report pursuant to Code §6043, or Code §6043A, or Treasury Regulations promulgated thereunder.
6.5 Responsibility for Filing Tax Returns. Buyer shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for the Company that are filed after the Closing Date. Buyer shall permit Sellers to review and comment on each such Tax Return relating to a Straddle Period or any period prior to Closing described in the preceding sentence prior to filing and shall make such revisions to such Tax Returns as are reasonably requested by Sellers.
6.6 Refunds and Tax Benefits. Any income Tax refunds with respect to the Company that are received by Buyer or the Company, and any amounts credited against income Tax with respect to the Company to which Buyer or the Company becomes entitled, that relate to income Tax periods or portions thereof ending on or before the Closing Date shall be for the account of Sellers, and Buyer shall pay over to Sellers any such refund or the amount of any such credit (net of any income Taxes of Buyer or the Company attributable to such refund or credit) within 30 days after receipt or entitlement thereto; provided, however, Buyer shall not be required to pay
28
over to Sellers any such refund or the amount of any such credit up to the amount of any Tax asset taken into account in determining the adjustments set forth in Section 1.3.
6.7 Amended Returns and Retroactive Elections. Buyer shall not, and shall not cause or permit the Company to (i) amend any Tax Returns filed with respect to any Tax year ending on or before the Closing Date or (ii) make any Tax election that has retroactive effect to any such year, in each such case without the prior written consent of Sellers, such consent not to be unreasonably withheld.
6.8 Tax-Sharing Agreements. All tax-sharing agreements or similar agreements with respect to or involving the Company shall be terminated as of the Closing Date and, after the Closing Date, the Company shall not be bound thereby or have any liability thereunder.
Article VII.
SURVIVAL AND INDEMNIFICATION
7.1 Survival. The covenants and agreements in this Agreement or in any Ancillary Agreement shall survive the Closing. The representations and warranties under this Agreement or in any Ancillary Agreement shall survive until the first anniversary of the Closing Date; provided, however, that (i) the following representations and warranties (collectively, the “Fundamental Representations”): (A) Section 3.1 (Authority; Execution and Delivery), Section 3.2 (Organization), Section 3.4 (Capitalization; Title to Company Units), Section 3.8(a) (Title to Assets), Section 3.16 (Taxes), Section 3.27 (Brokers); and (B) Section 4.1 (Organization), Section 4.2 (Authority), Section 4.6 (Brokers) shall survive the Closing for the full period of all applicable statutes of limitations (giving effect to any waiver, mitigation or extension thereof) plus 60 days; and (ii) the representations and warranties set forth in Section 3.15 (Environmental Matters) and Section 3.18 (Employee Benefit Matters) shall survive the Closing until the second anniversary of the Closing Date. No action or claim for Losses resulting from any misrepresentation or breach of warranty shall be brought or made after the expiration of the survival period applicable to such representation or warranty (as provided in this Section), except that such time limitation shall not apply to claims which have been asserted and which are the subject of a written notice from Sellers to Buyer or from Buyer to Sellers, as may be applicable, prior to the expiration of such survival period.
7.2 General Indemnification.
(a) Subject to the terms and conditions of this Article VII, Sellers, jointly and severally, shall indemnify, defend and hold harmless Buyer and its directors, officers, Affiliates, employees, agents and representatives (collectively, the “Buyer Indemnified Parties”), from and against all Losses that are incurred or suffered by any of them in connection with or resulting from any of the following:
(i) any breach of, or inaccuracy in, any representation or warranty made by any Seller (including, for the avoidance of doubt, the Key Seller) in this Agreement or any Ancillary Agreement;
(ii) any breach of any covenant made by any Seller in this Agreement or any Ancillary Agreement;
29
(iii) any Closing Indebtedness, to the extent not taken into account in determining the Final Adjusted Purchase Price;
(iv) any Transaction Expense, to the extent not taken into account in determining the Final Adjusted Purchase Price;
(v) any matter identified on Schedule 3.13;
(vi) the Leased Vehicles or either Seller’s use thereof after the Closing; or
(vii) the enforcement by any Buyer Indemnified Party of its indemnification rights under this Agreement.
(b) Subject to the terms and conditions of this Article VII, Buyer shall indemnify, defend and hold harmless Sellers and their respective agents and representatives (collectively, the “Seller Indemnified Parties”) from and against all Losses that are incurred or suffered by any of them in connection with or resulting from any of the following:
(i) any breach of, or inaccuracy in, any representation or warranty made by Buyer in this Agreement or any Ancillary Agreement;
(ii) any breach of any covenant made by Buyer in this Agreement or any Ancillary Agreement; or
(iii) the enforcement by the Seller Indemnified Parties of their indemnification rights under this Agreement.
