Transcat Inc 10-Q for FY2023 Q1
Transcat Inc (TRNS)
About this 10-Q
Transcat Inc filed this 10-Q on August 3, 2022, covering the quarter ended June 25, 2022 (FY2023 Q1).
Headline figures
Quarter ended June 25, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $54.66M
- up 14.4% from $47.79M a year earlier
- Net income
- $3.07M
- down 16.7% from net income of $3.69M a year earlier
- Diluted EPS
- $0.40
- down 18.4% from $0.49 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM
(Mark one)
For the quarterly period ended:
or
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 July 29, 2022 was
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
| (Unaudited) | ||||||||
| First Quarter Ended | ||||||||
| June 25, | June 26, | |||||||
| 2022 | 2021 | |||||||
| 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 (Benefit from) 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) | ||||||||
| First Quarter Ended | ||||||||
| June 25, | June 26, | |||||||
| 2022 | 2021 | |||||||
| Net Income | $ | $ | ||||||
| Other Comprehensive (Loss) Income: | ||||||||
| Currency Translation Adjustment | ( | ) | ||||||
| Other, net of tax effects of $( | ( | ) | ||||||
| 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) | (Audited) | |||||||
| June 25, | March 26, | |||||||
| 2022 | 2022 | |||||||
| 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 Current Liabilities | ||||||||
| Current Portion of Long-Term Debt | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Debt | ||||||||
| Deferred Tax Liabilities, net | ||||||||
| 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) | |||||||||
| First Quarter Ended | |||||||||
| June 25, | June 26, | ||||||||
| 2022 | 2021 | ||||||||
| 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 Expense | |||||||||
| Changes in Assets and Liabilities, net of acquisitions: | |||||||||
| Accounts Receivable and Other Receivables | |||||||||
| Inventory | ( | ) | |||||||
| Prepaid Expenses and Other Current Assets | ( | ) | |||||||
| Accounts Payable | ( | ) | ( | ) | |||||
| Accrued Compensation and Other Current 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 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 Decrease 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 Alliance acquisition | $ | $ | |||||||
| Assets acquired and liabilities assumed in business combinations: | |||||||||
| Accrued holdback consideration related to Alliance acquisition | $ | $ | |||||||
See accompanying notes to consolidated financial statements.
4
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands, Except Par Value Amounts)
(Unaudited)
| Capital | ||||||||||||||||||||||||
| Common Stock | In | Accumulated | ||||||||||||||||||||||
| Issued | Excess | Other | ||||||||||||||||||||||
| $0.50 Par Value | of Par | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Value | Income (Loss) | Earnings | Total | |||||||||||||||||||
| Balance as of March 27, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Issuance of Common Stock | ||||||||||||||||||||||||
| Repurchase of Common Stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Stock-Based Compensation | ||||||||||||||||||||||||
| Other Comprehensive Income | - | |||||||||||||||||||||||
| Net Income | - | |||||||||||||||||||||||
| Balance as of June 26, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Capital | ||||||||||||||||||||||||
| Common Stock | In | Accumulated | ||||||||||||||||||||||
| Issued | Excess | Other | ||||||||||||||||||||||
| $0.50 Par Value | of Par | Comprehensive | Retained | |||||||||||||||||||||
| Shares | Amount | Value | Income (Loss) | Earnings | Total | |||||||||||||||||||
| Balance as of March 26, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Issuance of Common Stock | ||||||||||||||||||||||||
| Repurchase of Common Stock | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Stock-Based Compensation | ||||||||||||||||||||||||
| Other Comprehensive Loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net Income | - | |||||||||||||||||||||||
| Balance as of June 25, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
See accompanying notes to consolidated financial statements.
5
TRANSCAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – GENERAL
Description of Business: Transcat, Inc. (“Transcat,” “we,” “us,” “our” or the “Company”) is a leading provider of accredited calibration services, enterprise asset management services, and value-added distributor of professional grade handheld test, measurement and control instrumentation. The Company is focused on providing services and products to highly regulated industries, particularly the life science industry, which includes pharmaceutical, biotechnology, medical device and other FDA-regulated businesses. Additional industries served include industrial manufacturing; energy and utilities, including oil and gas; chemical manufacturing; FAA-regulated businesses, including aerospace and defense and other industries that require accuracy in their processes, confirmation of the capabilities of their equipment, and for which the risk of failure is very costly.
Basis of Presentation: Transcat’s unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 26, 2022 (“fiscal year 2022”) contained in the Company’s 2022 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, which is generally upon shipment. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. The majority of the Company’s revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue over time using the output method-time elapsed as this portrays the transfer of control to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for product shipped or services performed. Sales taxes and other taxes billed and collected from customers are excluded from revenue. The Company generally invoices its customers for freight, shipping, and handling charges. Freight billed to customers is included in revenue. Shipping and handling is not included in revenue. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data.
Under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, we use judgments that could potentially impact both the timing of our satisfaction of performance obligations and our determination of transaction prices used in determining revenue recognized. Such judgments include considerations in determining our transaction prices and when our performance obligations are satisfied for our standard product sales that include general payment terms that are between net 30 and 90 days.
Revenue recognized from prior period performance obligations for the first quarter of the fiscal year ending March 25, 2023 (“fiscal year 2023”) was immaterial. As of June 25, 2022, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606, the Company applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of June 25, 2022 and March 26, 2022 were immaterial. See Note 4 for disaggregated revenue information.
Fair Value of Financial Instruments: Transcat has determined
the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in
measuring fair value, consists of three levels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs
other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable
inputs in which little or no market data exists, requires the Company to develop its own assumptions. The carrying amount of debt on the
Consolidated Balance Sheets approximates fair value due to variable interest rate pricing on a portion of the debt with the balance bearing
an interest rate approximating current market rates, and the carrying amounts for cash, accounts receivable and accounts payable approximate
fair value due to their short-term nature. Investment assets, which fund the Company’s non-qualified deferred compensation plan,
consist of mutual funds and are valued based on Level 1 inputs. At each of June 25, 2022 and March 26, 2022, investment assets totaled $
6
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. The Company did not capitalize any stock-based compensation costs as part of an asset. The Company
estimates forfeiture rates based on its historical experience. During the first quarter of fiscal year 2023 and fiscal year 2022, 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 currencies, the Euro and the Canadian dollar, respectively, and have been translated to U.S. dollars. Accordingly, the amounts representing assets and liabilities have been translated at the period-end rates of exchange and related revenue and expense accounts have been translated at an average rate of exchange during the period. Gains and losses arising from translation of Cal OpEx Limited’s and Transcat Canada Inc.’s financial statements into U.S. dollars are recorded directly to the accumulated other comprehensive loss component of shareholders’ equity.
