UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-K
(Mark one) | ||
[✓] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended: March 28, 2020 | ||
or | ||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission File Number: 000-03905
TRANSCAT, INC.
(Exact name of registrant as specified in its charter)
Ohio | 16-0874418 | ||
(State or other jurisdiction of | (I.R.S. Employer | ||
incorporation or organization) | Identification No.) |
35 Vantage Point Drive, Rochester, New York 14624
(Address of principal executive offices) (Zip Code)
(585) 352-7777
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, $0.50 par value | TRNS | Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [✓]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [✓]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [✓] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [✓] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [✓] |
Non-accelerated filer [ ] | Smaller reporting company [✓] |
Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [✓]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [✓]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on September 27, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $170.3 million. The market value calculation was determined using the closing sale price of the registrant’s common stock on September 27, 2019, as reported on the Nasdaq Global Market.
The number of shares of common stock of the registrant outstanding as of June 3, 2020 was 7,388,881.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held on September 9, 2020 have been incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this report.
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,” “intends,” “could,” “may,” and other similar words. Forward-looking statements are not statements of historical fact and thus are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or those expressed in such forward-looking statements. You should evaluate forward-looking statements in light of important risk factors and uncertainties that may affect our operating and financial results and our ability to achieve our financial objectives. These factors include, but are not limited to, the Company’s response to the coronavirus (“COVID-19”) pandemic, the highly competitive nature of the industries in which we compete and in the nature of our two business segments, cybersecurity risks, the risk of significant disruptions in our information technology systems, our inability to recruit, train and retain quality employees, skilled technicians and senior management, fluctuations in our operating results, competition in the rental market, the volatility of our stock price, our ability to adapt our technology, reliance on our enterprise resource planning system, technology updates, risks related to our acquisition strategy and the integration of the businesses we acquire, volatility in our customers’ industries, changes in vendor rebate programs, our vendors abilities to provide desired inventory, the risks related to current and future indebtedness, the relatively low trading volume of our common stock, foreign currency rate fluctuations and the impact of general economic conditions on our business. These risk factors and uncertainties are more fully described by us under the heading “Risk Factors” in Item IA. of Part I of this report. You should not place undue reliance on our forward-looking statements. Except as required by law, we undertake no obligation to update, correct or publicly announce any revisions to any of the forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.
BUSINESS OVERVIEW
Transcat, Inc. (“Transcat”, the “Company,” “we” or “us”) is a leading provider of accredited calibration and laboratory instrument services and a value-added distributor of professional grade test, measurement and control instrumentation. We are 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 FAA-regulated businesses, including aerospace and defense industrial manufacturing; energy and utilities, including oil and gas and alternative energy; 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.
We conduct our business through two operating segments: service (“Service”) and distribution (“Distribution”). See Note 7 to our Consolidated Financial Statements in this report for financial information for these segments. We concentrate on attracting new customers in each segment, retaining existing customers and cross-selling to customers to increase our total revenue. We serve approximately 25,000 customers through our Service and Distribution segments, with approximately 25% to 30% of those customers transacting with us through both of our business segments.
Through our Service segment, we offer calibration, repair, inspection, analytical qualifications, preventative maintenance, consulting and other related services, a majority of which are processed through our proprietary asset management system, CalTrak® (“CalTrak®”) and our online customer portal, C3®. Our Service model is flexible, and we cater to our customers’ needs by offering a variety of services and solutions including permanent and periodic on-site services, mobile calibration services, pickup and delivery and in-house services. As of the end of our fiscal year ended March 28, 2020 (“fiscal year 2020”), we operated twenty-two calibration service centers (“Calibration Service Centers”) strategically located across the United States, Puerto Rico, and Canada. We also serve our customers on-site at their facilities for daily, weekly or longer-term periods. In addition, we have several imbedded customer-site locations that we refer to as “client-based labs,” where we provide calibration services, and in some cases other related services, exclusively for the customer and where we reside and work every day. We also have a fleet of mobile calibration laboratories that can provide service at customer sites which may not have the space or utility capabilities we require to service their equipment.
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All of our Calibration Service Centers have obtained ISO/IEC 17025:2017 scopes of accreditation. Our accreditations are the cornerstone of our quality program, which we believe is among the best in the industry. Our dedication to quality is highly valued by businesses that operate in the industries we serve, particularly those in life science and other regulated industries, and our accreditations provide our customers with confidence that they will receive a consistent and uniform service, regardless of which of our service centers completes the service.
Through our Distribution segment, we sell and rent national and proprietary brand instruments to customers globally. Through our website, in-house sales team and printed and digital marketing materials, we offer access to more than 150,000 test, measurement and control instruments, including products from approximately 500 leading brands. Most instruments we sell and rent require calibration service to ensure that they maintain the most precise measurements. By having the capability to calibrate these instruments at the time of sale and at regular post-sale intervals, we can give customers a value-added service that most of our competitors are unable to provide. Calibrating before shipping means the customer can place their instruments into service immediately upon receipt, reducing downtime. Other value-added options we offer through our Distribution segment include equipment kitting (which is especially valued in the power generation sector), equipment rentals and used equipment sales.
Our commitment to quality goes beyond the services and products we deliver. Our sales, customer service and support teams provide expert advice, application assistance and technical support to our customers. Since calibration is an intangible service, our customers rely on us to uphold high standards and provide integrity in our people and processes.
Our customers include leading manufacturers in the life science/pharmaceutical, energy, defense, aerospace and industrial process control sectors. We believe our customers do business with us because of our integrity and commitment to quality service, our broad range of product and service offerings, our proprietary asset management system, CalTrak®, and our online customer portal, C3®. In our fiscal year ended March 30, 2019 (“fiscal year 2019”) through fiscal year 2020, no customer or controlled group of customers accounted for 5% or more of our total revenue. The loss of any single customer would not have a material adverse effect on our business, cash flows, balance sheet, or results of operations.
Transcat was incorporated in Ohio in 1964. We are headquartered in Rochester, New York and employ 772 people, including approximately 165 in our corporate headquarters. Our executive offices are located at 35 Vantage Point Drive, Rochester, New York 14624. Our telephone number is 585-352-7777. Our website is www.transcat.com. We trade on the Nasdaq Global Market under the ticker symbol “TRNS”.
OUR STRATEGY
Our two operating segments are highly complementary in that their offerings are of value to customers within the same industries. Our strategy is to leverage the complementary nature of our operating segments in ways that add value for all customers who select Transcat as their source for test and measurement equipment and/or calibration and laboratory instrument services. We strive to differentiate ourselves within the markets we serve and build barriers to competitive entry by offering a broad range of products and services and by integrating our product and service offerings in a value-added manner to benefit our customers’ operations.
During fiscal year 2020, we continued to commit capital, people and leadership investments to advance our “Operational Excellence” initiative. These initiatives are resulting in increased productivity and operational efficiency and further differentiation from our competitors as we leverage technology and process improvements to improve our effectiveness and our customers’ experiences. Our Operational Excellence is a multi-year, ever-evolving program that we believe will deliver certain short-term benefits but is focused on the use of technology and process improvements to create an infrastructure to support our strategic goals over a longer timeframe.
Within the Service segment, our strategy is to drive double-digit revenue growth through both organic expansion and acquisitions. We expect to achieve mid-to-high single digit organic revenue growth in this segment. We have adopted an integrated sales model to drive sales and capitalize on the cross-selling opportunities between our two segments, especially leveraging our Distribution relationships to develop new Service relationships. We leverage these relationships with our unique value proposition which resonates strongly with customers who rely on accredited calibration services and/or laboratory instrument services to maintain the integrity of their processes and/or meet the demands of regulated business environments. Our customer base values our superior quality programs and requires precise measurement capability in their processes to minimize risk, waste and defects. We execute this strategy by leveraging our quality programs, metrology expertise, multiple locations, qualified technicians, breadth of capabilities, and on-site and depot service options. Together, this allows us to meet the most rigorous quality demands of our most highly regulated customers while simultaneously being nimble enough to meet their business needs.
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We expect to continue to grow our Service business organically by taking market share from other third-party providers and original equipment manufacturers (“OEMs”), as well as by targeting the outsourcing of in-house calibration labs as multi-year client-based lab contracts. We believe an important element in taking market share is our ability to expand into new technical capabilities that are in demand by our current and target customer base.
The other component to our Service growth strategy is acquisitions. There are three drivers of our acquisition strategy: geographic expansion, increased capabilities and infrastructure leverage. The majority of our acquisition opportunities have been in the $500 thousand to $10 million annual revenue range, and we are disciplined in our approach to selecting target companies. One focus of our Operational Excellence initiative is to strengthen our acquisition integration process, allowing us to capitalize on acquired sales and cost synergies at a faster pace.
Our Distribution segment strategy is to be the premier distributor and rental source of leading test and measurement equipment while also providing cross-selling opportunities for our Service segment. Through our vendor relationships we have access to more than 150,000 products, which we market to our existing and prospective customers both with and without value-added service options that are unique to Transcat. In addition to offering pre-shipment value-added services, we offer our customers the options of renting selected test and measurement equipment or buying used equipment, furthering our ability to answer all of our customers’ test and measurement equipment needs. We continuously evaluate our offerings and add new in-demand vendors and products. In recent years we have expanded the number of SKUs that we stock and the number of SKUs that are sold with pre-shipment calibrations and have increased our focus on digital marketing to capitalize on the ever-growing B2B ecommerce trend. Our equipment rental business continues to grow, and with it used equipment sales. Having new, used and rental equipment further differentiates us from our Service segment competitors.
We see these various methods of meeting our Distribution customers’ needs as a way to differentiate ourselves and to diversify this segment’s customer base from its historically niche market. This differentiation and diversification strategy has been deliberately instituted in recent years as a means to mitigate the effect of price-driven competition and to lessen the impact that any particular industry or market will have on the overall performance of this segment.
As part of our growth strategy, we completed three business acquisitions during our fiscal year 2020 and two acquisitions during our fiscal year 2019:
● | Effective February 21, 2020, we acquired substantially all of the assets of TTE Laboratories, Inc. (“TTE"), a Boston, MA-based provider of pipette equipment and services. |
● | Effective July 19, 2019, we acquired Infinite Integral Solutions Inc. (“IIS”). IIS, a Mississauga, Ontario, Canada company, the owner and developer of the CalTree™ suite of software solutions for the automation of calibration procedures and datasheet generation. |
● | Effective April 1, 2019, we acquired substantially all of the assets of Gauge Repair Service (“GRS”), a Los Angeles, California-based provider of calibration services. |
● | Effective August 31, 2018, we acquired substantially all of the assets of Angel’s Instrumentation, Inc. (“Angel’s”), a Virginia-based provider of calibration services. |
● | Effective June 12, 2018, we acquired substantially all of the assets of NBS Calibration, Inc. (“NBS”), an Arizona-based provider of calibration services. |
Our acquisition strategy primarily targets service businesses that expand our geographic reach, increase the depth and/or breadth of our service capabilities and expertise and leverage our infrastructure. The table below illustrates the strategical drivers for the acquisitions described above:
Geographic | Increased | Leveraged | |
Expansion | Capabilities | Infrastructure | |
TTE | ✓ | ✓ | |
IIS | ✓ | ✓ | |
GRS | ✓ | ✓ | |
Angel’s | ✓ | ✓ | |
NBS | ✓ | ✓ |
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We believe our combined Service and Distribution segment offerings, experience, technical expertise and integrity create a unique and compelling value proposition for our customers, and we intend to continue to grow our business through organic revenue growth and business acquisitions. We consider the attributes of our Service segment which include higher gross margins and recurring revenue streams from customers in regulated industries to be more compelling and scalable than our legacy Distribution segment. For this reason, we expect our Service segment to be the primary source of revenue and earnings growth in future fiscal years. The charts below illustrate Service, Distribution and consolidated revenue over the past five years:
Service Revenue Trend (in millions) |
Distribution Sales Trend (in millions) | |
Consolidated Revenue (in millions) |
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SEGMENTS
Service Segment
Calibration. Calibration is the act of comparing a unit or instrument of unknown value to a standard of known value and reporting the result in some specifically defined form. After the calibration has been completed, a decision is made, based on rigorously defined parameters, regarding what, if anything, should be done to the unit to conform to the required standards or specifications. The decision may be to adjust, optimize or repair a unit; limit the use, range or rating of a unit; scrap the unit; or leave the unit as is. The purpose of calibration is to significantly reduce the risk of product or process failures caused by inaccurate measurements. In addition to its being an element of quality control and risk management, calibration improves an operation’s productivity and efficiency to optimal levels by assuring accurate, reliable instruments and processes.