(c) The representations and warranties in this Agreement and the Ancillary Agreements shall not be affected or diminished by, and no right of indemnification hereunder shall be limited by reason of, any investigation or audit conducted before or after the Closing or the knowledge of any Party of any breach of a representation, warranty, covenant or agreement by the other Party at any time, or the decision of any Party to complete the Closing.
(d) In calculating the amount of Losses recoverable from an Indemnifying Party, the amount of such Losses shall be reduced by the amount of any insurance proceeds actually received by the Indemnified Party in respect of the Losses net of (i) any deductible amounts and any reasonable costs and expenses actually incurred by the Indemnified Party in collecting such insurance proceeds, including reasonable attorneys’ fees, and (ii) any increase in insurance premiums reasonably attributable to insurance proceeds paid in respect of such Losses.
7.3 Process for Indemnification.
(a) A Party seeking indemnification hereunder is referred to as an “Indemnified Party.” A Party from whom indemnification is sought is referred to as an “Indemnifying Party.” As soon as is reasonable after an Indemnified Party either (i) receives notice of any claim or the commencement of any Action by any third party which such Indemnified Party reasonably believes may give rise to a claim for indemnification from an
30
Indemnifying Party hereunder (a “Third Party Claim”) or (ii) sustains any Loss not involving a Third Party Claim or action which such Indemnified Party reasonably believes may give rise to a claim for indemnification from an Indemnifying Party hereunder, such Indemnified Party shall, if a claim in respect thereof is to be made against an Indemnifying Party under this Article VII, notify such Indemnifying Party in writing of such claim, action or Loss, as the case may be; provided, however, that failure to notify Indemnifying Party shall not relieve Indemnifying Party of its indemnity obligation, except to the extent such Indemnifying Party is actually prejudiced in its defense of the Action by such failure. Any such notification must be in writing and must state in reasonable detail the nature and basis of the claim, Action or Loss, to the extent known. Except as provided in this Section 7.3, the Indemnifying Party shall have the right, using counsel acceptable to the Indemnified Party, which acceptance shall not be unreasonably withheld, to contest, defend, litigate or settle any such Third Party Claim which involves (and continues to involve) solely monetary damages; provided that the Indemnifying Party shall have notified the Indemnified Party in writing of its intention to do so within 15 days of the Indemnified Party having given notice of the Third Party Claim to the Indemnifying Party; provided, further, that (1) the Indemnifying Party expressly agrees in such notice to the Indemnified Party that, as between the Indemnifying Party and the Indemnified Party, the Indemnifying Party shall be solely obligated to fully satisfy and discharge the Third Party Claim subject to the limitations with respect to indemnification included in this Agreement; (2) if reasonably requested to do so by the Indemnified Party, the Indemnifying Party shall have made reasonably adequate provision to ensure the Indemnified Party of the financial ability of the Indemnifying Party to satisfy the full amount of any adverse monetary judgment that may result from such Third Party Claim; (3) assumption by the Indemnifying Party of such Third Party Claim would not reasonably be expected to cause a material adverse effect on the Indemnified Party’s business; and (4) the Indemnifying Party shall diligently contest the Third Party Claim (the conditions set forth in clauses (1), (2), (3) and (4) being collectively referred to as the “Litigation Conditions”). The Indemnified Party shall have the right to participate in, and to be represented by counsel (at its own expense) in any such contest, defense, litigation or settlement conducted by the Indemnifying Party; provided, that the Indemnified Party shall be entitled to reimbursement therefor if the Indemnifying Party shall lose its right to contest, defend, litigate and settle the Third Party Claim or if representation of the Indemnifying Party and the Indemnified Party by the same counsel would, in the reasonable opinion of such counsel, constitute a conflict of interest under applicable standards of professional conduct. The Indemnifying Party shall not be entitled, and shall lose its right, to contest, defend, litigate and settle the Third Party Claim if the Indemnified Party shall give written notice to the Indemnifying Party of any objection thereto based upon the Litigation Conditions.
(b) The Indemnifying Party, if it shall have assumed the defense of any Third Party Claim as provided in this Agreement, shall not consent to a settlement of, or the entry of any judgment arising from, any such Third Party Claim without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party, enter into any compromise or settlement which commits the Indemnified Party to take, or to forbear to take, any action or which does not provide for a complete release by such third party of the Indemnified Party. The Indemnified Party shall have the sole and exclusive right to settle any Third Party Claim, on such terms and conditions as it deems reasonably appropriate, to the extent such Third Party Claim involves equitable or other non-monetary relief. All expenses (including
31
attorneys’ fees) incurred by the Indemnifying Party in connection with the foregoing shall be paid by the Indemnifying Party. No failure by an Indemnifying Party to acknowledge in writing its indemnification obligations under this Article VII shall relieve it of such obligations to the extent such obligations exist.