Transcat records foreign currency gains and losses on business
transactions denominated in foreign currency. The net foreign currency gain was $
Earnings Per Share: Basic earnings per share of common stock is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of stock options and unvested restricted stock units using the treasury stock method in periods in which they have a dilutive effect. In computing the per share effect of assumed conversion, proceeds received from the exercise of options and unvested restricted stock units are considered to have been used to purchase shares of common stock at the average market prices during the period, and the resulting net additional shares of common stock are included in the calculation of average shares of common stock outstanding.
For the first quarter of fiscal year 2023, the net additional
common stock equivalents had a ($
| First Quarter Ended | ||||||||
| June 25, | June 26, | |||||||
| 2022 | 2021 | |||||||
| Average Shares Outstanding – Basic | ||||||||
| Effect of Dilutive Common Stock Equivalents | ||||||||
| Average Shares Outstanding – Diluted | ||||||||
| Anti-dilutive Common Stock Equivalents | ||||||||
7
Goodwill and Intangible Assets: Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment for each reporting unit on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company is permitted, but not required, to qualitatively assess indicators of a reporting unit’s fair value to determine whether it is necessary to perform the two-step goodwill impairment test. If a quantitative test is deemed necessary, a discounted cash flow analysis is prepared to estimate fair value.
Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. A summary of changes in the Company’s goodwill and intangible assets is as follows (amounts in thousands):
| Goodwill | Intangible Assets | |||||||||||||||||||||||
| Distribution | Service | Total | Distribution | Service | Total | |||||||||||||||||||
| Net Book Value as of March 26, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Additions | ||||||||||||||||||||||||
| Amortization | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Currency Translation Adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net Book Value as of June 25, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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 $
8
In
addition, the 2021 Credit Agreement provides that, assuming no event of default, restricted payments up to $
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 June 25, 2022, $
As
of June 25, 2022, $
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 (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 first quarter of fiscal year
2023. Our leverage ratio, as defined in the 2021 Credit Agreement, 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 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.
9
NOTE 3 – STOCK-BASED COMPENSATION
In
September 2021, the Transcat, Inc. 2021 Stock Incentive Plan (the “2021 Plan”) was approved by shareholders and became effective.
The 2021 Plan replaced the Transcat, Inc. 2003 Incentive Plan (the “2003 Plan”). Shares available for grant under the 2021
Plan include any shares remaining available for issuance under the 2003 Plan and any shares that are subject to outstanding awards under
the 2003 Plan that are subsequently canceled, expired, forfeited, or otherwise not issued or are settled in cash. The 2021 Plan provides
for, among other awards, grants of restricted stock units and stock options to directors, officers and key employees at the fair market
value at the date of grant. At June 25, 2022,
The
Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete tax
benefits related to share-based compensation and stock option activity during the first quarter of fiscal year 2023 and 2022 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
| Date | |
Measurement |
|
Total Number of Units |
|
Grant
Date Fair Value |
|
|
Estimated Level of Achievement at |
|
| Granted | Period | Outstanding | Per Unit | June 25, 2022 | ||||||
| October 2018 | October 2018 – September 2027 | $ | ||||||||
| April 2020 | April 2020 – March 2023 | $ | ||||||||
| July 2020 | July 2020 – July 2023 | $ | ||||||||
| September 2020 | September 2020 – July 2023 | $ | ||||||||
| September 2020 | September 2020 – July 2023 | $ | ||||||||
| September 2020 | September 2020 – September 2023 | $ | ||||||||
| January 2021 | January 2021 – January 2024 | $ | ||||||||
| May 2021 | May 2021 – May 2024 | $ | ||||||||
| June 2021 | June 2021 – March 2024 | $ | ||||||||
| June 2021 | June 2021 – March 2024 | $ | ||||||||
| September 2021 | September 2021 – September 2024 | $ | ||||||||
| September 2021 | September 2021 – September 2022 | $ | ||||||||
| December 2021 | December 2021 – December 2024 | $ | ||||||||
| January 2022 | January 2022 – March 2024 | $ | ||||||||
| March 2022 | March 2022 – March 2025 | $ | ||||||||
| May 2022 | May 2022-March 2025 | $ | ||||||||
| May 2022 | May 2022-March 2025 | $ | ||||||||
Total
expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $
10
Stock Options: The Company grants stock options to employees and directors with an exercise price equal to the quoted market price of the Company’s stock at the date of the grant. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Expense for stock options is recognized on a straight-line basis over the requisite service period for each award. Options vest either immediately or over a period of up to five years using a straight-line basis and expire either five years or ten years from the date of grant.
We calculate the fair value of the stock options granted using the Black-Scholes model. The following weighted-average assumptions were used to value options granted during the first quarter of fiscal year 2023 and fiscal year 2022:
| First Quarter Ended | ||||||||
| June 25, | June 26, | |||||||
| 2022 | 2021 | |||||||
| Risk-Free Interest Rate | % | % | ||||||
| Volatility Factor | % | % | ||||||
| Expected Term (in Years) | ||||||||
| Annual Dividend Rate | % | % | ||||||
We calculate expected volatility for stock options by taking an average of historical volatility over the expected term. The computation of expected term was determined based on safe harbor rules, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield in effect at the time of grant. We assume no expected dividends. Under FASB ASC Topic 718, “Compensation – Stock Compensation”, the Company has elected to account for forfeitures as they occur.
During
the first quarter of fiscal year 2023, the Company granted an option for
During
the first quarter of fiscal year 2022, the Company granted an option for
The
expense related to all stock option awards was $
The following table summarizes the Company’s options as of and for the first quarter ended June 25, 2022 (in thousands, except price per option data and years):
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Remaining | |||||||||||||||
| Number Of | Price Per | Contractual Term | Aggregate Intrinsic | |||||||||||||
| Options | Option | (in years) | Value | |||||||||||||
| Outstanding as of March 26, 2022 | $ | |||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||
| Forfeited | $ | |||||||||||||||
| Outstanding as of June 25, 2022 | $ | $ | ||||||||||||||
| Exercisable as of June 25, 2022 | $ | $ | ||||||||||||||
11
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first quarter of fiscal year 2023 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all holders exercised their options on June 25, 2022. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.