The need for calibration is often driven by regulation, which identifies a requirement for quality calibration and laboratory instrument services as a critical component of a company’s business operation. We specifically target industries and companies that are regulated by the FDA, FAA or other regulatory bodies. As a result of the various levels of regulation within our target industries, our customers’ calibration and laboratory instrument service sourcing decisions are generally made based on the provider’s quality systems, accreditation, reliability, trust, customer service and documentation of services. To maintain our competitive position in this segment, we maintain internationally recognized third-party accredited quality systems, further detailed in the section entitled “Service Quality” below, and provide our customers with access to proprietary asset management software solutions, which offer tools to manage their internal calibration programs and provide them with visibility to their service records.
Through our Service segment, we perform recurring periodic calibrations (typically ranging from three-month to twenty-four month intervals) on new and customer-owned instruments. We perform approximately 500,000 calibrations annually and can address a significant majority of the items requested to be calibrated with our in-house capabilities. For customers’ calibration needs in less common and highly specialized disciplines, we subcontract some calibrations to third-party vendors that have unique or proprietary capabilities. While typically representing approximately 13% to 15% of our Service segment revenue, we believe the management of these items is highly valued by our customers and providing this service has enabled us to continue our pursuit of having the broadest calibration offerings in these targeted markets.
Compliance Services. Our compliance services include analytical qualification, validation, remediation and preventative maintenance services. Our analytical qualification and validation services provide a comprehensive and highly specialized service offering focused on life science-related industries. Analytical qualifications and validation services include validations to specifically documented protocols that are commonly used in highly-regulated life science industries including installation qualification (“IQ”), operational qualification (“OQ”), and performance qualification (“PQ”). Most of the demand for our qualification, validation and preventative maintenance services comes from companies and institutions engaged in pharmaceutical manufacturing and research and development.
Our goal is to deliver specialized technical services with a quality assurance approach, which maximizes document accuracy and on-time job delivery. These industries demand knowledgeable contract services, and Transcat meets these demands with current good manufacturing practice (“cGMP”) and good laboratory practice (“GLP”) compliant services. Companies within these innovative and cutting-edge life science industries need a reliable alternative to the OEMs and the “generalist” service providers who cannot meet their industry-specific needs. We believe our value proposition to the life science industries is unique as a result of offering a comprehensive suite of both traditional calibration and laboratory instrument and other analytical services.
Analytical qualifications and preventative maintenance services are typically based on service agreements for periodic service and tend to generate recurring revenue. Some validation services are based on certain customer processes. While some validation services may not be repeated, we generally develop relationships with these customers that lead to demand for additional unique validation services. Remediation services are based on specific regulatory actions and are generally project-based and required by a customer for a finite period of time. Remediation revenue is not recurring by its nature.
Other Services. We provide other services to our customers such as inspection, repair and consulting services, which appeal to customers across all sectors in our customer base. These are generally value-added services and allow us to provide “one-stop shopping” for our customers.
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Service Value Proposition. Our calibration services strategy encompasses multiple ways to manage a customer’s calibration and laboratory instrument service needs:
1) | We offer an “Integrated Calibration Service Solution” that provides a complete wrap-around service, which can be delivered in the following ways: |
● | in-house services: services are performed at one of our twenty-two Calibration Service Centers (often accompanied by pick-up and delivery services); |
● | periodic on-site services: Transcat technicians travel to a customer’s location, including aboard vessels docked at shipyards, and provide bench-top or in-line calibration or laboratory services on predetermined service cycles; |
● | client-based-laboratory services: Transcat establishes and manages a calibration service program within a customer’s facility; and |
● | mobile calibration services: services are completed on a customer’s property within one of our mobile calibration units. |
2) | For companies that maintain an internal calibration operation, we can provide: |
● | calibration of their primary calibration assets, also called “standards”; and |
● | overflow capability, either on-site or at one of our Calibration Service Centers, during periods of high demand. |
Inclusive with all the above services, we provide total program management including logistics, remediation and consultation services when needed.
We strive to provide the broadest accredited calibration offering to our targeted markets, which includes certification of our technicians pursuant to the American Society for Quality standards, complete calibration management encompassing the entire metrology function, and access to our complementary service and product offerings. We believe our calibration services are of the highest technical and quality levels, with broad ranges of accreditation.
Our Compliance Services strategy is to identify and establish long-term relationships with life science research and development and manufacturing customers who require analytical qualifications, validation, remediation and/or preventative maintenance services. In most cases, these customers are life science companies, including pharmaceutical and biotechnology companies engaged in research and development and manufacturing, which are subject to extensive government regulation. The services we provide to these regulated customers are typically a critical component of the customer’s overall compliance program. Because many laboratory instrument service customers operate in regulated industries, these same customers typically also require accredited calibration services. This requirement allows a natural synergy between our laboratory instrument and calibration services. Our strategy includes cross-selling our services within our customer accounts to maximize our revenue opportunities with each customer.
Proprietary Asset Management Software. CalTrak® is our proprietary documentation and asset management software which is used to integrate and manage both the workflow of our Calibration Service Centers and our customers’ assets. With CalTrak®, we are able to provide our customers with timely and consistent calibration service while optimizing our own efficiencies. CalTrak® has been validated to U.S. federal regulations 21 CFR Part 820.75 and 21 CFR Part 11, as applicable. This validation is important to pharmaceutical and other FDA-regulated industries where federal regulations can be particularly stringent.
Additionally, C3® provides our customers with web-based asset management capability and a safe and secure off-site archive of calibration and other service records that can be accessed 24 hours a day through our secure password-protected website. C3® stands for Compliance, Control and Cost, and we see these as the major areas of focus for our clients within the regulatory environment as it relates to instrument calibration. We specifically designed C3® to assist our customers in increasing efficiency, driving compliance to quality system and enhancing control of instrumentation, all while bringing their overall metrology costs down. Understanding the regulated environments that our clients operate within, we customized the platform to allow for single system of record utilization via capabilities that allow clients to track and manage instruments maintained internally in addition to instruments supported by Transcat. C3® is validated to 21 CFR Part 820.75 and 21 CFR Part 11 to meet stringent FDA requirements.
Through CalTrak® and C3®, each customer calibration is tracked and automatically cross-referenced to the assets used to perform the calibration, providing traceability.
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Service Marketing and Sales. Under our integrated sales model, we have both inside and outside sales teams that seek to acquire new customers in our targeted markets by leveraging our unique value proposition, including our broad geographic footprint and comprehensive suite of services. We target regulated, enterprise customers with multiple manufacturing operations throughout North America. We leverage our ability to manage the complete life cycle of instrumentation from purchase of calibrated equipment to long-term service and maintenance requirements. Connecting all the dots by using new and used product sales, rentals, and repair and calibration services is the goal of our marketing and sales initiatives. We also have a team of customer success managers focused on delivering ever-increasing value for our existing customers. We utilize print media, trade shows and web-based initiatives to market our services to customers and prospective customers with a strategic focus in the highly regulated industries including life science and other FDA-regulated industries, aerospace and defense, energy and utilities, and chemical manufacturing. We also target industrial manufacturing and other industries that appreciate the value of quality calibrations.
Service Competition. The calibration services industry is highly fragmented and is composed of companies ranging from internationally recognized and accredited OEM’s, to non-accredited sole proprietors as well as companies that perform their own calibrations in-house, resulting in a tremendous range of service levels and capabilities. A large percentage of calibration companies are small businesses that generally do not have a range of capabilities as broad as ours. There are also several companies with whom we compete that have national or regional operations.
We differentiate ourselves from our competitors by demonstrating our commitment to quality, having a wide range of capabilities that are tailored to the markets we serve, having a geographical footprint that spans North America and providing a comprehensive suite of services that spans many manufacturers and is not limited to certain product lines or brands. Our unique ability to bundle our products with our compliance and calibration services also provides a high level of differentiation from our competitors. As one of the only North American compliance and calibration service providers who also distributes product, our customers can seamlessly replace instruments that cannot be calibrated or are otherwise deemed to be at end of life. Our close knowledge of the products we distribute also allows our service staff to consult and advise customers on what products are best suited for their in-house calibration needs. We also believe that our proprietary software is a key differentiator from our competitors. CalTrak® and C3® are utilized by our customers in an integrated manner, providing a competitive barrier as customers realize synergies and efficiencies as a result of this integration.
In fiscal year 2020, we invested in a software solution for the automation of calibration procedures and datasheet generation. We are in the early testing phases with the rollout for the first limited set of calibration disciplines. In fiscal year 2019, we expanded our range of capabilities by making significant capital and staffing investments in reference-level radio frequency/microwave calibration capabilities. This allowed us to increase business with our prestigious clients in the enterprise computer manufacturing and aerospace defense sectors. In addition, we grew our mobile calibration laboratory fleet and added the ability to carry inventory and sell products while onsite. This was done to strategically target onsite calibration and instrument sales to the wind energy sector. We believe this mobile approach combined with our high-quality significantly improves our differentiation in this space.
Competition for laboratory instrument services is composed of both small local and regional service providers and large multi-national OEMs. We believe we are generally financially stronger, service a larger customer base and are typically able to offer a larger suite of services than many of the small local and regional competitors. The large OEMs may offer specialized services and brand-specific expertise which we do not offer, but they are generally focused on providing specialized services only for their proprietary brands and product lines, rather than servicing an array of brands and product lines as we do. We believe our competitive advantages in the laboratory instrument services market are our financial and technical resources, turnaround time, and flexibility to react quickly to customers’ needs. The breadth of our suite of laboratory instrument service, combined with our calibration service offerings, also differentiates us from our competitors by allowing us to be our customers’ one-source accredited services provider for their entire calibration and compliance programs.
Service Quality. The accreditation process is the only system currently in existence that validates measurement competence. To ensure that the quality and consistency of our calibrations are consistent with the global metrology network, designed to standardize measurements worldwide, we have sought and achieved international levels of quality and accreditation to provide uniformity across all locations with advanced levels of training for our technical staff. Our Calibration Service Centers are accredited to ISO/IEC 17025:2017 by ANSI-ASQ National Accreditation Board (“ANAB”) and other accrediting bodies. These accrediting bodies are International Laboratory Accreditation Cooperation Mutual Recognition Arrangement (“ILAC MRA”) signatories, are proficient in the technical aspects of the chemistry and physics that underlie metrology, and provide an objective, third-party, internationally accepted evaluation of the quality, consistency, and competency of our calibration processes. Accreditation also requires that all measurement standards used for accredited measurements have a fully documented path, known as Metrological Traceability, through the National Institute of Standards and Technology or the National Research Council (the National Measurement Institutes for the United States and Canada, respectively), or to other national or international standards bodies, or to measurable conditions created in our Calibration Service Centers, or accepted fundamental and/or natural physical constants, ratio type of calibration, or by comparison to consensus standards, all inclusive of measurement uncertainties.