(c) If an Indemnified Party is entitled to indemnification against a Third Party Claim, and the Indemnifying Party fails to accept a tender of, or assume the defense of, a Third Party Claim pursuant to this Section 7.3, the Indemnifying Party shall not be entitled, and shall lose its right, to contest, defend, litigate and settle such a Third Party Claim, and the Indemnified Party shall have the right, without prejudice to its right of indemnification hereunder, in its discretion exercised in good faith, to contest, defend and litigate such Third Party Claim, and may settle such Third Party Claim either before or after the initiation of litigation, at such time and upon fair and reasonable terms, provided that at least ten (10) days prior to any such settlement, written notice of its intention to settle is given to the Indemnifying Party. If, pursuant to this Section 7.3, the Indemnified Party so contests, defends, litigates or settles a Third Party Claim for which it is entitled to indemnification hereunder, the Indemnified Party shall be reimbursed on a monthly basis by the Indemnifying Party for the reasonable attorneys’ fees and other expenses of contesting, defending, litigating and/or settling the Third Party Claim which are incurred from time to time.
7.4 Recoupment Against Escrow. Sellers agree that Buyer shall be entitled to receive payment from the Escrow Agent, from the Escrow Amount, any amount necessary to satisfy (a) Sellers’ indemnification obligations with respect to any Claim for Loses required to be paid by Sellers pursuant to this Article VII; (b) Sellers’ indemnification obligations pursuant to Article VI; and (c) any obligation of Sellers to pay any amounts that may become due to Buyer pursuant to Section 1.3 or Section 1.6 with respect to the reductions to the Purchase Price, which right may be exercised at any time after such payments become due. When Buyer becomes entitled to any payment from the Escrow Amount pursuant to this Agreement, Buyer and Sellers shall jointly sign and deliver to the Escrow Agent a written direction authorizing such payment to Buyer, in accordance with the terms of the Escrow Agreement. Upon expiration of the Escrow Period, Buyer and Sellers shall sign and deliver to the Escrow Agent, in accordance with the Escrow Agreement, a written direction authorizing the payment of the remaining Escrow Amount, if any, to Sellers. Notwithstanding the foregoing or the provisions of Section 1.5, if, at the expiration of the Escrow Period there is one or more pending Claims by a Buyer Indemnified Party against Sellers for indemnification pursuant to Article VI or Article VII, but there has not been a final resolution of such Claim, then Buyer and Sellers shall execute and deliver to the Escrow Agent written direction authorizing the Escrow Agent to continue to hold in escrow the portion of the Escrow Amount that Buyer reasonably determines is necessary to fully satisfy such Claim (up to the full remaining amount of the Escrow Amount then held in escrow), until such time as there is a final resolution of such Claim or Claims (at which time Buyer and Sellers shall jointly sign and deliver to the Escrow Agent a written direction authorizing payment to Buyer or Sellers, as appropriate, in accordance with the terms of the Escrow Agreement).
7.5 Remedies Exclusive. The remedies provided in this Article VII shall be the sole and exclusive remedies of any Indemnified Party related to any and all Losses incurred because of or resulting from or arising out of this Agreement and any Ancillary Agreements; provided, however, that nothing contained in this Article VII shall be deemed to limit or restrict in any
32
manner (a) any rights or remedies which any Indemnified Party has, or might have, at law or in equity based on fraud or intentional misrepresentation, or (b) any Person’s right to seek and obtain any equitable relief to which any Person shall be entitled.
7.6 Tax Treatment. Any indemnification payments under this Article VII shall be treated for Tax purposes as adjustments to the Purchase Price to the extent permitted by applicable Law.
Article VIII.
MISCELLANEOUS
8.1 Interpretive Provisions.
(a) Whenever used in this Agreement, (i) “including” (or any variation thereof) means including without limitation and (ii) any reference to gender shall include all genders. Reference to a particular agreement (including this Agreement), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof. The terms “dollars” and “$” mean United States Dollars. Unless Business Days are specified, all references to “days” hereunder shall mean calendar days. The Exhibits and Schedules identified in this Agreement are incorporated into this Agreement by reference and made a part hereof.
(b) The Parties acknowledge and agree that (i) each Party and its counsel have reviewed the terms and provisions of this Agreement and have contributed to its drafting, (ii) the normal rule of construction, to the effect that any ambiguities are resolved against the drafting Party, shall not be employed in the interpretation of it, and (iii) the terms and provisions of this Agreement shall be construed fairly as to all Parties and not in favor of or against any Party, regardless of which Party was generally responsible for the preparation of this Agreement.