Total
unrecognized compensation cost related to non-vested stock options as of June 25, 2022 was $
NOTE 4 – SEGMENT INFORMATION
The
basis for determining our operating segments is the manner in which financial information is used in monitoring our operations. Transcat
has
| First Quarter Ended | ||||||||
| June 25 | June 26, | |||||||
| 2022 | 2021 | |||||||
| 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 (Benefit from) Income Taxes | ( | ) | ||||||
| Total | ||||||||
| Net Income | $ | $ | ||||||
| Geographic Data: | ||||||||
| Revenues to Unaffiliated Customers (2): | ||||||||
| United States (3) | $ | $ | ||||||
| Canada | ||||||||
| Other International | ||||||||
| Total | $ | $ | ||||||
| (1) |
| (2) |
| (3) |
12
NOTE 5 – BUSINESS ACQUISITIONS
Alliance: Effective May 31, 2022, Transcat acquired substantially all of the assets of Charlton Jeffmont Inc., Raitz Inc. and Toolroom Calibration Inc. d/b/a Alliance Calibration (“Alliance”), an Ohio based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s service capabilities.
The
Alliance goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do
not qualify for separate recognition. All the goodwill and intangible assets relating to the Alliance acquisition has been allocated
to the Service segment. Intangible assets related to the Alliance acquisition are being amortized for financial reporting purposes on
an accelerated basis over the estimated useful life of up to
The
purchase price for Alliance was approximately $
The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, working capital adjustments, assets acquired, and liabilities assumed. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Alliance’s assets and liabilities acquired on May 31, 2022 (in thousands):
| Goodwill | $ | ||||
| Intangible Assets – Customer Base & Contracts | |||||
| Intangible Assets – Covenant Not to Compete | |||||
| Plus: | Accounts Receivable | ||||
| Property and Equipment | |||||
| Less: | Current Liabilities | ( | ) | ||
| Total Purchase Price | $ | ||||
From
the date of acquisition, Alliance has contributed revenue of $
Tangent: Effective December 31, 2021, Transcat purchased all the outstanding membership units of Tangent Labs, LLC, a privately held company (“Tangent”). Tangent provides in-house and on-site calibrations of precision measurement and control instrumentation to customers in the life science, aerospace and other regulated industries, and has lab locations in Indianapolis, Indiana and Huntsville, Alabama. This transaction aligned with a key component of the Company’s strategy of acquiring local capabilities in attractive geographies.
The
Tangent goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do
not qualify for separate recognition. All the goodwill and intangible assets relating to the Tangent acquisition has been allocated to
the Service segment. Intangible assets related to the Tangent acquisition are being amortized for financial reporting purposes on an
accelerated basis over the estimated useful life of up to
The
purchase price for Tangent was approximately $
13
The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, and assets acquired. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Tangent’s assets and liabilities acquired on December 31, 2021 (in thousands):
| Goodwill | $ | ||||
| Intangible Assets – Customer Base & Contracts | |||||
| Intangible Assets – Covenant Not to Compete | |||||
| Plus: | Cash | ||||
| Accounts Receivable | |||||
| Other Current Assets | |||||
| Less: | Current Liabilities | ( | ) | ||
| Deferred Tax Liability | ( | ) | |||
| Total Purchase Price | $ | ||||
During
the first quarter of fiscal year 2023, Tangent contributed revenue of $
NEXA:
Effective
The
NEXA goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not
qualify for separate recognition.
The
purchase price for NEXA was approximately $
14
The following is a summary of the 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 | $ | ||||
During
the first quarter of fiscal year 2023, NEXA contributed revenue of $
Upstate
Metrology: Effective
All the goodwill related to the Upstate Metrology acquisition has been allocated to the Service segment. Amortization of goodwill related to the Upstate Metrology acquisition is deductible for tax purposes.
The
total purchase price for the assets of Upstate Metrology was approximately $
| Goodwill | $ | ||||
| Plus: | Current Assets | ||||
| Non-Current Assets | |||||
| Less: | Current Liabilities | ( | ) | ||
| Total Purchase Price | $ | ||||
Since this operation was integrated immediately into our existing operation, Upstate Metrology’s separate operating income in undeterminable.
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 Alliance, Tangent, NEXA and Upstate Metrology had occurred at the beginning of fiscal year 2022. 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) | ||||||||
| Quarter Ended | ||||||||
| (in thousands except per share information) | June 25, 2022 | June 26, 2021 | ||||||
| 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 June
25, 2022, $
During
the first quarter of fiscal years 2023 and 2022, acquisition costs of less than $
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, general economic conditions applicable to our business, the impact of the COVID-19 pandemic, inflationary impacts, the highly competitive nature of the industries in which we compete and in the nature of our two business segments, the concentration of Service segment customers in the life science and other regulated and industrial manufacturing industries, tariffs and trade relations, any impairment of our goodwill or intangible assets, cybersecurity risks, the risk of significant disruptions in our information technology systems, our ability to recruit, train and retain quality employees, skilled technicians and senior management, fluctuations in our operating results, 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, supply chain delays or disruptions, the risks related to current and future indebtedness, risks related to our intellectual property, the relatively low trading volume of our common stock, foreign currency rate fluctuations, adverse weather events or other catastrophes or natural disasters, changes in tax rates, and changes in accounting standards, legal requirements and listing standards. These risk factors and uncertainties are more fully described by us under the heading “Risk Factors” in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 26, 2022. 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 26, 2022.
RESULTS OF OPERATIONS
Executive Summary
During our first quarter of fiscal year 2023, we had consolidated revenue of $54.7 million. This represented an increase of $6.9 million or 14.4% versus the first quarter of fiscal year 2022. 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.
Our first quarter of fiscal year 2023 gross profit was $16.0 million. This was an increase of $2.5 million or 18.6% versus the first quarter of fiscal year 2022. In addition, consolidated gross margin was 29.3%, an increase of 100 basis points, versus the first quarter of fiscal year 2022. This increase was largely the result of operating leverage on our fixed costs and accretive gross margins from recent acquisitions.
Total operating expenses were $12.4 million in the first quarter of fiscal year 2023, an increase of $2.6 million or 26.5% when compared to the prior year first quarter. Included in operating expenses during the first quarter of fiscal year 2023 were incremental operating expenses related to the acquisition of Alliance, investments in technology and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were 22.7% in the first quarter of fiscal year 2023, up 210 basis points from 20.6% in the first quarter of fiscal year 2022. Operating income decreased by $0.1 million and operating margin decreased from 7.7% to 6.6% in the first quarter of fiscal year 2023.