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The importance of this international oversight to our customers is the assurance that our service documentation will be accepted worldwide, removing one of the barriers to trade that they may experience if using a calibration laboratory provider whose accrediting body is not an ILAC MRA signatory. To provide the widest range of services to our customers in our target markets, our ISO/IEC 17025:2017 accreditations extend across many technical disciplines, including working-level and reference-level capabilities. We believe our scope of accreditation to ISO/IEC 17025:2017 to be the broadest for the industries we serve.
To reinforce our belief in the importance of calibration quality, we are leveraging a branding campaign for our Service segment that is centered around three simple words – “Calibrated by Transcat®”. We believe we have established a strong, differentiated brand that has a deep and meaningful association with quality, compliance and control. We want the phrase “Calibrated by Transcat®” to be synonymous with risk reduction and quality compliance.
Acquired calibration labs might use other quality registration systems. We continually evaluate when to integrate acquired quality systems with the focus on minimizing business disruptions and disruptions to our customers while maintaining our commitment to quality.
Our scopes of accreditation can be found at http://www.transcat.com/calibration-services/accreditation/calibration-lab-certificates.
Distribution Segment
Distribution Summary. We distribute professional grade test, measurement and control instrumentation throughout North America and internationally. Our customers use test and measurement instruments to ensure that their processes, and ultimately their end products, are within specification. Utilization of such diagnostic instrumentation also allows for continuous improvement processes to be in place, increasing the accuracies of their measurements. The industrial test and measurement instrumentation market, in those geographic areas where we predominately operate, has historically been serviced by broad-based national equipment distributors and niche or specialty-focused organizations such as Transcat. We offer value-added services such as calibration/certification of equipment purchases, equipment rentals, used equipment for sale, and equipment kitting. In recent years, online-based distributors have become more prevalent. To more effectively compete with these online-based distributors, we have continued to make improvements to our digital platform, including enhanced e-commerce capabilities.
We believe that a customer chooses a distributor based on a number of different criteria, including product availability, price, ease of doing business, timely delivery and accuracy of orders, consistent product quality, technical competence of the representative serving them and availability of value-added services. The decision to buy is generally made by plant engineers, quality managers, or their purchasing personnel, and products are typically obtained from one or more distributors as replacements, upgrades, or for expansion of manufacturing and research and development facilities. As a result, sales to Distribution customers are somewhat unpredictable and potentially non-recurring. Our online presence, including our website and e-newsletters; Master Catalog; supplemental mailings and other sales and marketing activities are designed to create interest and maintain a constant presence in front of our customers to ensure we receive the order when they are ready to purchase.
We provide our customers with value-added services, including technical support, to ensure our customers receive the right product for their application, and more comprehensive instrument suitability studies to customers in regulated industries who are concerned about the technical uncertainties that their testing or in-process instruments may bring to a process. We consider our biggest value-added service for our Distribution customers is the option to have calibration service performed on their new product purchases prior to shipment, allowing them to place newly acquired equipment directly into service upon receipt, saving downtime. We also offer online procurement, credit card payment options, same day shipment of in-stock items, kitted products, the option to rent, training programs and a variety of custom product offerings. Items are regularly added to and deleted from our product offerings on the basis of customer demand, recommendations of suppliers, sales volumes and other factors. Because of the breadth of our product and service offerings, we are often a “one-stop shop” for our customers who gain operational efficiency by dealing with just one distributor for most or all of their test and measurement instrumentation needs.
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In fiscal year 2020, our Distribution segment performed well against our corporate strategy. We grew our core set of customers while focusing on strategic pricing initiatives that drove incremental gross profit. Our focus on higher margin channels such as used equipment and rentals will be a continual focus to bolster profitability in the Distribution segment. This effort is intended to offset competitive pressures in our legacy distribution business.
Distribution Marketing and Sales. We market, create demand and sell to our customers through multiple direct sales channels including our website, digital and print advertising, proactive outbound sales and an inbound call center. Our outbound and inbound sales teams are staffed with technically trained personnel who are available to help guide product selection. Our website serves as a sales channel for our products and services, and provides search capability, detailed product information, in-stock availability, selection guides, demo videos and downloadable product specification sheets. We have made investments in our website to implement the latest marketing technologies which allow us to provide an intuitive customer experience, with simple product comparison and quoting, ease at checkout and automated post-order follow-up. We also operate and maintain several industry-specific service websites, obtained through recent acquisitions. For example, the URL www.pipettes.com was obtained in connection with the acquisition of TTE. TTE focuses on selling pipettes, pipette supplies and related services to its customers. We believe with our digital marketing experience we can expand the web traffic and sales through www.pipettes.com.
We use a multichannel approach to reach our customers and prospective customers including our Master Catalog, periodic supplemental catalogs, website, e-newsletters, and other direct sales and marketing programs. Our digital marketing strategy includes ongoing investment in search engine optimization, application-specific digital content, pay-per-click search engine advertising, and product listings on online marketplaces such as Amazon and Google Shopping. We continue to invest in back-end technologies designed to provide a seamless customer experience across all our marketing channels. During fiscal year 2020, we proactively communicated with our customers and prospective customers through direct mail catalogs, email newsletters, vertical email drip campaigns, retargeting ads, educational webinars, and outbound sales calls. Some of the key factors that determine the marketing materials a customer may receive include relevancy of new product introductions, current promotions, purchase history, the customer’s market segment, and the contact’s job function.
As a result of strong relationships with our product vendors and our historical marketing program results, we have the opportunity to carry out co-branded marketing initiatives, aimed at our existing customers and our prospective customer base, for which we receive cooperative advertising support. These co-branded marketing initiatives typically feature specific vendors, new products or targeted product categories and take the form of direct mailers, web-based initiatives or outbound sales efforts.
Distribution Competition. The distribution market for industrial test and measurement instrumentation is fragmented and highly competitive. Our competitors range from large national distributors and manufacturers that sell directly to customers to small local distributors and online distributors. Key competitive factors typically include customer service and support, quality, lead time, inventory availability, brand recognition and price. To address our customers’ needs for technical support and product application assistance, we employ a staff of highly trained technical sales specialists. In order to maintain this competitive advantage, technical training is an integral part of developing our sales staff. To differentiate ourselves from competitors, we offer pre-shipment calibration or performance data reports which allow customers to receive our products and immediately place them into service, saving them downtime and money.
Online distributors, including Amazon which sells lower price-point products, have become prominent competitors for sales of handheld test and measurement equipment, competing primarily on price. While online competitors lack the value-added services we offer in our Distribution segment, they have been successful in capturing some market share in the worldwide market for test and measurement instruments. To stay ahead of growing competition from these online distributors and in keeping with the general trend of increased use of e-commerce, we continue to invest in our digital platform including a well-indexed website with improved design and functionality. In addition, we have diversified our offerings by expanding the brands and product lines that we offer and adding higher gross margin equipment rentals and used equipment sales, which we believe makes Transcat unique among our competitors.
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Distribution Suppliers and Purchasing. We believe that effective purchasing is a key element to maintaining and enhancing our position as a provider of high-quality test and measurement instruments. We frequently evaluate our purchase requirements and suppliers’ offerings to obtain products at the best possible cost. We obtain our products from approximately 500 suppliers of brand name and private-labeled equipment. In fiscal year 2020, our top 10 vendors accounted for approximately 73% of our aggregate Distribution business.
We plan our product mix and inventory stock to best serve the anticipated needs of our customers, whose individual purchases vary in size. We can usually ship our top selling products to our customers the same day they are ordered.
Distribution Vendor Rebates. We have agreements with certain product vendors that provide for rebates based on meeting a specified cumulative level of purchases and/or incremental distribution sales. These rebates are recorded as a reduction of cost of distribution sales. Purchase rebates are calculated and recorded quarterly based upon our volume of purchases with specific vendors during the quarter. Point of sale rebate programs that are based on year-over-year sales performance on a calendar year basis are recorded as earned, on a quarterly basis, based upon the estimated level of annual achievement. Point of sale rebate programs that are based on year-over-year sales performance on a quarterly basis are recorded as earned in the respective quarter.
Distribution Operations. Our Distribution operations primarily take place at our 48,500 square-foot facility in Rochester, New York which includes 17,000 square feet of warehouse space. The Rochester location also serves as our corporate headquarters, houses our customer service, sales and administrative functions, and is a Calibration Service Center. We also have two smaller warehouse facilities. Our Wisconsin warehouse fulfills orders for certain large industrial scales and our Fullerton, California warehouse fulfills orders for used equipment and rental equipment. In fiscal year 2020, we shipped approximately 31,000 product orders.
Distribution Backlog. Distribution orders include orders for instruments that we routinely stock in our inventory, customized products, and other products ordered less frequently, which we do not stock. Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in one of our Calibration 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. Our total backlog was $4.3 million and $3.9 million as of March 28, 2020 and March 30, 2019, respectively.
CUSTOMER SERVICE AND SUPPORT
Key elements of our customer service approach are our business development sales team, outbound sales team, account management team, inbound sales and customer service organization. To ensure the quality of service provided, we monitor our customer service through customer surveys, call monitoring and daily statistical reports.
● | Mail to Transcat, Inc., 35 Vantage Point Drive, Rochester, NY 14624; |
● | Telephone at 1-800-828-1470; |
● | Email at sales@transcat.com; |
● | Online at www.transcat.com; or |
● | Fax at 1-800-395-0543 |
INFORMATION REGARDING EXPORT SALES
In fiscal years 2020 and 2019, approximately 10% of our total revenue resulted from sales to customers outside the United States. Of those export sales in fiscal year 2020, approximately 12% were denominated in U.S. dollars and the remaining 88% were in Canadian dollars. Our revenue is subject to the customary risks of operating in an international environment, including the potential imposition of trade or foreign exchange restrictions, tariff and other tax increases, fluctuations in exchange rates and unstable political situations, any one or more of which could have a material adverse effect on our business, cash flows, balance sheet or results of operations. See “Foreign Currency” in Item 7A. of Part II and Note 7 to our Consolidated Financial Statements in this report for further details.
INFORMATION SYSTEMS
We utilize a turnkey enterprise software solution from Infor, Inc. (“Infor”) called Application Plus to manage our business and operations segments. This software includes a suite of fully integrated modules to manage our business functions, including customer service, warehouse management, inventory management, financial management, customer relations management and business intelligence. This solution is a fully mature business package and has been subject to more than 20 years of refinement. We utilize customer relationship management (“CRM”) software offered by SalesForce.com, Inc., which is strategically partnered with Infor, allowing us to fully integrate the CRM software with our Infor enterprise software.
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We also utilize CalTrak®, our proprietary document and asset management system, to manage documentation, workflow and customers’ assets within and amongst most of our Calibration Service Centers. In addition to functioning as an internal documentation, workflow, and asset management system, CalTrak®, through C3®, provides customers with web-based calibration cycle management service and access to documentation relating to services completed by Transcat. Certain recent acquisitions utilize either third-party or their own proprietary calibration management systems. We continually evaluate when to integrate these acquired systems with a focus on obtaining operational synergies while imposing minimal disruption to customers.