8.2 Entire Agreement. This Agreement (including the Schedules and the exhibits attached hereto) together with the Ancillary Agreements constitute the sole understanding and agreement of the Parties with respect to the subject matter hereof. The Parties agree and acknowledge that as of the Closing Date, the mutual non-disclosure agreement, dated May 11, 2021, between Buyer and the Company is terminated.
8.3 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the Parties; provided however, that this Agreement may not be assigned by any Seller without the prior written consent of Buyer or be assigned by Buyer without the prior written consent of Sellers, except that (i) Buyer may, at its election and provided it remains liable for its obligations hereunder, assign this Agreement to any Affiliate of Buyer, and (ii) Buyer or any such assignee may make a collateral assignment of its rights (but not its obligations) under this Agreement to any lender providing financing to Buyer in connection with the Closing.
8.4 Headings. The headings of the Articles, Sections, and paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof.
33
8.5 Modification and Waiver. No amendment, modification, or alteration of the terms or provisions of this Agreement shall be binding unless the same shall be in writing and duly executed by the Parties, except that any of the terms or provisions of this Agreement may be waived in writing at any time by the Party that is entitled to the benefits of such waived terms or provisions. No single waiver of any of the provisions of this Agreement shall be deemed to or shall constitute, absent an express statement otherwise, a continuous waiver of such provision or a waiver of any other provision hereof (whether or not similar). No delay on the part of any Party in exercising any right, power, or privilege hereunder shall operate as a waiver thereof.
8.6 Expenses. Except as otherwise expressly provided herein, each of the Parties shall bear the expenses incurred by that Party incident to this Agreement and the transactions contemplated hereby, including all fees and disbursements of counsel and accountants retained by such Party, whether or not the transactions contemplated hereby shall be consummated.
8.7 Notices. Any notice, request, instruction, or other document to be given hereunder by any Party to any other Party shall be in writing and shall be given by delivery in person, by electronic mail, by electronic facsimile transmission, by overnight courier or by registered or certified mail, postage prepaid (and shall be deemed given when delivered if delivered by hand, when delivered if delivered by electronic mail, when transmission confirmation is received if delivered by facsimile during normal business hours, one Business Day after deposited with an overnight courier service if delivered by overnight courier and three days after mailing if mailed), as follows:
|
to a Seller: 12408 Bittern Circle Fishers, Indiana 46037
|
|
|
in each case, with a copy to:
|
34
|
to Buyer to: 35 Vantage Point Drive Rochester, New York 14624 Attn : James M. Jenkins, General Counsel/VP of Corporate Development Email : jim.jenkins@transcat.com
|
|
|
with a copy to: Fax No.: (716) 853-1617
|
or at such other address for a Party as shall be specified by like notice.
8.8 Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York applicable to agreements made and to be performed wholly within that jurisdiction.
8.9 Public Announcements. Neither Sellers nor Buyer shall make any public statements, including any press releases, with respect to this Agreement and the transactions contemplated hereby without the prior written consent of the other Parties (which consent shall not be unreasonably withheld) except as may be required by Law or the applicable rules of any securities exchange. If a public statement is required to be made by Law or any securities exchange, the Parties shall consult with each other in advance as to the contents and timing thereof.
8.10 No Third Party Beneficiaries. This Agreement is intended and agreed to be solely for the benefit of the Parties and their permitted successors and assigns, and no other Party shall be entitled to rely on this Agreement or accrue any benefit, claim, or right of any kind whatsoever pursuant to, under, by, or through this Agreement.
8.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument.
8.12 Delivery by Email or Electronic Transmission. This Agreement and any of the Ancillary Agreements, along with any amendments hereto or thereto, to the extent signed and delivered by means of E mail, DocuSign or other means of electronic transmission in portable document format (.pdf), shall be treated in all manner and respects and for all purposes as an
35
original signature, agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person.
Article IX.
CERTAIN DEFINITIONS
9.1 Defined Terms. The following terms shall have the following meanings:
“Affiliate” means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such first Person.
“Ancillary Agreement” means any agreement, exhibit, schedule, statement, document or certificate executed or delivered in accordance with, in connection with or required by this Agreement.
“Anti-Corruption Laws” means the US Foreign Corrupt Practices Act and any other applicable anti-corruption Laws.
“Authority” means the United States of America or any other nation, any state or other political subdivision thereof, or any entity, agency, court or authority (foreign, federal, state or local) exercising executive, legislative, judicial, regulatory or administrative functions of government.
“Business” means the business of (i) providing calibration, certification, and repair services for test and measurement instrumentation, and (ii) renting and selling test and measurement instrumentation.
“Business Day” means any day other than a day on which banks in New York, New York are required or authorized to be closed.
“CARES Act” means Public Law Number 116-136, and any rules, regulations or guidance promulgated thereunder, or published with respect thereto, by any Authority.