Net income was $3.1 million for the first quarter of fiscal year 2023, down from $3.7 million in the first quarter of fiscal year 2022 primarily due to a higher provision from income taxes.
16
The following table presents, for the first quarter of fiscal year 2023 and fiscal year 2022, the components of our Consolidated Statements of Income:
| (Unaudited) | ||||||||
| First Quarter Ended | ||||||||
| June 25, | June 26, | |||||||
| 2022 | 2021 | |||||||
| As a Percentage of Total Revenue: | ||||||||
| Service Revenue | 62.0 | % | 57.7 | % | ||||
| Distribution Sales | 38.0 | % | 42.3 | % | ||||
| Total Revenue | 100.0 | % | 100.0 | % | ||||
| Gross Profit Percentage: | ||||||||
| Service Gross Profit | 32.0 | % | 31.8 | % | ||||
| Distribution Gross Profit | 25.0 | % | 23.6 | % | ||||
| Total Gross Profit | 29.3 | % | 28.3 | % | ||||
| Selling, Marketing and Warehouse Expenses | 10.6 | % | 10.5 | % | ||||
| General and Administrative Expenses | 12.1 | % | 10.1 | % | ||||
| Total Operating Expenses | 22.7 | % | 20.6 | % | ||||
| Operating Income | 6.6 | % | 7.7 | % | ||||
| Interest and Other Expense, net | 0.3 | % | 0.4 | % | ||||
| Income Before Income Taxes | 6.3 | % | 7.3 | % | ||||
| Provision for (Benefit from) Income Taxes | 0.7 | % | (0.4 | %) | ||||
| Net Income | 5.6 | % | 7.7 | % | ||||
FIRST QUARTER ENDED JUNE 25, 2022 COMPARED TO FIRST QUARTER ENDED JUNE 26, 2021 (dollars in thousands):
Revenue:
| First Quarter Ended | Change | |||||||||||||||
| June 25, | June 26, | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Revenue: | ||||||||||||||||
| Service | $ | 33,876 | $ | 27,557 | $ | 6,319 | 22.9 | % | ||||||||
| Distribution | 20,785 | 20,233 | 552 | 2.7 | % | |||||||||||
| Total | $ | 54,661 | $ | 47,790 | $ | 6,871 | 14.4 | % | ||||||||
Total revenue increased $6.9 million, or 14.4%, in our fiscal year 2023 first quarter compared to the prior fiscal year first quarter.
Service revenue, which accounted for 62.0% and 57.7% of our total revenue in the first quarter of fiscal years 2023 and 2022, respectively, increased 22.9% from the first quarter of fiscal year 2022 to the first quarter of fiscal year 2023. This year-over-year increase included $3.9 million in revenue from acquisitions, and also included organic revenue growth of 8.6% driven by improvement in end market conditions and continued market share gains.
17
Our fiscal years 2023 and 2022 Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows:
| FY 2023 | FY 2022 | ||||||||||||||||||||
| Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||
| Service Revenue Growth | 22.9 | % | 19.6 | % | 22.1 | % | 20.4 | % | 20.0 | % | |||||||||||
The growth in Service segment revenue during the first quarter of fiscal year 2023 versus the first quarter of fiscal year 2022 reflected both organic growth and acquisitions.
Within any fiscal year, while we add new customers, we also have customers from the prior fiscal year whose service orders may not repeat for any number of factors. Among those factors are variations in the timing of periodic calibrations and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of Service segment orders can vary on a quarter-to-quarter basis, we believe trailing twelve-month information provides a better indication of the progress of this segment.
The following table presents the trailing twelve-month Service segment revenue for each quarter in fiscal years 2023 and 2022 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period:
| FY 2023 | FY 2022 | ||||||||||||||||||||
| Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||
| Trailing Twelve-Month: | |||||||||||||||||||||
| Service Revenue | $ | 128,324 | $ | 122,005 | 116,315 | 110,854 | 105,864 | ||||||||||||||
| Service Revenue Growth | 21.2 | % | 20.5 | % | 19.5 | % | 17.2 | % | 13.1 | % | |||||||||||
Our strategy has been to focus our investments in the core electrical, temperature, pressure, physical/dimensional and radio frequency/microwave calibration disciplines. We expect to subcontract approximately 13% to 15% of our Service revenue to third-party vendors for calibration beyond our chosen scope of capabilities. We continually evaluate our outsourcing needs and make capital investments, as deemed necessary, to add more in-house capabilities and reduce the need for third-party vendors. Capability expansion through business acquisitions is another way that we seek to reduce the need for outsourcing. The following table presents the source of our Service revenue and the percentage of Service revenue derived from each source for the first quarter of fiscal year 2023 and for each quarter during fiscal year 2022:
| FY 2023 | FY 2022 | ||||||||||||||||||||
| Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||
| Percent of Service Revenue: | |||||||||||||||||||||
| In-House | 85.4 | % | 85.4 | % | 84.1 | % | 83.2 | % | 83.1 | % | |||||||||||
| Outsourced | 13.2 | % | 13.1 | % | 14.4 | % | 15.3 | % | 15.4 | % | |||||||||||
| Freight Billed to Customers | 1.4 | % | 1.5 | % | 1.5 | % | 1.5 | % | 1.5 | % | |||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
18
Our Distribution sales accounted for 38.0% of our total revenue in the first quarter of fiscal year 2023 and 42.3% of our total revenue in the first quarter of fiscal year 2022. During the first quarter of fiscal year 2023, Distribution segment sales showed an increase of 2.7% to $20.8 million. This increase was due to strong demand for rental orders.
Our fiscal years 2023 and 2022 Distribution sales growth, in relation to prior fiscal year quarter comparisons, was as follows:
| FY 2023 | FY 2022 | ||||||||||||||||||||
| Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||
| Distribution Sales Growth | 2.7 | % | 7.2 | % | 7.2 | % | 22.2 | % | 27.0 | % | |||||||||||
The change in the first quarter of fiscal year 2023 versus the first quarter of fiscal year 2022 for the Distribution segment reflected organic growth.
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. Backorders are the total dollar value of orders received for which revenue has not yet been recognized. Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in our service centers prior to shipment, orders required by the customer to be shipped complete or at a future date, and other orders awaiting final credit or management review prior to shipment. Management uses pending product shipments and backorders as measures of our future business performance and financial performance within the distribution segment.