INTELLECTUAL PROPERTY
We have federally registered trademarks for Transcat®, CalTrak®, C3® and Procision™, which we consider to be of material importance to our business. The registrations for these trademarks are in good standing with the U.S. Patent & Trademark Office. Our CalTrak® trademark is also registered in Canada for one class with the Canada Intellectual Property Office. Our trademark registrations must be renewed at various times, and we intend to renew our trademarks, as necessary, for the foreseeable future.
In addition, we own www.transcat.com and www.transcat.ca among other Internet domain names. As with phone numbers, we do not have, and cannot acquire any property rights to an Internet address. The regulation of domain names in the United States and in other countries is also subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we might not be able to maintain our domain names or obtain comparable domain names, which could harm our business.
SEASONALITY
Our business has certain historical seasonal factors. Historically, our fiscal third and fourth quarters have been stronger than our fiscal first and second quarters due to the operating cycles of our industrial sector customers. Our Distribution segment has historically been strongest in our third fiscal quarter while Service has historically been strongest in our fourth fiscal quarter.
FISCAL YEAR
We operate on a 52/53 week fiscal year, ending the last Saturday in March. In a 52-week fiscal year, each of the four quarters is a 13-week period. In a 53-week fiscal year, the last quarter is a 14-week period. Fiscal year 2020 and 2019 both consisted of 52 weeks. Fiscal year 2021 which ends on March 27, 2021 (“fiscal year 2021”) will also have 52 weeks.
ENVIRONMENTAL MATTERS
We believe that we are in compliance with federal, state, and local provisions relating to the protection of the environment, and that continued compliance will not have any material effect on our capital expenditures, earnings, or competitive position.
EMPLOYEES
At the end of fiscal year 2020, we had 772 employees, including 50 part-time employees, compared with 685 employees, including 28 part-time employees, at the end of fiscal year 2019.
AVAILABLE INFORMATION
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our filings with the SEC are available on the SEC’s website at www.sec.gov. We also maintain a website at www.transcat.com. We make available, free of charge, in the Investor Relations section of our website, documents we file with or furnish to the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports. We make this information available as soon as reasonably practicable after we electronically file such materials with, or furnish such information to, the SEC. The other information found on our website is not part of this or any other report we file with, or furnish to, the SEC. Copies of such documents are available in print at no charge to any shareholder who makes a request. Such requests should be made to our corporate secretary at our corporate headquarters, 35 Vantage Point Drive, Rochester, New York 14624.
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You should consider carefully the following risks and all other information included in this report. The risks and uncertainties described below and elsewhere in this report are not the only ones facing our business. If any of the following risks were to actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall and you could lose all or part of your investment.
Our business, results of operations and financial condition may be adversely impacted by the COVID-19 pandemic. The COVID-19 pandemic has negatively affected the U.S. and global economies, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it will impact our customers, employees and supply chain. Given the critical nature of the services and products that we provide, our calibration labs, distribution centers and support offices have remained open during the pandemic. While the COVID-19 pandemic did not have a material adverse effect on our reported results for the fourth quarter of fiscal year 2020, we are unable to predict the ultimate impact that it may have on our business, future results of operations, financial position or cash flows. The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted. We may experience additional operating costs due to increased challenges with our workforce (including as a result of illness, absenteeism or government orders), access to supplies, capital, and fundamental support services (such as shipping and transportation). Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown.
The impact of the COVID-19 pandemic may also exacerbate other risks discussed in this section, any of which could have a material adverse effect on us. This situation is changing rapidly and additional impacts may arise that we are not aware of currently.
The COVID-19 pandemic may significantly disrupt our workforce and internal operations. The COVID-19 pandemic may significantly disrupt our workforce if a significant percentage of our employees are unable to work due to illness, quarantines, government actions, facility closures in response to the pandemic, fear of acquiring COVID-19 while performing essential business functions, or as a result of recent changes to unemployment insurance where unemployed workers can receive, in the short-term, benefits in excess of what would be offered for working for us. As part of our response to the pandemic, we instituted hazard pay for certain employees that perform essential work at customer sites. While we remain fully operational as an essential business, we cannot guarantee that we will be able to adequately staff our operations when needed, particularly as the COVID-19 pandemic progresses, which may strain our existing personnel, increase costs, and negatively impact our operations. As a result, our internal operations may experience disruptions. The pandemic may create additional challenges in attracting and retaining quality employees in the future. In addition, COVID-19 related-illness could impact members of our board of directors resulting in absenteeism from meetings of the directors or committees of directors, making it more difficult to convene the quorums of the full board of directors or its committees needed to conduct meetings for the management of our affairs. We cannot predict the extent to which the COVID-19 pandemic may disrupt our workforce and internal operations.
We have taken certain precautions due to the COVID-19 pandemic that could negatively impact our business. In response to the COVID-19 pandemic, we have taken measures intended to protect the health and well-being of our employees, customers, and communities, which could negatively impact our business. These measures include temporarily requiring all non-essential employees (personnel whose roles allow) to work remotely, restricting work-related travel except for direct onsite service to our customers, restricting non-essential visitors from entering our sites, increasing the frequency and extent of cleaning and disinfecting facilities, workstations, and equipment, developing social distancing plans, and instituting specialized training to ensure the safe handling of our customers’ critical equipment. The health of our workforce, customers and communities is of primary concern and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and others. In addition, our management team has, and will likely continue to, spend significant time, attention and resources monitoring the COVID-19 pandemic and seeking to manage its effects on our business and workforce. The extent to which the pandemic and our precautionary measures may impact our business will depend on future developments, which are highly uncertain and cannot be predicted at this time.
The industries in which we compete are highly competitive, and we may not be able to compete successfully. Within our Service segment, we provide calibration services and compete in an industry that is highly fragmented and is composed of companies ranging from internationally recognized and accredited corporations to non-accredited sole proprietors, resulting in a tremendous range of service levels and capabilities. Also, within our Service segment, we provide compliance services and compete in an industry that is composed of both small local and regional service providers and large multi-national companies who are also OEMs. Within our Service segment, some of our larger competitors may have broader service capabilities and may have greater name recognition than us. Some manufacturers of the products we sell may also offer calibration and compliance services for their products.
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Within our Distribution segment, we compete with numerous companies, including several major manufacturers and distributors. Most of our products are available from several sources and our customers tend to have relationships with several distributors. Competitors in the product distribution industry could also obtain exclusive rights to market particular products, which we would then be unable to market. Manufacturers could also increase their efforts to sell directly to end-users and bypass distributors like us. Industry consolidation among distributors, the unavailability of products, whether due to our inability to gain access to products or interruptions in supply from manufacturers, including as a result of the COVID-19 pandemic, or the emergence of new competitors could also increase competition and adversely affect our business or results of operations.
In each of the industries in which we compete, some of our competitors have greater financial and other resources than we do, which could allow them to compete more successfully. In the future, we may be unable to compete successfully and competitive pressures may reduce our sales.
Competition in our Distribution segment is changing with an increase in web-based distributors. We may not be able to compete successfully. We face substantial and increased competition throughout the world, especially in our Distribution segment. The competition is changing, with web-based distributors becoming more prevalent and increasing their market share. Some of our competitors are much larger than us. Changes in the competitive landscape pose new challenges that could adversely affect our ability to compete. Entry or expansion of other vendors into this market may establish competitors that have larger customer bases and substantially greater financial and other resources with which to pursue marketing and distribution of products. Their current customer base and relationships, as well as their relationships and ability to negotiate with manufacturers, may also provide them with a competitive advantage. If we are unable to effectively compete with our current and future competitors, our ability to sell products could be harmed and could result in a negative impact on our Distribution segment. Any erosion of our competitive position could have a material adverse effect on our business, results of operations, and financial condition.
Cybersecurity incidents could adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information and/or damage to our business relationships, all of which could negatively impact our business, results of operations or financial condition. We rely extensively on information technology (“IT”) systems, some of which are provided by third parties, to support our business activities, including for orders and the storage, processing and transmission of our electronic, business-related, information assets used in or necessary to conduct business. The data we store and process may include customer payment information, personal information concerning our employees, confidential financial information and other types of sensitive business-related information. Numerous and evolving cybersecurity threats pose potential risks to the security of our IT systems, networks and services, as well as the confidentiality, availability and integrity of our data. To mitigate the spread of COVID-19, some of our office personnel transitioned to remote work environments which may exacerbate various cybersecurity risks to our business, including an increased risk of phishing and other social engineering attacks, and an increased risk of unauthorized dissemination of sensitive personal, proprietary or other confidential information. Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to our IT systems to sophisticated and targeted measures known as advanced persistent threats. The techniques used in these attacks change frequently and may be difficult to detect for periods of time and we may face difficulties in anticipating and implementing adequate preventative measures. While we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, vulnerability assessments, management training, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data or proprietary information and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, compromised employee, customer, or third-party information, litigation with third parties, regulatory actions, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our business and results of operations. In addition, the laws and regulations governing security of data on IT systems and otherwise held by companies is evolving and adding layers of complexity in the form of new requirements and increasing costs of attempting to protect IT systems and data and complying with new cybersecurity regulations.
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If we experience a significant disruption in, or breach in security of, our IT systems, or if we fail to implement new systems and software successfully, our business could be adversely affected. Our IT systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, telecommunication failures, user errors, catastrophes or other unforeseen events. Our IT systems also may experience interruptions, delays or cessations of service or produce errors in connection with system integration, software upgrades or system migration work that takes place from time to time. In addition, technology resources may be strained due to the increase in the number of remote users in response to the COVID-19 pandemic. If we were to experience a prolonged system disruption in the IT systems that involve our interactions with customers or suppliers, it could result in the loss of sales and customers and significant incremental costs, which could adversely affect our business.
Our revenue and ability to achieve our stated corporate objectives depends on our senior management and our ability to retain recruit, train and retain quality employees. Our success is dependent on our senior management and our ability to attract, retain and motivate qualified personnel, especially skilled service technicians. Competition for senior management is intense, and we may not be successful in attracting and retaining key personnel. Qualified skilled service technicians are in high demand and are subject to competing offers. The ability to meet our labor needs while controlling costs associated with hiring and training new employees is subject to external factors such as unemployment levels and prevailing wage rates. The loss of services of any member of our senior management team or key employees, and the inability to attract and retain other qualified personnel, especially skilled service technicians, could affect our ability to achieve our stated corporate objectives and could adversely impact our business and results of operations.
We expect that our quarterly results of operations will fluctuate. Such fluctuations could cause our stock price to decline. A large portion of our expenses for our Service segment, including expenses for facilities, equipment and personnel are relatively fixed. Accordingly, if revenues decline or do not grow as we anticipate, we may not be able to correspondingly reduce our expenses in any particular quarter. Our quarterly revenues and operating results have fluctuated in the past and are likely to do so in the future. Historically, our fiscal third and fourth quarters have been stronger than our fiscal first and second quarters due to industrial operating cycles. Fluctuations in industrial demand for products we sell and services we provide, including as a result of the COVID-19 pandemic, could cause our revenues and operating results to fluctuate. If our operating results in some quarters fail to meet the expectations of stock market analysts and investors, our stock price may decline.