“Cash on Hand” means all cash and cash equivalents of the Company, calculated as of the Effective Time (and prior to giving effect to any transactions contemplated by this Agreement), determined in accordance with GAAP, and subject to the next sentence (which, for the avoidance of doubt, may be a negative number). For the avoidance of doubt, Cash on Hand shall be calculated (i) net of (A) all issued but uncleared checks and drafts, ACH transactions and other wire transfers issued by the Company to the extent such checks, drafts, ACH transactions or other wire transfers have not yet cleared and are not included as Current Liabilities in the calculation of Closing Working Capital as finally determined pursuant to Section 1.3(b), (B) any cash and cash equivalents of the Company that is distributed or otherwise paid to any Seller or any Seller’s Affiliates prior to the Effective Time and (C) investment securities (including equity securities and certificates of deposit); and (ii) shall include all checks, ACH transactions and other wire transfers and drafts deposited or received by the Company and available for deposit for the account of the Company, and to the extent not included as Current Assets in the calculation of Closing Working Capital as finally determined pursuant to Section 1.3(b).
36
“Closing Cash” means the amount of Cash on Hand as of the Effective Time.
“Closing Indebtedness” means the amount of Indebtedness of the Company outstanding as of immediately prior to the Closing (without giving effect to the transactions contemplated herein), as determined in accordance with GAAP.
“Closing Transaction Expenses” means, to the extent not paid by Sellers, the Company or otherwise prior to the Closing Date, the amount of Transaction Expenses accrued or outstanding as of the Effective Time (without giving effect to the transactions contemplated herein), as determined in accordance with GAAP.
“Closing Working Capital” means the value, as of the Closing, of the current assets of the Company, less the aggregate amount of current Liabilities of the Company, all as determined in accordance with GAAP, and in accordance with the terms and conditions of, and subject to the adjustments described in, Section 1.3.
“Code” means the Internal Revenue Code of 1986, as amended.
“Contract” means any written or oral contract, lease, license, loan or credit agreement, bond, debenture, note, mortgage, indenture, supply agreement, sale or purchase order, or any other binding agreement, commitment, arrangement or understanding.
“control” (including the terms “controlled by” and “under common control with”) means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise.
“Encumbrances” means all liens, charges, mortgages, pledges, security interests or other encumbrances of any kind.
“Environmental Laws” means all foreign, federal, state and local laws, rules, regulations, ordinances, codes, common law, judgments, orders, consent agreements and legally-binding requirements relating to (i) the protection of the environment (including air, surface and subsurface water, drinking water supplies, surface and subsurface land, the interior of any building or building component, soil and natural resources) or human health (including without limitation occupational health and safety) or (ii) Hazardous Substances.
“Environmental Liabilities” shall mean, with respect to any Person, all Liabilities, obligations, responsibilities, remedial actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred, based upon, related to, or arising under or pursuant to any Environmental Laws, or which relates to any environmental, health or safety condition.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
37
“ERISA Affiliate” means any Person, trade or business (whether or not incorporated) that is a member of a “controlled group of corporations” with, or is under “common control” with, or is a member of the same “affiliated service group” with the Company, as defined in Section 414 of the Code, or is otherwise required to be aggregated with the Company under Section 414(o) of the Code.
“Estimated Adjusted Purchase Price” means an amount equal to the total of (a) the Purchase Price, minus (b) the Escrow Amount, plus (c) the Estimated Closing Cash, minus (d) the amount, if any, by which Estimated Closing Working Capital is less than Target Closing Working Capital Amount, plus (e) the amount, if any, by which Estimated Closing Working Capital is greater than Target Closing Working Capital Amount, minus (f) the Estimated Closing Indebtedness, minus (g) the Estimated Closing Transaction Expenses.
“Final Adjusted Purchase Price” means an amount equal to the total of (a) the Purchase Price, minus (b) the Escrow Amount, plus (c) the Final Closing Cash, minus (d) the amount, if any, by which Final Closing Working Capital is less than Target Closing Working Capital Amount, plus (e) the amount, if any, by which Final Closing Working Capital is greater than Target Closing Working Capital Amount, minus (f) the Final Closing Indebtedness, minus (g) the Final Closing Transaction Expenses.
“Final Closing Cash” means the Closing Cash set forth in the Final Closing Statement, as finally determined pursuant to Section 1.3.
“Final Closing Indebtedness” means the Closing Indebtedness set forth in the Final Closing Statement, as finally determined pursuant to Section 1.3.
“Final Closing Transaction Expenses” means the Closing Transaction Expenses set forth in the Final Closing Statement, as finally determined pursuant to Section 1.3.
“Final Closing Working Capital” means the Closing Working Capital set forth in the Final Closing Statement, as finally determined pursuant to Section 1.3.
“GAAP” means United States generally accepted accounting principles consistently applied throughout the relevant periods.