Our total pending product shipments at the end of the first quarter of fiscal year 2023 were $9.0 million, an increase of $0.9 million versus the end of the first quarter of fiscal year 2022 and an increase of $1.3 million since March 26, 2022. The year-over-year increase in pending product shipments and backorders was a result of the disruption to the supply of products as well as increased orders.
The following table presents our total pending product shipments and the percentage of total pending product shipments that were backorders at the end of the first quarter of fiscal year 2023 and each quarter of fiscal year 2022:
| FY 2023 | FY 2022 | ||||||
| Q1 | Q4 | Q3 | Q2 | Q1 | |||
| Total Pending Product Shipments | $9,034 | $7,747 | $8,854 | $7,612 | $8,173 | ||
| % of Pending Product | |||||||
| Shipments that were Backorders | 78.1% | 83.2% | 81.3% | 78.1% | 78.4% | ||
Gross Profit:
| First Quarter Ended | Change | |||||||||||||||
| June 25, | June 26, | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Gross Profit: | ||||||||||||||||
| Service | $ | 10,835 | $ | 8,752 | $ | 2,083 | 23.8 | % | ||||||||
| Distribution | 5,203 | 4,768 | 435 | 9.1 | % | |||||||||||
| Total | $ | 16,038 | $ | 13,520 | $ | 2,518 | 18.6 | % | ||||||||
Total gross profit for the first quarter of fiscal year 2023 was $16.0 million, an increase of $2.5 million or 18.6% versus the first quarter of fiscal year 2022. Total gross margin was 29.3% in the first quarter of fiscal year 2023, up from 28.3% in the first quarter of fiscal year 2022, a 100 basis point increase.
Service gross profit in the first quarter of fiscal year 2023 increased $2.1 million, or 23.8%, from the first quarter of fiscal year 2022. Service gross margin was 32.0% in the first quarter of fiscal year 2023, a 20 basis point increase versus the first quarter of fiscal year 2022. This increase in gross margin was the result of operating leverage on our fixed costs and accretive gross margins from recent acquisitions, offset by increased start-up costs from new client-based lab implementations.
19
The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:
| FY 2023 | FY 2022 | ||||||
| Q1 | Q4 | Q3 | Q2 | Q1 | |||
| Service Gross Margin | 32.0% | 33.1% | 29.7% | 32.9% | 31.8% | ||
Our Distribution gross margin includes net sales less the direct cost of inventory sold and the direct costs of equipment rental revenues, primarily depreciation expense for the fixed assets in our rental equipment pool, as well as the impact of rebates and cooperative advertising income we receive from vendors, freight billed to customers, freight expenses and direct shipping costs. In general, our Distribution gross margin can vary based upon the mix of products sold, price discounting, and the timing of periodic vendor rebates offered and cooperative advertising programs from suppliers.
The following table reflects the quarterly historical trend of our Distribution gross margin as a percent of Distribution sales:
| FY 2023 | FY 2022 | ||||||
| Q1 | Q4 | Q3 | Q2 | Q1 | |||
| Distribution Gross Margin | 25.0% | 24.5% | 22.5% | 23.5% | 23.6% | ||
Distribution segment gross margin was 25.0% in the first quarter of fiscal year 2023 versus 23.6% in the first quarter of fiscal year 2022, a 140 basis point increase. The increase in segment gross margin was primarily due to a favorable mix of higher margin products sold and rented.
Operating Expenses:
| First Quarter Ended | Change | |||||||||||||||
| June 25, | June 26, | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Selling, Marketing and Warehouse | $ | 5,820 | $ | 4,997 | $ | 823 | 16.5 | % | ||||||||
| General and Administrative | 6,614 | 4,834 | 1,780 | 36.8 | % | |||||||||||
| Total | $ | 12,434 | $ | 9,831 | $ | 2,603 | 26.5 | % | ||||||||
Total operating expenses were $12.4 million in the first quarter of fiscal year 2023 versus $9.8 million during the first quarter of fiscal year 2022. The year-over-year increase in selling, marketing and warehouse expenses is due to increased expenses related to recent acquisition, especially acquisition related amortization expense. The increase in general and administrative expenses includes 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 were 22.7% in the first quarter of fiscal year 2023 and 20.6% in the first quarter of fiscal year 2022, an increase of 210 basis points.
Income Taxes:
| First Quarter Ended | Change | |||||||||||||||
| June 25, | June 26, | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Provision for (Benefit from) Income Taxes | $ | 376 | $ | (194 | ) | $ | 570 | 293.8 | % | |||||||
Our effective tax rates for the first quarter of fiscal years 2023 and 2022 were 10.9% and (5.6%), respectively. The increase in the tax provision is due to the decreased amount of discrete tax benefit from share-based compensation activity. Our quarterly provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the first quarter of fiscal years 2023 and 2022 was $0.5 million and $1.1 million, respectively.
20
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 2023 effective tax rate to be approximately 22.0% to 24.0%.
Net Income:
| First Quarter Ended | Change | |||||||||||||||
| June 25, | June 26, | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Net Income | $ | 3,072 | $ | 3,688 | $ | (616 | ) | (16.7 | %) | |||||||
Net income for the first quarter of fiscal year 2023 decreased $0.6 million from the first quarter of fiscal year 2022 primarily due to the increased operating expenses and a higher 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.
| First Quarter Ended | ||||||||
| June 25, | June 26, | |||||||
| 2022 | 2021 | |||||||
| Net Income | $ | 3,072 | $ | 3,688 | ||||
| + Interest Expense | 360 | 189 | ||||||
| + Other (Income) / Expense | (204 | ) | 6 | |||||
| + Tax Provision | 376 | (194 | ) | |||||
| Operating Income | $ | 3,604 | $ | 3,689 | ||||
| + Depreciation & Amortization | 2,641 | 1,990 | ||||||
| + Transaction Expense | 30 | - | ||||||
| + Other Income / (Expense) | 204 | (6 | ) | |||||
| + Noncash Stock Compensation | 828 | 437 | ||||||
| Adjusted EBITDA | $ | 7,307 | $ | 6,110 | ||||
Total Adjusted EBITDA for the first quarter of fiscal year 2023 was $7.3 million, an increase of $1.2 million or 19.6% versus the first quarter of fiscal year 2022. As a percentage of revenue, Adjusted EBITDA increased to 13.4% for the first quarter of fiscal year 2023 from 12.8% for the first quarter of fiscal year 2022. The increase in Adjusted EBITDA during the first quarter of fiscal year 2023 was primarily driven by the increase in depreciation and amortization expense and noncash stock compensation expense.