If we do not effectively compete in the rental test and measurement equipment market, our operating results may be adversely affected. We compete in the rental market on the basis of a number of factors, including equipment availability, price, service and reliability. Some of our competitors may offer similar equipment for rent at lower prices and may offer more extensive servicing, or financing options. In addition, if the supply of rental equipment available on the market significantly increases, demand for and pricing of our rental products could be adversely impacted lowering our gross margins on rentals. Further, customers’ confronting competing budget priorities and more limited resources as a result of the COVID-19 pandemic could lead to less demand for rental equipment and increased pressure on pricing. Failure to adequately forecast the adoption of and demand for equipment may cause us not to meet our customers’ rental equipment requirements and may adversely affect our operating results.
Our stock price may be volatile. The stock market, from time to time, has experienced significant price and volume fluctuations that are both related and unrelated to the operating performance of companies. Our stock may be affected by market volatility and by our own performance. The following factors, among others, may have a significant effect on the market price of our common stock:
● | The impact of the COVID-19 pandemic on the capital markets; |
● | Developments in our relationships with current or future manufacturers of products we distribute; |
● | Announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
● | Litigation or governmental proceedings or announcements involving us or our industry; |
● | Economic and other external factors, such as disasters or other crises; |
● | Sales of our common stock or other securities in the open market; |
● | Repurchases of our common stock on the open market or in privately-negotiated transactions; |
● | Period-to-period fluctuations in our operating results; and |
● | Our ability to satisfy our debt obligations. |
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If we fail to adapt our technology to meet customer needs and preferences, the demand for our products and services may diminish. Our future success will depend on our ability to develop services and solutions that keep pace with technological change, evolving industry standards and changing customer preferences in the markets we serve. We cannot be sure that we will be successful in adapting existing or developing new technology or services in a timely or cost-effective manner or that the solutions we do develop will be successful in the marketplace. Our failure to keep pace with changes in technology, industry standards and customer preferences in the markets we serve could diminish our ability to retain and attract customers and retain our competitive position, which could adversely impact our business and results of operations.
We rely on our CalTrak®, Application Plus (our enterprise resource planning system) and other management information systems for inventory management, distribution, workflow, accounting and other functions. If our CalTrak®, Application Plus or other management information systems fail to adequately perform these functions, experience an interruption in their operation or a security breach, our business and results of operations could be adversely affected. The efficient operation of our business depends on our management information systems. We rely on our CalTrak®, Application Plus and other management information systems to effectively manage accounting and financial functions, customer service, warehouse management, order entry, order fulfillment, inventory replenishment, documentation, asset management, and workflow. Our management information systems are vulnerable to damage or interruption from computer viruses or hackers, natural or man-made disasters, vandalism, terrorist attacks, power loss, or other computer systems, internet, telecommunications or data network failures. Any such interruptions to our management information systems could disrupt our business and could result in decreased revenues, increased overhead costs, excess inventory and product shortages, causing our business and results of operations to suffer. In addition, our management information systems are vulnerable to security breaches. Our security measures or those of our third-party service providers may fail to detect or prevent such security breaches. Security breaches could result in the unauthorized publication of our confidential business or proprietary information, the unauthorized release of customer, vendor, or employee data and payment information, the violation of privacy or other laws, and the exposure to litigation, any of which could harm our business and results of operations.
Our enterprise resource planning system is aging, and we may experience issues from any implementation of a new enterprise resource planning system. We have an enterprise resource planning system (“ERP”) to assist with the collection, storage, management and interpretation of data from our business activities to support future growth and to integrate significant processes. Although we use current versions of software and have support agreements in place, due to the age of our ERP, we anticipate that a new ERP will be required to be implemented sometime in the future. ERP implementations are complex and time-consuming and involve substantial expenditures on system software and implementation activities, as well as changes in business processes. Our ERP system is critical to our ability to accurately maintain books and records, record transactions, provide important information to our management and prepare our consolidated financial statements. ERP implementations also require the transformation of business and financial processes in order to reap the benefits of the ERP system; any such transformation involves risks inherent in the conversion to a new computer system, including loss of information and potential disruption to our normal operations. Any disruptions, delays or deficiencies in the design and implementation of a new ERP system could adversely affect our ability to process orders, provide services and customer support, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. Additionally, if the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess it adequately could be delayed.
We may not successfully integrate business acquisitions. We completed three acquisitions during fiscal year 2020 and two acquisitions during fiscal year 2019. If we fail to accurately assess and successfully integrate any recent or future business acquisitions, we may not achieve the anticipated benefits, which could result in lower revenues, unanticipated operating expenses, reduced profitability and dilution of our book value per share. Successful integration involves many challenges, including:
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The difficulty of integrating acquired operations and personnel with our existing operations, which could be exacerbated by the impact of the COVID-19 pandemic; |
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The difficulty of developing and marketing new products and services; |
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The diversion of our management’s attention as a result of evaluating, negotiating and integrating acquisitions; |
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Our exposure to unforeseen liabilities of acquired companies; and |
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The loss of key employees of an acquired operation. |
In addition, an acquisition could adversely impact cash flows and/or operating results, and dilute shareholder interests, for many reasons, including:
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Charges to our income to reflect the impairment of acquired intangible assets, including goodwill; |
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Interest costs and debt service requirements for any debt incurred in connection with an acquisition or new business venture; and |
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Any issuance of securities in connection with an acquisition or new business venture that dilutes or lessens the rights of our current shareholders. |
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If the integration of any or all of our acquisitions or future acquisitions is not successful, it could have a material adverse impact on our operating results and stock price.
Our future business acquisition efforts may not be successful, which may limit our growth or adversely affect our results of operations, and financing of any future acquisitions could result in shareholder dilution and/or increase our leverage. Business acquisitions are an important part of our growth strategy. If we identify an appropriate acquisition candidate, we may not be able to successfully negotiate terms or finance the acquisition. If disruptions from the COVID-19 pandemic and related government measures, economic downturns or other matters of global concern continue for an extensive period of time or recur, our ability to pursue and consummate potential acquisitions could be materially adversely affected. In addition, to successfully complete targeted acquisitions, we may issue additional equity securities that could dilute our holders stock ownership, or we may incur additional debt, which could increase our leverage and our risk of default under our existing credit facility. If we fail to successfully acquire businesses, our growth and results of operations could be adversely affected.
Volatility in the oil and gas industry has had, in the past, and could have in the future, a negative impact on our operating results. A portion of our products and services customer base is directly or indirectly related to the oil and gas industry. As a result, demand for some of our products is dependent on the level of expenditures by the oil and gas industry. Global oil markets have recently experienced significant volatility and dramatic decreases in prices due to decreased demand resulting from, among other things, the COVID-19 pandemic and increased supply resulting from aggressive increases in production of oil by Saudi Arabia and Russia. In addition to the more significant impact on our Distribution segment, an extended downturn in the oil and gas industry or continued volatility in oil and gas prices could impact customers’ demand for some of our services (generally excluding life sciences, our largest industry customer sector), which could have a material adverse effect on our financial condition, results of operations and cash flows.
Our Service segment has a concentration of customers in the life science and other FDA-regulated and industrial manufacturing industries. A number of our Service segment customers operate in the pharmaceutical and other FDA-regulated or industrial manufacturing industries. This concentration of our customer base affects our overall risk profile, since a significant portion of our customers would be similarly affected by changes in economic, political, regulatory, and other industry conditions. An abrupt or unforeseen change in conditions in these industries could adversely affect customer demand for our services, which could have a material adverse effect on our financial results.
A change in vendor rebate programs could adversely affect our gross margins and results of operations. The terms on which we purchase products from certain of our suppliers entitle us to receive a rebate based on the volume of our purchases. These rebates effectively reduce our costs for products. If suppliers adversely change the terms of some or all of these programs, the changes may lower our gross margins on products we sell and may have an adverse effect on our operating results.
We depend on manufacturers to supply inventory to our Distribution segment and if our vendors fail to provide desired products to us, increase prices, or fail to timely deliver products, our revenue and gross profit could suffer. Like other distributors in our industry, we occasionally experience supplier shortages and are unable to purchase our desired volume of products. If we are unable to enter into and maintain satisfactory distribution arrangements with leading manufacturers, if we are unable to maintain an adequate supply of products, or if manufacturers do not regularly invest in, introduce to us, and/or make new products available to us for distribution, our Distribution segment sales could suffer considerably. The COVID-19 pandemic has disrupted the supply of products, and we may experience increased difficulties in obtaining products at stable pricing levels. As a result, we may need to restructure or change some of our product lines in the future. We cannot provide any assurance that particular products, or product lines, will be available to us, or available in quantities sufficient to meet customer demand. This is of particular significance to our Distribution segment business because the products we sell are often only available from one source. Any limits to product access could materially and adversely affect our Distribution segment business.
Adverse changes in general economic conditions or uncertainty about future economic conditions, including economic uncertainty from the current pandemic, could adversely affect us. We are subject to the risks arising from adverse changes in general economic market conditions, including the negative impact to the U.S. and global economy from the COVID-19 pandemic. Uncertainty about future economic conditions could negatively affect our current and prospective customers causing them to delay the purchase of necessary services or test and measurement instruments. Poor economic conditions could harm our business, financial condition, operating results and cash flows.
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Tariffs imposed by the U.S. and those imposed in response by other countries, as well as rapidly changing trade relations, could have a material adverse effect on our business and results of operations. Changes in U.S. and foreign governments’ trade policies have resulted in, and may continue to result in, tariffs on imports into and exports from the U.S. In response, some foreign governments’ have proposed or implemented their own tariffs on certain products, increasing our costs of doing business. If we are unable to recover these costs, our profit margins may be negatively impacted. Continued diminished trade relations between the U.S. and other countries, including as a result of the recent COVID-19 pandemic, as well as the continued escalation of tariffs, could have a material adverse effect on our financial performance and results of operations.
Our future success may be affected by our current and future indebtedness. Under our credit agreement, as of March 28, 2020, we owed $30.3 million to our secured creditor, a commercial bank, including $12.6 million borrowed under a $15.0 million term loan to fund acquisitions and provide additional working capital. We amended our credit agreement after the end of fiscal year 2020 to provide us an additional $10.0 million of borrowing capacity. We may borrow additional funds in the future to support our growth and working capital needs. We are required to meet financial tests on a quarterly basis and comply with other covenants customary in secured financings. Although we believe that we will continue to comply with such covenants, if we do not remain in compliance with such covenants, our lender may demand immediate repayment of amounts outstanding. Furthermore, we are dependent on credit from manufacturers of our products to fund our inventory purchases. If our debt burden increases to high levels, such manufacturers may restrict our credit. Our cash requirements will depend on numerous factors, including the rate of growth of our revenues, the timing and levels of products purchased, payment terms, and credit limits from manufacturers, the timing and level of our accounts receivable collections and our ability to manage our business profitably. Our ability to satisfy our existing obligations, whether or not under our secured credit facility, will depend upon our future operating performance, which may be impacted by prevailing economic conditions and financial, business, and other factors described in this report, many of which are beyond our control.
The relatively low trading volume of our common stock may limit your ability to sell your shares. Although our shares of common stock are listed on the Nasdaq Global Market, we have historically experienced a relatively low trading volume of approximately 30,000 shares a day. If our low trading volume continues in the future, holders of our shares may have difficulty selling shares of our common stock in the manner or at a price that they desire.
If significant existing shareholders sell large numbers of shares of our common stock, our stock price could decline. The market price of our common stock could decline if a large number of our shares are sold in the public market by our existing shareholders or as a result of the perception that such sales could occur. Due to the relatively low trading volume of our common stock, the sale of a large number of shares of our common stock may significantly depress the price of our common stock.