“General Enforceability Exceptions” means general principles of equity and by bankruptcy, insolvency or similar Laws and general equitable principles affecting the rights of creditors generally.
“Government Official” means (i) any director, officer, employee, agent or representative (including anyone elected, nominated, or appointed to be an officer, employee, or representative) of any Authority, or anyone otherwise acting in an official capacity on behalf of an Authority; (ii) any candidate for public or political office; (iii) any royal or ruling family member; or (iv) any agent or representative of any of those Persons listed in subcategories (i) through (iii).
“Governmental Order” means any order, writ, judgment, injunction, decree, stipulation, ruling, determination or award entered by or with any Authority
38
“Hazardous Substances” means any and all hazardous or toxic substances, materials, and wastes, solid wastes, industrial wastes, pollutants, contaminants, polychlorinated biphenyls, asbestos, volatile and semi-volatile organic compounds, oil, petroleum products and fractions thereof, radioactive materials and wastes, and any and all other chemicals, substances, materials and wastes regulated under Environmental Law.
“Indebtedness” means all principal, interest, premiums, penalties or other Liabilities related to (a) all indebtedness for borrowed money, (b) all obligations (contingent or otherwise) for the deferred purchase price of property or services (other than trade accounts payable in the Ordinary Course of Business) (including notes payable to the sellers of such property or services), (c) all other obligations evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired, (e) all obligations as lessee or lessees under leases that have been or should be, in accordance with GAAP, recorded as capital leases (other than the leases designated on Schedule 3.12(a) as excluded from Indebtedness), (f) all obligations, contingent or otherwise, under acceptance, letter of credit or similar facilities, (g) all obligations owing pursuant to factoring agreements for accounts receivable, (h) all obligations in respect of unfunded pensions, (i) all obligations of the type referred to in clauses (a) through (h) above guaranteed directly or indirectly in any manner by the Company, or in effect guaranteed directly or indirectly by the Company through an agreement (1) to pay or purchase such obligations or to advance or supply funds for the payment or purchase of such obligations, (2) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such obligations or to assure the holder of such obligations against loss, (3) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (4) otherwise to assure a creditor against loss; provided, that such Indebtedness referred under this clause (i) is of the type that would be reflected as debt on a balance sheet prepared in accordance with GAAP, (j) all Indebtedness of the type referred to in clauses (a) through (i) above secured by (or for which the holder of such obligations has an existing right, contingent or otherwise, to be secured by) any lien on property (including accounts and Contract rights) owned by the Company, even though such Person has not assumed, become liable for or guaranteed the payment of such Indebtedness, (k) all Liabilities of under or in connection with any accrued bonuses and deferred compensation bonuses (including all related Taxes, including the employers share of any payroll Taxes attributable to such amounts and any amounts payable pursuant to Section 280G of the Code (or any corresponding provision of Law) or to offset or gross-up any Person for any excise Taxes, income Taxes or other Taxes related to such amounts), (l) any unfunded capital expenditures committed to by the Company, (m) all accrued but unpaid interest (or interest equivalent) to the date of determination, and all prepayment premiums or penalties payable upon repayment of any items of Indebtedness of the type referred to in clauses (a) through (i) above, and (n) all withholding Taxes the payment of which has been deferred pursuant to Section 2302 of the CARES Act.
“Indianapolis Landlord” means Broderick Holdings, LLC, the owner of the Indiana Property.
39
“Indianapolis Property” means the Leased Real Property located at 2845 Tobey Drive, Indianapolis, Indiana 46219.
“Interim Balance Sheet” means the balance sheet of the Company as of the Interim Balance Sheet Date, as set forth in the Financial Statements.
“Interim Balance Sheet Date” means October 31, 2021.
“Interim Financial Statement” has the meaning set forth in Section 3.6.
“Intellectual Property” means all of the following in any jurisdiction throughout the world: (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trade-marks, service marks, trade dress, logos, slogans, trade names, corporate names, internet domain names, and rights in telephone numbers, together with all translations, adaptations, derivations, and combinations thereof, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including source code, executable code, data, databases, and related documentation), (g) all material advertising and promotional materials, (h) all industrial designs and integrated circuit topography rights, (i) all other proprietary rights, and (j) all copies and tangible embodiments thereof (in whatever form or medium).
“IRS” means the Internal Revenue Service.
“knowledge”, “to the knowledge” or “known” and words of similar import means the actual knowledge of a natural person or, with respect to a Person that is not a natural person, the actual knowledge of the officers of such Person, in each case after due inquiry.
“Laws” means any federal, state or local law (including, without limitation, principles of common law), statute, ordinance, regulation, Permit, certificate, judgment, order, award or other legally enforceable determination, decision or requirement of any Authority.