21
Adjusted Diluted Earnings Per Share:
In addition to reporting Diluted Earnings Per Share, a GAAP measure, we present Adjusted Diluted Earnings Per Share (net income plus acquisition related amortization expense, acquisition related transaction expenses, acquisition related stock-based compensation, acquisition amortization of backlog and restructuring expense, on a diluted per share basis), which is a non-GAAP measure. Our management believes Adjusted Diluted Earnings Per Share is an important measure of our operating performance because it provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.
Adjusted Diluted Earnings Per Share is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of Diluted Earnings Per Share and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted Diluted Earnings Per Share, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.
| First Quarter Ended | ||||||||
| June 25, | June 26, | |||||||
| 2022 | 2021 | |||||||
| Net Income | $ | 3,072 | $ | 3,688 | ||||
| + Amortization of Intangible Assets | 1,084 | 620 | ||||||
| + Acquisition Deal Costs | 299 | - | ||||||
| + Income Tax Effect @ 25% | (346 | ) | (155 | ) | ||||
| Adjusted Net Income | 4,109 | 4,153 | ||||||
| Average Diluted Shares Outstanding | 7,629 | 7,593 | ||||||
| Diluted Earnings Per Share – GAAP | $ | 0.40 | $ | 0.49 | ||||
| Adjusted Diluted Earnings Per Share | $ | 0.54 | $ | 0.55 | ||||
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 fiscal year 2022 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.
22
In addition, the 2021 Credit Agreement provides that, assuming no event of default, restricted payments up to $25.0 million (increased from $10.0 million in the Prior Credit Agreement) in the aggregate and $10.0 million (increased from $3.0 million in the Prior Credit Agreement) in any single fiscal year may be used by us to repurchase our shares and pay dividends. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply. The 2021 Credit Agreement also reduced the London Interbank Offered Rate (“LIBOR”) floor from 1.0% to 0.25% and included a mechanism for adoption of a different benchmark rate upon the discontinuation of LIBOR. The 2021 Credit Agreement also reduced the fixed interest rate on our term loan in the amount of $15.0 million (the “2018 Term Loan”) was reduced 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 $40.0 million.
Amendment Two had modified the definition of the applicable rate used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and it amended the definition of permitted acquisitions to amend borrowings available under the revolving credit facility for acquisitions. In addition, Amendment Two had amended the definition of restricted payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain employee tax obligations associated with share-based payment and stock option activity, and modified certain restrictions to the Company’s ability to repurchase its shares and pay dividends. Amendment Two also had modified the leverage ratio and fixed charge coverage ratio covenants with which the Company was required to comply and limited capital expenditures to $5.5 million for fiscal year 2021. Amendment Two also had established a LIBOR floor of 1.0% and included a mechanism for adoption of a different benchmark rate in the event LIBOR was discontinued.
As of June 25, 2022, $80.0 million was available under the revolving credit facility, of which $43.7 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. During the first quarter of fiscal year 2023 and 2022, we used $4.0 million and $0.9 million, respectively, for business acquisitions.
As of June 25, 2022, $8.0 million was outstanding on the 2018 Term Loan, of which $2.2 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 first quarter of fiscal year 2022 was a maximum multiple of 4.0 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 first quarter of fiscal year 2023. Our leverage ratio, as defined in the 2021 Credit Agreement, was 1.83 at June 25, 2022, compared with 1.74 at March 26, 2022
Interest on the revolving credit facility continues to accrue, at our election, at either the variable one-month LIBOR or a fixed rate for a designated period at the LIBOR corresponding to such period (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods), in each case, plus a margin. Interest on outstanding borrowings under the 2018 Term Loan accrued at a fixed rate of 4.15% during the first quarter of fiscal year 2022 and accrue at a fixed rate of 3.90% during the second quarter of fiscal year 2022 and over the term of the loan for subsequent periods. Unused fees accrue based on the average daily amount of unused credit available on the revolving credit facility. Interest rate margins and unused fees are determined on a quarterly basis based upon the Company’s calculated leverage ratio.
Cash Flows: The following table is a summary of our Consolidated Statements of Cash Flows (dollars in thousands):
| First Quarter Ended | ||||||||
| June 25, | June 26, | |||||||
| 2022 | 2021 | |||||||
| Cash Provided by (Used in): | ||||||||
| Operating Activities | $ | 2,043 | $ | 2,055 | ||||
| Investing Activities | $ | (6,429 | ) | $ | (2,134 | ) | ||
| Financing Activities | $ | 3,110 | $ | (43 | ) | |||
23
Operating Activities: Net cash provided by operations was $2.0 million during the first quarter of fiscal year 2023 compared to $2.1 million of net cash provided by operating activities during the first quarter of fiscal year 2022. The year-over-year decrease in cash provided by operations was primarily the result of changes in net working capital (defined as current assets less current liabilities). The significant working capital fluctuations were as follows:
| ● | Receivables: Accounts receivable decreased by a net amount of $1.7 million during the first quarter of fiscal year 2023 inclusive of $0.3 million of accounts receivable acquired as part of the Alliance acquisition completed during the period. During the first quarter of fiscal year 2022, accounts receivable decreased by a net amount of $0.6 million during the first quarter of fiscal year 2022 inclusive of $0.2 million of accounts receivable acquired as part of the Upstate Metrology acquisition completed during the period. The year-over-year variation reflects changes in the timing of collections. The following table illustrates our “days sales outstanding” as of June 25, 2022 and June 26, 2021 (dollars in thousands): |
| June 25, | June 26, | |||||||
| 2022 | 2021 | |||||||
| Net Sales, for the last two fiscal months | $ | 38,321 | $ | 33,502 | ||||
| Accounts Receivable, net | $ | 38,031 | $ | 33,324 | ||||
| Days Sales Outstanding | 60 | 60 | ||||||
| ● | 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 SKU’s 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 quarter of fiscal year 2023. Our inventory balance remained flat during the first quarter of fiscal year 2022. |
| ● | Accounts Payable: Changes in accounts payable may or may not correlate with changes in inventory balances at any given quarter end due to the timing of vendor payments for inventory, as well as the timing of payments for outsourced Service vendors and capital expenditures. |
Accounts payable decreased $1.2 million during the first quarter of fiscal year 2023. Accounts payable decreased $1.1 million during the first quarter of fiscal year 2022. The variances are largely due to the timing of inventory and capital expenditures and other payments in the respective periods.