Tax rates applicable to us may change. Tax legislation initiatives could adversely affect our net earnings and tax liabilities. We are subject to the tax laws and regulations of the United States federal, state and local governments, as well as foreign jurisdictions. From time to time, various legislative initiatives may be enacted that could adversely affect our tax positions. Tax laws and regulations are extremely complex and subject to varying interpretations. The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) made broad and complex changes to the U.S. tax code, including, but not limited to reducing the Federal corporate income tax rate from 35% to 21%. Although we believe that our tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge.
Any impairment of goodwill or intangible assets could negatively impact our results of operations. Our goodwill and intangible assets are subject to an impairment test on an annual basis and are also tested whenever events and circumstances indicate that goodwill and/or intangible assets may be impaired. Any excess goodwill and/or indefinite-lived intangible assets value resulting from the impairment test must be written-off in the period of determination. Intangible assets (other than goodwill and indefinite-lived intangible assets) are generally amortized over the useful life of such assets. In addition, from time to time, we may acquire or make an investment in a business that will require us to record goodwill based on the purchase price and the value of the acquired tangible and intangible assets. We may subsequently experience unforeseen issues with the businesses we acquire, which may adversely affect the anticipated returns of the business or value of the intangible assets and trigger an evaluation of the recoverability of the recorded goodwill and intangible assets for such business. Future determinations of significant write-offs of goodwill or intangible assets because of an impairment test or any accelerated amortization of other intangible assets could have a material negative impact on our results of operations and financial condition.
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We face risks associated with foreign currency rate fluctuations. We currently transact a portion of our business in foreign currencies, namely the Canadian dollar. During fiscal years 2020 and 2019, less than 10% of our total revenues were denominated in Canadian dollars. Conducting business in currencies other than U.S. dollars subjects us to fluctuations in currency exchange rates that could have a negative impact on our reported operating results. Since the onset of the COVID-19 pandemic in North America, the Canadian dollar has weakened compared to the U.S. dollar. Fluctuations in the value of the U.S. dollar relative to the Canadian dollar impact our revenues, cost of revenues and operating margins and result in foreign currency transaction gains and losses. During fiscal years 2020 and 2019, the value of the U.S. dollar relative to one Canadian dollar ranged from 1.30 to 1.45 and from 1.27 to 1.36, respectively.
We continually utilize short-term foreign exchange forward contracts to reduce the risk that our earnings would be adversely affected by changes in currency exchange rates. However, this strategy does not eliminate our exposure. If there is a significant or prolonged downturn in the Canadian dollar, it could have an adverse impact on our business and financial condition.
Changes in accounting standards, legal requirements and the Nasdaq Global Market listing standards, or our ability to comply with any existing requirements or standards, could adversely affect our operating results. Extensive reforms relating to public company financial reporting, corporate governance and ethics, the Nasdaq Global Market listing standards and oversight of the accounting profession have been implemented over the past several years and continue to evolve. Compliance with these rules, regulations and standards that have resulted from such reforms has increased our accounting and legal costs and has required significant management time and attention. In the event that additional rules, regulations or standards are implemented or any of the existing rules, regulations or standards to which we are subject undergoes additional material modification, we could be forced to spend significant financial and management resources to ensure our continued compliance, which could have an adverse effect on our results of operations. In addition, although we believe we are in full compliance with all such existing rules, regulations and standards, should we be or become unable to comply with any of such rules, regulations and standards, as they presently exist or as they may exist in the future, our results of operations could be adversely affected and the market price of our common stock could decline.
Our inability to adequately enforce and protect our intellectual property or defend against assertions of infringement could prevent or restrict our ability to compete.
We rely on intellectual property in order to maintain a competitive advantage. Our inability to defend against the unauthorized use of these assets could have an adverse effect on our results of operations and financial condition. Litigation may be necessary to protect our intellectual property rights or defend against claims of infringement. This litigation could result in significant costs and divert our management’s focus away from operations.
Hurricanes, other adverse weather events, national or regional catastrophes or natural disasters could negatively affect the local economies we serve or disrupt our operations, which could have an adverse effect on our business or results of operations. Our market areas include the Gulf Coast and Mid-Atlantic regions of the United States, and Puerto Rico, which are susceptible to hurricanes. Such weather events can disrupt our operations, result in damage to our properties and negatively affect the local economies in which we operate. Future hurricanes could result in damage to certain of our facilities and the equipment located at such facilities, or equipment on rent with customers in those areas. Even if our properties suffer no direct damage from such events, the operations of our customers could be disrupted, and our supply chain impacted. In addition, climate change could lead to an increase in intensity or occurrence of hurricanes or other adverse weather events, including severe winter storms. Future occurrences of these events, as well as regional or national catastrophes or natural disasters, and their effects may adversely impact our business or results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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The following table presents our leased and owned properties as of March 28, 2020:
Approximate | ||||
Property | Location | Square Footage | ||
Corporate Headquarters, Calibration Service Center and Distribution Center | Rochester, NY | 48,500 | ||
Calibration Service Center | Los Angeles, CA | 12,000 | ||
Calibration Service Center | Boston, MA | 4,000 | ||
Calibration Service Center | Toronto, ON | 14,200 | ||
Calibration Service Center | Charlotte, NC | 4,900 | ||
Calibration Service Center | Philadelphia, PA | 10,800 | ||
Calibration Service Center | Dayton, OH | 10,500 | ||
Calibration Service Center | Denver, CO | 19,400 | ||
Calibration Service Center (1) | Houston, TX | 10,300 | ||
Rental and Used Equipment Distribution Center | Los Angeles, CA | 6,200 | ||
Calibration Service Center and Headquarters for Canadian Operations | Montreal, QC | 27,500 | ||
Calibration Service Center | Ottawa, ON | 4,000 | ||
Calibration Service Center | Phoenix, AZ | 4,200 | ||
Calibration Service Center | Portland, OR | 7,000 | ||
Calibration Service Center | San Juan, PR | 1,600 | ||
Calibration Service Center | St. Louis, MO | 5,600 | ||
Calibration Service Center | Chesapeake, VA | 4,600 | ||
Calibration Service Center | Hopkinton, MA | 6,100 | ||
Sales Office | Irvine, CA | 1,800 | ||
United Scale & Engineering: | ||||
Calibration Service Center | Green Bay, WI | 3,300 | ||
Calibration Service Center and Warehouse | Madison, WI | 6,000 | ||
Calibration Service Center and Warehouse | Milwaukee WI | 16,000 | ||
Calibration Service Center | Ft. Wayne, IN | 3,600 | ||
Calibration Service Center | San Diego, CA | 5,500 | ||
Spectrum Technologies Inc. (“STI”): | ||||
Calibration Service Center and Warehouse | Paxinos, PA | 14,500 | ||
STI Satellite Service Office | Bakersfield, CA | 1,200 | ||
STI Satellite Service Office | Toronto, ON | 900 | ||
STI Satellite Service Office | Birmingham, AL | 500 | ||
STI Satellite Service Office | Melrose, FL | 200 | ||
STI Satellite Service Office | Mt. Airy, NC | 200 | ||
STI Satellite Service Office | LaCrosse, WI | 300 | ||
STI Satellite Service Office | Omaha, NE | 800 | ||
Mobile Service Unit and Offices | Pittsburgh, PA | 6,300 |
(1) | The Company has entered into a lease for a new replacement location in Houston, TX that has approximately 22,300 square feet. The Company expects to move during fiscal year 2021. |
We believe that our properties are in good condition, are well maintained and are generally suitable and adequate to carry on our business in its current form.
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None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq Global Market under the symbol “TRNS”. As of June 3, 2020, we had approximately 453 shareholders of record.
DIVIDENDS
Our credit agreement, as amended, limits our ability to pay cash dividends to $3.0 million in any fiscal year. We have not declared any cash dividends since our inception and have no current plans to pay any dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table provides selected financial data for fiscal year 2020 and the previous four fiscal years (in thousands, except per share data). We operate on a 52/53 week fiscal year, ending on the last Saturday in March. Our fiscal year 2018 consisted of 53 weeks, while our fiscal years 2020, 2019, 2017 and 2016 each consisted of 52 weeks. Certain reclassifications of financial information for prior fiscal years have been made to conform to the presentation for the current fiscal year.
For the Fiscal Years Ended | |||||||||||||||
March 28, | March 30, | March 31, | March 25, | March 26, | |||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||
Statements of Income Data: | |||||||||||||||
Total Revenue | $ | 173,099 | $ | 160,898 | $ | 155,141 | $ | 143,898 | $ | 122,166 | |||||
Total Cost of Revenue | 130,621 | 121,555 | 117,700 | 108,928 | 93,047 | ||||||||||
Gross Profit | 42,478 | 39,343 | 37,441 | 34,970 | 29,119 | ||||||||||
Operating Expenses | 31,628 | 29,114 | 28,415 | 27,036 | 22,817 | ||||||||||
Operating Income | 10,850 | 10,229 | 9,026 | 7,934 | 6,302 | ||||||||||
Interest and Other Expense, net | 1,120 | 994 | 1,078 | 770 | 295 | ||||||||||
Income Before Income Taxes | 9,730 | 9,235 | 7,948 | 7,164 | 6,007 | ||||||||||
Provision for Income Taxes | 1,663 | 2,090 | 2,026 | 2,642 | 1,883 | ||||||||||
Net Income | $ | 8,067 | $ | 7,145 | $ | 5,922 | $ | 4,522 | $ | 4,124 | |||||
Share Data: | |||||||||||||||
Basic Earnings Per Share | $ | 1.10 | $ | 0.99 | $ | 0.83 | $ | 0.65 | $ | 0.60 | |||||
Basic Average Shares Outstanding | 7,331 | 7,196 | 7,124 | 6,994 | 6,887 | ||||||||||
Diluted Earnings Per Share | $ | 1.08 | $ | 0.95 | $ | 0.81 | $ | 0.64 | $ | 0.58 | |||||
Diluted Average Shares Outstanding | 7,487 | 7,515 | 7,303 | 7,111 | 7,121 | ||||||||||
Closing Price Per Share | $ | 25.36 | $ | 22.98 | $ | 15.65 | $ | 12.52 | $ | 10.14 |
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As of or for the Fiscal Years Ended | |||||||||||||||
March 28, | March 30, | March 31, | March 25, | March 26, | |||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||
Balance Sheets and Working Capital Data: | |||||||||||||||
Inventory, net | $ | 14,180 | $ | 14,304 | $ | 12,651 | $ | 10,278 | $ | 6,520 | |||||
Property and Equipment, net | 20,833 | 19,653 | 17,091 | 15,568 | 12,313 | ||||||||||
Goodwill and Intangible Assets, net | 49,517 | 39,778 | 38,245 | 40,039 | 37,323 | ||||||||||
Total Assets | 128,122 | 105,230 | 96,822 | 92,097 | 76,707 | ||||||||||
Depreciation and Amortization | 6,659 | 6,361 | 5,991 | 6,184 | 3,946 | ||||||||||
Capital Expenditures | 6,579 | 6,998 | 5,882 | 5,250 | 4,101 | ||||||||||
Debt | 30,344 | 21,002 | 22,850 | 27,312 | 19,073 | ||||||||||
Shareholders' Equity | 67,087 | 59,630 | 51,348 | 43,401 | 38,911 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Operational Overview. We are a leading provider of accredited calibration, repair, inspection and laboratory instrument services and a value-added distributor of professional grade handheld test, measurement and control instrumentation.
We operate our business through two reportable business segments, Service and Distribution, which offer a comprehensive range of services and products to the same customer base.