“Liabilities” means liabilities, obligations or commitments of any nature whatsoever, asserted or unasserted, known or unknown, absolute or contingent, accrued or unaccrued, matured or unmatured or otherwise.
“Losses” means any and all losses, Liabilities, damages, penalties, obligations, awards, fines, deficiencies, demands, interest, claims (including third party claims whether or not meritorious), costs and expenses whatsoever (including reasonable attorneys’, consultants’ and other professional fees and disbursements of every kind, nature and description) resulting from,
40
arising out of or incident to any matter for which indemnification is provided under this Agreement.
“Material Adverse Effect” means any circumstance or event which is material and adverse to the business, properties, operations, condition (financial or otherwise), or results of operations of the Company. For purposes of this definition of Material Adverse Effect, the effect of any matter as to any past period shall be determined based on its actual effect.
“Off-the-Shelf Software” means unmodified commercially-available, off-the-shelf, click-wrap, shrink-wrap or similar software obtained from a Person (a) on general commercial terms and which is generally available on similar commercial terms, and (b) which is not distributed as “open source software” or “free software” or under a similar licensing or distribution model.
“Ordinary Course of Business” means, with respect to the Company, the ordinary course of business consistent with the Company’s past custom and practice (including with respect to quantity and frequency).
“Organizational Documents” means, for any entity, its constituent or organizational documents, including, in the case of a corporation, its articles or certificates of incorporation and its bylaws.
“Permitted Encumbrances” means (i) statutory liens for Taxes not yet due and payable or the validity or amount of which is being contested in good faith by appropriate proceedings and for which adequate reserves have been established on the Interim Financial Statements; (ii) mechanics’, carriers’, workers’, repairers’ and other similar liens arising or incurred in the Ordinary Course of Business and securing sums that are not yet due and payable or the validity or amount of which is being contested in good faith by appropriate proceedings, and for which adequate reserves have been established on the Interim Financial Statements and do not otherwise constitute a breach of or an event of default under any Lease.
“Person” means an individual, corporation, partnership, association, limited liability company, trust, unincorporated organization, or other entity.
“Personal Information” means the type information regulated and/or subject to Privacy Laws and collected, used, disclosed or retained by the Company including information regarding the Company’s clients, customers, suppliers, employees, agents, dependent and independent contractors including an individual’s name, address, age, gender, identification or social insurance number, income, family status, citizenship, employment, assets, liabilities, source of funds, payment records, credit information, personal and professional references and health and/or medical records.
“Privacy Laws” means all applicable, federal, state or municipal laws governing the collection, use, disclosure and/or retention of Personal Information.
“Restricted Territory” means North America.
“SEC” means the U.S. Securities and Exchange Commission.
41
“Target Closing Working Capital Amount” means $250,000.
“Tax” means (i) any federal, state, local or non-U.S. income, gross receipts, sales, use, ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, property taxes (real or personal), including unpaid property taxes, premium, windfall profits, environmental assessments, alternative or add-on minimum, custom duties, capital stock, profits, social security (or similar), unemployment, disability, estimated, or any other tax of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts, whether disputed or not, and (ii) any obligation to indemnify or otherwise assume or succeed to any Liability described in clause (i) hereof of any other Person whether by Contract or under common law doctrine of de facto merger and successor liability or otherwise.
“Tax Return” means any return, report, information return or other document (including any related or supporting information or any amended return) filed or required to be filed with any Taxing Authority in connection with the determination, assessment, or collection of any Tax paid or payable by or with respect to the Company or the administration of any laws, regulations, or administrative requirements relating to any such Tax.
“Transaction Expenses” means (without duplication), (i) the collective amount payable by the Company, or Liabilities of the Company that were incurred by the Company or Sellers to, outside legal counsel, accountants, advisors, brokers and other Persons in connection with the transactions contemplated by this Agreement or otherwise arising by consummation of the transactions contemplated hereby, including 100% of the costs and expenses of obtaining any third party consents (including customer consents), 100% of the filing fees incurred by the Company in connection with any filing by the Company with an Authority, and (ii) all Liabilities of the Company under or in connection with any severance arrangements, stay bonuses, incentive bonuses, transaction bonuses, termination and change of control arrangements, and similar obligations that are triggered in whole or in part by the consummation of the transactions contemplated by this Agreement (including all related Taxes, including the employer’s share of any payroll Taxes attributable to such amounts and any amounts payable pursuant to Section 280G of the Code (or any corresponding provision of Law) or to offset or gross-up any Person for any excise Taxes, income Taxes or other Taxes related to the foregoing items).