| ● | Accrued Compensation and Other Current Liabilities: Accrued compensation and other current liabilities include, among other things, amounts paid to employees for non-equity performance-based compensation. At the end of any particular period, the amounts accrued for such compensation may vary due to many factors including, but not limited to, changes in expected performance levels, the performance measurement period, and timing of payments to employees. |
During the first quarter of fiscal year 2023, accrued compensation and other current liabilities decreased by $2.8 million. During the first quarter of fiscal year 2022, accrued compensation and other current liabilities decreased by $3.1 million. The change from the first quarter of fiscal year 2022 was largely due to the one-time annual payments of incentive based compensation accruals.
| ● | Income Taxes Payable: In any given period, net working capital may be affected by the timing and amount of income tax payments. During the first quarter of fiscal year 2023 income tax payable remained flat. During the first quarter of fiscal year 2022, income taxes payable decreased by $0.3 million. The year-over-year difference is due to timing of income tax payments. |
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Investing Activities: During the first quarter of fiscal year 2023, we invested $2.4 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 quarter of fiscal year 2022, we invested $1.2 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 quarter of fiscal year 2023, we used $4.0 million for business acquisitions. During the first quarter of fiscal year 2022, we used $0.9 million for business acquisitions.
During each of the first quarters of fiscal year 2023 and fiscal year 2022, no contingent consideration or other holdback amounts were paid related to business acquisitions.
Financing Activities: During the first quarter of fiscal year 2023, $3.8 million was borrowed from our revolving line of credit and $0.2 million in cash was generated from the issuance of common stock. In addition, we used $0.5 million for scheduled repayments of our term loan and $0.4 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in the quarter which are shown as a repurchase of shares of our common stock.
During the first quarter of fiscal year 2022, $3.2 million was borrowed from our revolving line of credit and $0.7 million in cash was generated from the issuance of common stock. In addition, we used $0.6 million for scheduled repayments of our term loan and $3.4 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in the quarter which are shown as a repurchase of shares of our common stock.
OUTLOOK
As we head into a more uncertain economic environment, we are pleased with the strong demand levels we experienced in our first quarter of fiscal year 2023. We continue to demonstrate our ability to drive growth through various economic cycles as can be seen over the past ten years and we are confident that will continue. The business continues to benefit from a predominately life science-oriented market, driven by regulation and recurring revenue streams. In the fiscal year ahead, we expect organic Service revenue growth in the high-single digit range and gross margin improvement to continue.
We expect our income tax rate to range between 22% and 24% for full fiscal year 2023. This estimate includes Federal, various state, Canadian and Irish income taxes and reflects the discrete tax accounting associated with share-based payment awards.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATES
Our exposure to changes in interest rates results from our borrowing activities. In the event interest rates were to move by 1%, our yearly interest expense would increase or decrease by approximately $0.4 million assuming our average borrowing levels remained constant. As of June 25, 2022, $80.0 million was available under our revolving credit facility, of which $43.7 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 June 25, 2022, $8.0 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.
25
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 quarter of fiscal year 2023 for our revolving credit facility ranged from 1.6% to 2.8%. Interest on outstanding borrowings of 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. Our revolving credit facility includes a mechanism for adoption of a different benchmark rate upon the discontinuation of LIBOR. On June 25, 2022, 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 quarters of fiscal year 2023 and 2022 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 U.S. and Canadian currencies and the U.S. dollar and the Euro on a monthly basis and adjust sales prices for products and services sold in Canadian dollars or Euros as we believe to be appropriate.
We continually utilize short-term foreign exchange forward contracts to reduce the risk that future earnings denominated in Canadian dollars would be adversely affected by changes in currency exchange rates. We do not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a loss of $0.1 million during the first quarter of each of the fiscal years 2023 and 2022, was recognized as a component of other expense in the Consolidated Statements of Income. The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated in Canadian dollars being hedged. On June 25, 2022, we had a foreign exchange contract, which matured in July 2022, outstanding in the notional amount of $3.9 million. The foreign exchange contract was renewed in July 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 first fiscal quarter of fiscal year 2023) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In connection with the acquisition of substantially all of Alliance’s assets, on May 31, 2022, we issued to Charlton Jeffmont, Inc., an Ohio corporation, Raitz, Inc., an Ohio corporation, and Toolroom Calibration, Inc., an Ohio corporation (collectively, “Sellers”), an aggregate of 2,284 shares of our common stock. Such shares were issued pursuant to an exemption from registration in reliance upon Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). Pursuant to the acquisition agreement, the Sellers represented to the Company that they are “accredited investors” as that term is defined in Regulation D of the Securities Act. Appropriate legends stating that such shares have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom were affixed to the certificates or book entry statements evidencing such shares.
ISSUER PURCHASES OF EQUITY SECURITIES
| (a) | (b) | (c) | (d) | |||||
| Period | Total Number of Shares Purchased |
Average |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||
| 03/27/22 - 04/23/22 | -(2) | -(2) | - | - | ||||
| 04/24/22 - 05/21/22 | -(2) | -(2) | - | - | ||||
| 05/22/22 - 06/25/22 | 6,921(2) | $63.17(2) | - | - | ||||
| Total | 6,921 | $63.17 | - | - |
| (1) | We have a Share Repurchase Plan (the “Plan”), announced on October 31, 2011, which allows us to repurchase shares of our common stock from certain of our executive officers, directors and key employees, subject to certain conditions and limitations. The purchase price is determined by the weighted average closing price per share of our common stock on The NASDAQ Global Market over the twenty (20) trading days following our acceptance of the repurchase request and may not be more than 15% higher than the closing price on the last day of the twenty (20) trading day period. We may purchase shares of our common stock pursuant to the Plan on a continuous basis, but we may not expend more than $1.0 million in any fiscal year to repurchase the shares. Our board of directors may terminate the Plan at any time. No shares were repurchased under the Plan during the first quarter of fiscal year 2023. |
| (2) | Shares of common stock withheld pursuant to the Transcat, Inc. 2021 Incentive Plan, as Amended and Restated, to cover employee tax-withholding obligations upon vesting of restricted stock unit awards that vested and stock option exercises in the first quarter of fiscal year 2023. Amounts in column (b) reflect the weighted average price for shares withheld in satisfaction of these tax-withholding obligations. |
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ITEM 6. EXHIBITS
INDEX TO EXHIBITS
| Exhibit No. |
Description | ||
| (10) | Material Contracts | ||
| 10.1*# | Form of Award Notice of Non-Qualified Stock Options granted pursuant to the Transcat, Inc. 2021 Stock Incentive Plan. | ||
| (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) | ||
| * | Exhibit filed with this report. |
| ** | Exhibit furnished with this report. |
| # | Management contract or compensatory plan or arrangement |
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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: August 3, 2022 | /s/ Lee D. Rudow |
| Lee D. Rudow | |
President and Chief Executive Officer (Principal Executive Officer) | |
| Date: August 3, 2022 | /s/ Thomas L. Barbato |
| Thomas L. Barbato | |
Senior Vice President of Finance and Chief Financial Officer (Principal Financial Officer) |
29
Exhibit 10.1
FORM OF AWARD NOTICE OF
NON-QUALIFIED STOCK OPTIONS
GRANTED PURSUANT TO THE
TRANSCAT, INC.