Our strength in our Service segment is based upon our wide range of disciplines, our investment in quality systems and our ability to provide accredited calibrations to customers in highly-regulated targeted market segments. Our services range from the calibration and repair of a single unit to managing a customer’s entire calibration program. We believe our Service segment offers an opportunity for long-term growth and the potential for continuing revenue from established customers with regular calibration cycles and recurring laboratory instrument service requirements.
Our Service segment has shown consistent revenue growth over the past several years, ending fiscal year 2020 with its 44th consecutive quarter of year-over-year growth. This segment has benefited from both organic growth as well as acquisitions over those 44 quarters. The business acquisitions that we made have been heavily focused on expanding our service capabilities, increasing our geographic reach and leveraging our Calibration Service Centers and other infrastructure to create operational synergies. Our total Service revenue growth was 10.7% for fiscal year 2020 compared to fiscal year 2019. The Service segment gross margin increased by 40 basis points. Service gross profit and gross margin were positively impacted by productivity improvements from various initiatives including more robust data analytics and improved onboarding, training and retention of our service technicians. In fiscal year 2020, we invested in a software solution for the automation of calibration procedures and datasheet generation. This investment is expected to further enhance our operational efficiency efforts and allow us to build out a commercialized platform capable of facilitating calibration automation for various disciplines. We are in the early testing phases with the rollout for the first limited set of calibration disciplines. Following that, we plan to develop automation opportunities for additional disciplines.
In our Distribution segment, we sell and offer for rent, professional grade handheld test and measurement instruments. Because we specialize in professional grade handheld test and measurement instruments, as opposed to a wide array of industrial products, our sales and customer service personnel can provide value-added technical assistance to our customers to aid them in determining what product best meets their particular application requirements. We have expertise in the procurement and sale of used equipment, furthering our ability to add value for our customers. We also have a higher-end electronic test and measurement equipment rental business that augments our organically grown test and measurement equipment rental business. Through our website and sales teams, customers can place orders for test and measurement instruments and can elect to have their purchased instruments calibrated and certified by our Calibration Service Centers before shipment as well as on regular post-purchase intervals. Pre-shipment calibration and certification allows our customers to place newly purchased instruments into service immediately upon receipt.
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Sales in our Distribution segment are generally not consumable items but are instruments purchased as replacements, upgrades or for expansion of manufacturing or research and development facilities. As such, this segment can be heavily impacted by changes in the economic environment. As customers increase or decrease capital and discretionary spending, our Distribution sales will typically be directly impacted. In fiscal year 2020, Distribution sales increased by 4.2%. These results were driven by increased demand and revenue in all channels, especially in the alternative energy sector, used equipment and rental revenue. In fiscal year 2019, the Distribution sales decrease reflected lower sales to non-core, lower-margin resellers and sales to Canada. This was offset by increased higher-margin rental revenue. Overall, the Distribution segment gross margin in fiscal year 2020 decreased by 20 basis points. The decrease in gross margin was driven by the pricing and mix of products sold. Initiatives implemented within this segment include adding new in-demand vendors and product lines, expanding the number of SKUs that we offer with and without pre-shipment calibration and offering equipment rental and used equipment options. Management believes this diversification strategy will mitigate the impact that any particular industry or sector will have on the overall performance of this segment as well as help to further differentiate us from our competitors going forward.
Financial Overview. In evaluating our results for fiscal year 2020, investors should consider that we operate on a 52/53 week fiscal year, ending the last Saturday in March. In a 52-week fiscal year, each of the four quarters is a 13-week period. In a 53-week fiscal year, the last quarter is a 14-week period. Fiscal years 2020 and 2019 both consisted of 52 weeks.
Total revenue for fiscal year 2020 was $173.1 million. This represented an increase of $12.2 million or 7.6% versus total revenue of $160.9 million for fiscal year 2019. This year-over-year growth includes a combination of organic and acquisition-related revenue growth.
Service revenue was $93.0 million in fiscal year 2020, an increase of 10.7%. Service revenue now accounts for 53.7% of our total revenue. Of our Service revenue in fiscal year 2020, 83.5% was generated by our Calibration Service Centers while 14.9% was generated through subcontracted third-party vendors, compared with 83.6% and 14.9%, respectively, in fiscal year 2019. The remainder of our Service revenue in each period was derived from freight charges.
Distribution sales increased 4.2% to $80.1 million in fiscal year 2020. Distribution sales account for 46.3% of our total revenue. Sales to domestic customers comprised 92.1% of total Distribution sales in fiscal year 2020, while 6.3% were to Canadian customers and 1.6% were to customers in other international markets.
Total gross profit was $42.5 million in fiscal year 2020 compared to $39.3 million in fiscal year 2019, an increase of $3.1 million or 8.0%. Total gross margin was 24.5%, consistent with gross margin in fiscal year 2019. Service gross margin was 25.3% in fiscal year 2020 compared with 24.9% in fiscal year 2019. Distribution gross margin was 23.7% in fiscal year 2020 compared with 23.9% in fiscal year 2019.
Operating expenses were $31.6 million, or 18.3% of total revenue, in fiscal year 2020 compared with $29.1 million, or 18.1% of total revenue, in fiscal year 2019. Operating income was $10.9 million, or 6.3% of total revenue, in fiscal year 2020 compared with $10.2 million, or 6.4% of total revenue, in fiscal year 2019.
Net income for fiscal year 2020 was $8.1 million compared with $7.1 million in fiscal year 2019, a $1.0 million improvement. Diluted earnings per share for fiscal year 2020 was $1.08 compared with $0.95 for fiscal year 2019, a $0.13 per diluted share improvement.
COVID-19 Impact. In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States. The COVID-19 pandemic has had a negative impact on our fiscal year 2020 operations and financial results to date, and the full financial impact of the pandemic cannot be reasonably estimated at this time due to uncertainty as to its severity and duration. We have taken steps to help mitigate the current impact, as well as the continued uncertainty regarding the ultimate impact of the COVID-19 pandemic on our business, results of operations, financial position and cash flows.
● | Currently, our network of labs, distribution center and support facilities remain fully operational. We do not anticipate disruptions to the Distribution supply chain in the short-term and are working with partners to minimize any potential delays. |
● | We have established a cross-functional COVID-19 task force, which meets regularly, to standardize continuity plans and daily practices across the 42 Calibration Service Centers and client-based labs and our distribution/rental operations for responding to the rapidly changing issues around this global pandemic. Actions instituted include:
●Adhering to guidelines and recommendations of the Centers for Disease Control and Prevention and World Health Organization to reduce the spread of COVID-19; ●Established a pandemic protocol across the organization to ensure continuous service to customers and mitigate risk;
|
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●Suspended all work-related travel except for direct onsite service to customers. When performing necessary onsite service for customers, we are following recommended protocols including self-assessments and travel disclosures and asking the same from our customers;
●Required personnel whose roles allow to work remotely from home in order to adhere to the social distancing recommendations issued by global health officials;
●Aligning variable costs with demand, a freeze on hiring and wages, with the exception of technology personnel, and tightly controlling discretionary spending;
●Reducing the CEO’s salary and Board of Director cash retainer fees by 20% and reducing other executive team members salaries by 10%;
●Leveraging government work programs and tax deferrals and extensions; and
●Amending our revolving credit facility to provide for, among other things, $10.0 million in additional borrowing capacity and financial covenant modifications.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Use of Estimates. The preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to, allowance for doubtful accounts and returns, inventory reserves, estimated levels of achievement for performance-based restricted stock units, fair value of stock options, depreciable lives of fixed assets, estimated lives of major catalogs and intangible assets, and the valuation of assets acquired and liabilities assumed in business acquisitions. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. Our estimates are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Such changes and refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to our Consolidated Financial Statements.
The following items in our Consolidated Financial Statements require significant estimation or judgment:
Accounts Receivable. Accounts receivable represent amounts due from customers in the ordinary course of business. These amounts are recorded net of the allowance for doubtful accounts and returns in the Consolidated Balance Sheets. The allowance for doubtful accounts is based upon the expected collectability of accounts receivable. We apply a specific formula to our accounts receivable aging, which may be adjusted on a specific account basis where the formula may not appropriately reserve for loss exposure. After all attempts to collect a receivable have failed, the receivable is written-off against the allowance for doubtful accounts. The returns reserve is calculated based upon the historical rate of returns applied to revenues over a specific timeframe. The returns reserve will increase or decrease as a result of changes in the level of revenues and/or the historical rate of returns. Management believes that the allowances are appropriate to cover anticipated losses under current conditions. However, unexpected changes or deterioration in economic conditions could materially change these expectations.
Inventory. Inventory consists of products purchased for resale and is valued at the lower of cost or net realizable value. Costs are determined using the average cost method of inventory valuation. Inventory is reduced by a reserve for items not saleable at or above cost by applying a specific loss factor, based on historical experience and current demand, to specific categories of our inventory. Inventory is at risk of obsolescence if economic conditions change. Relevant economic conditions include changing consumer demand, customer preferences or increasing competition. We believe these risks are largely mitigated because our inventory typically turns several times per year. We evaluate the adequacy of the reserve on a quarterly basis.
Business Acquisitions. We apply the acquisition method of accounting for business acquisitions. Under the acquisition method, the underlying tangible and intangible assets acquired and liabilities assumed are recorded based on their respective assigned fair values at the date of acquisition. We use a valuation hierarchy to determine the fair values used. Historically, we have relied, in part, upon the use of reports from third-party valuation specialists to assist in the estimation of fair values. Purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. Administration costs to acquire a business may include, but are not limited to, fees for accounting, legal and valuation services and are recorded as incurred in our Consolidated Statement of Income.
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Goodwill and Intangible Assets. Goodwill represents the excess of the purchase price over the values assigned to the underlying net assets of an acquired business and is not amortized. As of March 28, 2020, we had $41.5 million of recorded goodwill.
Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. These intangible assets are amortized over their estimated useful lives and are reviewed for impairment if and when indicators are present. We estimate the fair value of our reporting units using the fair market value measurement requirement.
We test goodwill for impairment on an annual basis during the fourth quarter of each fiscal year or immediately if conditions indicate that such impairment could exist. We have the option to perform a qualitative assessment to determine if it is more likely than not that the fair value of a segment has declined below its carrying value. This assessment considers various financial, macroeconomic, industry and segment specific qualitative factors.
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. Based on the results of our reviews, we have determined that no impairment was indicated as of each of the fiscal years ended March 28, 2020 and March 30, 2019.
Income Taxes. We record deferred income taxes for the effects of timing differences between financial and tax reporting. These differences relate primarily to accrued expenses, bad debt reserves, inventory reserves, operating leases, goodwill and intangible assets, depreciation and amortization and stock based compensation. We base our deferred income taxes, accrued income taxes and provision for income taxes upon income, statutory tax rates, the legal structure of our Company, interpretation of tax laws and tax planning opportunities available to us in the various jurisdictions in which we operate. We file income tax returns in the U.S. federal jurisdiction, various states and Canada. We are regularly audited by federal, state and foreign tax authorities, but a number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. From time to time, these audits result in assessments of additional tax. We maintain reserves for such assessments.
We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50% likelihood of being ultimately realized upon settlement. Future changes in judgments and estimates related to the expected ultimate resolution of uncertain tax positions will affect income in the quarter of such change. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome.
Stock-Based Compensation. We measure 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. We record 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. In accordance with Accounting Standards Updates (“ASU”) 2016-09, excess tax benefits for share-based award activity are reflected in the Consolidated Statement 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. We did not capitalize any stock-based compensation costs as part of an asset. We estimate forfeiture rates based on our historical experience.