9.2 Other Definitions. Each of the following terms is defined in the Section set forth opposite such term:
| “Accounts Receivable” | 3.10(a) |
| “Action” | 3.13 |
| “Ancillary Agreements” | 3.1 |
| “Agreement” | Preamble |
| “Benefit Plans” | 3.18(a) |
| “Buyer” | Preamble |
| “Buyer Indemnified Parties” | 7.2(a) |
| “Closing” | 2.1 |
| “Closing Date” | 2.1 |
| “Confidential Information” | 5.1 |
42
| “Company” | Preamble |
| “Company Units” | Recitals |
| “Confidential Information” | 5.1 |
| “Designated Benefit Plans” | 5.6 |
| “Effective Time” | 2.1 |
| “Escrow Agent” | 1.2(b)(ii) |
| “Escrow Agreement” | 1.5 |
| “Escrow Amount” | 1.2(b)(ii) |
| “Escrow Period” | 1.5 |
| “Estimated Closing Indebtedness” | 1.3(a) |
| “Estimated Closing Statement” | 1.3(a) |
| “Estimated Closing Transaction Expenses” | 1.3(a) |
| “Estimated Closing Working Capital” | 1.3(a) |
| “Financial Statements” | 3.6 |
| “Final Closing Statement” | 1.3(b) |
| “First Release Amount” | 1.6(c) |
| “First Release Date” | 1.6(c) |
| “Fundamental Representations” | 7.1 |
| “Indemnified Party” | 7.3(a) |
| “Indemnifying Party” | 7.3(a) |
| “Independent Accountant” | 1.3(e) |
| “Intellectual Property” | 3.12(a) |
| “Interim Financial Statements” | 3.6 |
| “IT Systems” | 3.11(d) |
| “Key Employee” | 1.6 |
| “Key Seller” | Preamble |
| “Leased Real Property” | 3.9(b) |
| “Leased Vehicles” | 1.7 |
| “Licensed Intellectual Property” | 3.11(a) |
| “Litigation Conditions” | 7.3(a) |
| “Material Contracts” | 3.12(a) |
| “Material Owned Intellectual Property” | 3.11(a) |
| “Notice of Disagreement” | 1.3(d) |
| “Party” | Preamble |
| “Parties” | Preamble |
| “Permits” | 3.14 |
| “Pre-Closing Tax Period” | 6.1 |
| “Purchase Price” | 1.2(a) |
| “Real Property Leases” | 3.9(b) |
| “Releasing Party” | 5.5 |
| “Restricted Period” | 5.2(a) |
| “Retention Adjustment Amount” | 1.6 |
| “Seller Indemnified Parties” | 7.2(b) |
| “Seller” | Preambles |
43
| “Significant Customer” | 3.21 |
| “Significant Supplier” | 3.22 |
| “Straddle Period” | 6.2 |
| “Taxing Authority” | 3.16(a) |
| “Third Party Claim” | 7.3(a) |
| “Transfer Taxes” | 6.3 |
[Signature page follows.]
44
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed on its behalf as of the date first above written.
|
BUYER: TRANSCAT, INC. By: _/s/ James M. Jenkins_____________ | |
|
SELLERS:
| |
|
__/s/ Kevin M. Broderick________ _______ Kevin M. Broderick
__/s/ Andrea M. Broderick _ _ ___________ Andrea Broderick
|
[signature page to Membership Unit Purchase Agreement]
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lee D. Rudow, President and Chief Executive Officer of Transcat, Inc., certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Transcat, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 2, 2022 | /s/ Lee D. Rudow |
| Lee D. Rudow | |
|
President and Chief Executive Officer (Principal Executive Officer) |
| 31
|
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark A. Doheny, Vice President of Finance and Chief Financial Officer of Transcat, Inc., certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Transcat, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 2, 2022 | /s/ Mark A. Doheny |
| Mark A. Doheny | |
|
Vice President of Finance and Chief Financial Officer (Principal Financial Officer) |
| 32
|
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report on Form 10-Q of Transcat, Inc., Lee D. Rudow, the Chief Executive Officer of Transcat, Inc. and Mark A. Doheny, the Chief Financial Officer of Transcat, Inc. certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of their knowledge, that:
| 1. | This quarterly report on Form 10-Q for the third quarter ended December 25, 2021 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in this quarterly report on Form 10-Q for the third quarter ended December 25, 2021 fairly presents, in all material respects, the financial condition and results of operations of Transcat, Inc. |
| Date: February 2, 2022 | /s/ Lee D. Rudow |
| Lee D. Rudow | |
|
President and Chief Executive Officer (Principal Executive Officer) |
| Date: February 2, 2022 | /s/ Mark A. Doheny |
| Mark A. Doheny | |
|
Vice President of Finance and Chief Financial Officer (Principal Financial Officer) |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Transcat, Inc. and will be retained by Transcat, Inc. and furnished to the SEC or its staff upon request.
| 33
|