2021 STOCK INCENTIVE PLAN
| Grantee: | ||
| Number of Shares: | ||
| Option Price: | $ | |
| Date of Grant: |
1. Grant of Option. This Award Notice serves to notify you that the Board of Directors of Transcat, Inc. (the “Company”) has granted to you, under the Company’s 2021 Stock Incentive Plan (the “Plan”), a non-qualified stock option (the “Option”) to purchase, on the terms and conditions set forth in this Award Notice and the Plan, up to the number of shares of its Common Stock, $.50 par value per share (the “Common Stock”) and at the price per share set forth above. The Plan is incorporated herein by reference and made a part of this Award Notice. Capitalized terms not defined herein have the respective meanings set forth in the Plan.
2. Period of Option and Limitations on Right to Exercise. Unless the Option is previously terminated pursuant to the terms of the Plan or this Award Notice, the Option will expire at 5:00 p.m., Eastern Time, on the day which is ten years from the Date of Grant (the “Expiration Date”).
3. Exercise of Option. Subject to the terms of the Plan and this Award Notice, provided you are still in the service of the Company at that time, the Option will vest and become exercisable pro rata with respect to all of the shares subject to the Option on the third anniversary of the Date of Grant. The Option may be exercised with respect to any vested shares, in whole or in part, by you providing a notice of exercise to the Company and payment in accordance with the forms and procedures established by the Committee and in effect on the date of exercise.
4. Effect of Certain Events.
(a) Death. In the event of your death prior to the complete exercise of the Option, your designated beneficiary or, in the absence of such beneficiary, your duly qualified personal representative may exercise the Option to purchase any vested shares available under the Option until the earlier of the Expiration Date or one year after your death. Upon your death, the Option shall terminate with respect to any unvested shares under the Option.
(b) Disability. In the event of your Disability prior to the complete exercise of the Option, you may exercise the Option to purchase any vested shares available under the Option until the earlier of the Expiration Date or one year after the date of your Disability. Upon the date of your Disability, the Option shall terminate with respect to any unvested shares under the Option.
(c) Other Separation. Upon your separation from the Company for any reason other than your death or Disability, you may exercise the Option to purchase any vested shares available under the Option until the earlier of the Expiration Date or 90 days after the date of your separation. Upon your separation, the Option shall terminate with respect to any unvested shares under the Option.
(d) Change of Control. Notwithstanding the vesting schedule set forth in Section 3 of this Award Notice, upon a “Change of Control,” the Option shall become fully vested and immediately exercisable for the total number of shares available under the Option. For purposes of this Award Notice, “Change of Control” has the meaning given to such term in the Plan.
5. Limitation of Rights. You will not have any rights as a stockholder with respect to the shares covered by the Option until you become the holder of record of such shares by exercising the Option. Neither the Plan, the granting of the Option nor this Award Notice gives you any right to remain in the service of the Company or a Subsidiary.
6. Restrictions on Issuance of Shares. If at any time the Company determines that listing, registration or qualification of the shares covered by the Option upon any securities exchange or under any state or federal law, or the approval of any governmental agency, is necessary or advisable as a condition to the exercise of the Option, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification or approval shall have been effected or obtained free of any conditions not acceptable to the Company.
7. Restriction on Transfers. You may not make any sale or other distribution or disposition of any shares of Common Stock acquired by you pursuant to the exercise of all or any part of the Option unless (i) a registration statement with respect to such shares is in effect at the time of such sale, distribution or disposition and the Company shall have received proof satisfactory to it that there has been compliance with applicable state law, or (ii) the Company shall have received an opinion of counsel satisfactory to it that no violation of the Securities Act of 1933, as amended, or applicable state law will be involved in such transfer.
8. Plan Controls. The Option is subject to all of the provisions of the Plan, which is hereby incorporated by reference, and is further subject to all the interpretations, amendments, rules and regulations that may from time to time be promulgated and adopted by the Committee pursuant to the Plan. In the event of any conflict among the provisions of the Plan and this Award Notice, the provisions of the Plan will be controlling and determinative.
2
ACKNOWLEDGEMENT
The undersigned Grantee acknowledges receipt of a copy of the Plan, and understands and agrees to the terms of this Award Notice and the Plan. The Grantee further acknowledges that as of the Date of Grant, this Award Notice and the Plan set forth the entire understanding between the Grantee and the Company regarding the acquisition of Common Stock and supersede all prior oral and written agreements on that subject, with the exception of any other awards under the Plan made to the Grantee contemporaneously with this Option.
| Date: | Transcat, Inc. | |||
| By: | ||||
| Grantee: | ||||
3
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: August 3, 2022 | /s/ Lee D. Rudow |
| Lee D. Rudow | |
President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas L. Barbato, Senior 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: August 3, 2022 | /s/ Thomas L. Barbato |
| Thomas L. Barbato | |
Senior Vice President of Finance and Chief Financial Officer (Principal Financial Officer) |
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 Thomas L. Barbato, 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 first quarter ended June 25, 2022 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 first quarter ended June 25, 2022 fairly presents, in all material respects, the financial condition and results of operations of Transcat, Inc. |
| Date: August 3, 2022 | /s/ Lee D. Rudow |
| Lee D. Rudow | |
President and Chief Executive Officer (Principal Executive Officer) |
| Date: August 3, 2022 | /s/ Thomas L. Barbato |
| Thomas L. Barbato | |
Senior 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.