We grant timed-based and performance-based restricted stock units as a component of executive and key employee compensation. These restricted stock units are either time vested or vest following the third fiscal year from the date of grant and some of these grants are subject to cumulative diluted earnings per share growth targets over the eligible period. Compensation cost ultimately recognized for these 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, we record compensation cost based on the expected level of achievement of the performance conditions.
Stock 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. The expense relating to options is recognized on a straight-line basis over the requisite service period for the entire award.
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See Note 6 to our Consolidated Financial Statements for further disclosure regarding our stock-based compensation.
Post-retirement Health Care Plans. The Company has a defined benefit post-retirement health care plan which provides long-term care insurance benefits, medical and dental insurance benefits and medical premium reimbursement benefits to eligible retired corporate officers and their eligible spouses.
For accounting purposes, the defined benefit post-retirement health care plan requires assumptions to estimate the projected and accumulated benefit obligations, including the following variables: discount rate; certain employee-related factors, such as retirement age and mortality; and health care cost trend rates. These and other assumptions affect the annual expense and obligations recognized for the underlying plans. Our assumptions reflect our historical experiences and management's best judgment regarding future expectations.
Increasing the assumed health care cost trend rate by one percentage point would increase the accumulated post-retirement benefit obligation and the annual net periodic post-retirement benefit cost by $0.1 million. A one percentage point decrease in the healthcare cost trend would decrease the accumulated post-retirement benefit obligation and the annual net periodic post-retirement benefit cost by $0.1 million.
Recently Issued Accounting Pronouncements. In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) to determine the potential impact they may have on our consolidated financial statements. For a discussion of the newly issued accounting pronouncements see “Recently Issued Accounting Pronouncements” under Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of this report.
RESULTS OF OPERATIONS
The following table sets forth, for fiscal years 2020 and 2019, the components of our Consolidated Statements of Income.
FY 2020 | FY 2019 | |||||
As a Percentage of Total Revenue: | ||||||
Service Revenue | 53.7 | % | 52.2 | % | ||
Distribution Sales | 46.3 | % | 47.8 | % | ||
Total Revenue | 100.0 | % | 100.0 | % | ||
Gross Profit Percentage: | ||||||
Service Gross Profit | 25.3 | % | 24.9 | % | ||
Distribution Gross Profit | 23.7 | % | 23.9 | % | ||
Total Gross Profit | 24.5 | % | 24.5 | % | ||
Selling, Marketing and Warehouse Expenses | 10.4 | % | 10.5 | % | ||
General and Administrative Expenses | 7.9 | % | 7.6 | % | ||
Total Operating Expenses | 18.3 | % | 18.1 | % | ||
Operating Income | 6.3 | % | 6.4 | % | ||
Interest and Other Expenses, net | 0.7 | % | 0.7 | % | ||
Income Before Provision for Income Taxes | 5.6 | % | 5.7 | % | ||
Provision for Income Taxes | 0.9 | % | 1.3 | % | ||
Net Income | 4.7 | % | 4.4 | % |
FISCAL YEAR ENDED MARCH 28, 2020 COMPARED TO FISCAL YEAR ENDED MARCH 30, 2019 (dollars in thousands):
Revenue:
For the Fiscal Years Ended | ||||||||||||
March 28, 2020 |
March 30, 2019 |
Change | ||||||||||
$ | % | |||||||||||
Revenue: | ||||||||||||
Service | $ | 93,003 | $ | 84,041 | $ | 8,962 | 10.7 | % | ||||
Distribution | 80,096 | 76,857 | 3,239 | 4.2 | % | |||||||
Total | $ | 173,099 | $ | 160,898 | $ | 12,201 | 7.6 | % |
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Total revenue was $173.1 million in fiscal year 2020 compared to $160.9 million in fiscal year 2019, an increase of $12.2 million or 7.6%.
Service revenue, which accounted for 53.7% and 52.2% of our total revenue in fiscal years 2020 and 2019, respectively, increased $9.0 million, or 10.7% from fiscal year 2019 to fiscal year 2020. This year-over-year growth includes a combination of organic and acquisition-related revenue growth. The Service segment organic growth was 8.4% in fiscal year 2020. Higher revenue was the result of new business from the highly-regulated life sciences market, including higher revenue from client-based labs and growth in other regulated sectors such as aerospace and defense. Fiscal year 2020 revenue includes revenue from TTE acquired in late February 2020.
Our fiscal years 2020 and 2019 Service revenue growth in relation to prior fiscal year quarter comparisons, was as follows:
FY 2020 | FY 2019 | ||||||||||||||||||||||||
Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||
Service Revenue Growth | 2.9 | % | 7.8 | % | 18.1 | % | 15.9 | % | 10.8 | % | 9.2 | % | 9.1 | % | 4.6 | % |
Within any year, while we add new customers, we also have customers from the prior 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 a trailing twelve-month trend provides a better indication of the progress of this segment. The growth in fiscal year 2020 and fiscal year 2019 reflected both organic growth and acquisitions. The growth in Service segment revenue during the fourth quarter of fiscal year 2020 includes revenue from the TTE acquisition. The trailing twelve-month Service segment revenue growth for the third quarter of fiscal year 2019 includes the Angel’s acquisition in fiscal year 2019.
The following table presents the trailing twelve-month Service segment revenue for each quarter in fiscal years 2020 and 2019 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period:
FY 2020 | FY 2019 | ||||||||||||||||||||||||||||||||
Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||||||
Trailing Twelve-Month: | |||||||||||||||||||||||||||||||||
Service Revenue | $93,003 | $92,309 | $90,714 | $87,114 | $84,041 | $81,674 | $79,951 | $78,288 | |||||||||||||||||||||||||
Service Revenue Growth | 10.7% | 13.0% | 13.5% | 11.3% | 8.5% | 8.9% | 8.5% | 8.1% |
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 each quarter during fiscal years 2020 and 2019:
FY 2020 | FY 2019 | ||||||||||||||||||||||||
Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||
In-House | 84.9 | % | 82.9 | % | 82.9 | % | 83.3 | % | 82.7 | % | 83.3 | % | 84.0 | % | 84.4 | % | |||||||||
Outsourced | 13.5 | % | 15.6 | % | 15.6 | % | 15.1 | % | 15.8 | % | 15.1 | % | 14.4 | % | 14.0 | % | |||||||||
Freight Billed to Customers | 1.6 | % | 1.5 | % | 1.5 | % | 1.6 | % | 1.5 | % | 1.6 | % | 1.6 | % | 1.6 | % | |||||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
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Our Distribution sales accounted for 46.3% and 47.8% of our total revenue in fiscal years 2020 and 2019, respectively. Distribution sales increased $3.2 million, or 4.2% compared to fiscal year 2019. This increase in sales was driven by increased demand and revenue in all channels, especially in the alternative energy sector, used equipment and rental sales. The increase in fiscal year 2020 versus fiscal year 2019 and the change in fiscal year 2019 versus fiscal year 2018 reflected both organic and acquisition revenue. Our fiscal years 2020 and 2019 Distribution sales (decline) growth in relation to prior fiscal year quarter comparisons were as follows:
FY 2020 | FY 2019 | ||||||||||||||||||||||||
Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||
Distribution Sales (Decline) Growth | 2.9 | % | 3.5 | % | (3.8 | %) | 15.4 | % | (1.6 | %) | (6.2 | %) | 7.3 | % | (2.6 | %) |
Distribution sales orders include orders for instruments that we routinely stock in our inventory, customized products, and other products ordered less frequently, which we do not stock. Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in our service centers prior to shipment, orders required by the customer to be shipped complete or at a future date, and other orders awaiting final credit or management review prior to shipment. Our total pending product shipments increased $0.5 million, or 12.5%, at the end of fiscal year 2020 compared to the end of fiscal year 2019. Backorders at the end of fiscal year 2020 were $2.9 million, consistent with the backorders at the end of fiscal year 2019. The year-over-year increases in pending product shipments and consistency with backorders can be attributed to the timing of sales activity during the respective quarter. The following table presents the percentage of total pending product shipments that were backorders at the end of each quarter in fiscal years 2020 and 2019 and our historical trend of total pending product shipments:
FY 2020 | FY 2019 | ||||||||||||||||||||||||||||||||
Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||||||
Total Pending Product Shipments | $ | 4,330 | $ | 3,743 | $ | 4,205 | $ | 4,115 | $ | 3,850 | $ | 3,658 | $ | 3,734 | $ | 3,486 | |||||||||||||||||
% of Pending Product Shipments that were Backorders | 66.5 | % | 77.6 | % | 71.7 | % | 77.2 | % | 74.8 | % | 71.6 | % | 66.7 | % | 70.2 | % |
Gross Profit:
For the Fiscal Years Ended | ||||||||||||
March 28, | March 30, | Change | ||||||||||
2020 | 2019 | $ | % | |||||||||
Gross Profit: | ||||||||||||
Service | $ | 23,486 | $ | 20,945 | $ | 2,541 | 12.1 | % | ||||
Distribution | 18,992 | 18,398 | 594 | 3.2 | % | |||||||
Total | $ | 42,478 | $ | 39,343 | $ | 3,135 | 8.0 | % |
Total gross profit in fiscal year 2020 was $42.5 million compared to $39.3 million in fiscal year 2019, an increase of $3.1 million or 8.0%. As a percentage of total revenue, total gross margin was 24.5% in both fiscal years 2020 and 2019.
Service gross profit increased $2.5 million, or 12.1%, from fiscal year 2019 to fiscal year 2020. Our annual and quarterly Service segment gross margins are a function of several factors. Our organic Service revenue growth provides some incremental gross margin growth by leveraging certain fixed costs of this segment. The mix of services provided to customers may also affect gross margins in any given period. Annual Service gross margin increased by 40 basis points from fiscal year 2019 to fiscal year 2020. This gross margin in fiscal year 2020 was positively impacted by our various technology and productivity initiatives, and improved margins in client-based lab contracts initiated in prior years. The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:
FY 2020 | FY 2019 | ||||||||||||||||||||||||
Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||
Service Gross Margin | 28.9 | % | 22.0 | % | 25.6 | % | 24.0 | % | 27.7 | % | 21.9 | % | 24.2 | % | 25.5 | % |
Our Distribution gross margin includes net sales less the direct cost of inventory sold and the direct costs of equipment rental revenues, primarily depreciation expense for the fixed assets in our rental equipment pool, as well as the impact of rebates and cooperative advertising income we receive from vendors, freight billed to customers, freight expenses and direct shipping costs. In general, our Distribution gross margin can vary based upon the mix of products sold, price discounting, and the timing of periodic vendor rebates offered and cooperative advertising programs from suppliers.
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The following table reflects the quarterly historical trend of our Distribution gross margin as a percent of Distribution sales:
FY 2020 | FY 2019 | ||||||||||||||||||||||||
Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||
Distribution Gross Margin | 23.2 | % | 24.0 | % | 24.3 | % | 23.4 | % | 23.9 | % | 24.8 | % | 22.8 | % | 24.2 | % |
Annual Distribution segment gross margin decreased 20 basis points in fiscal year 2020 compared to fiscal year 2019. The decrease in gross margin was driven by the pricing and mix of products sold.
Operating Expenses:
For the Fiscal Years Ended | ||||||||||||
March 28, | March 30, | Change | ||||||||||
2020 | 2019 | $ | % | |||||||||
Operating Expenses: | ||||||||||||
Selling, Marketing and Warehouse | $ | 17,985 | $ | 16,956 | $ | 1 ,029 | 6.1 | % | ||||
General and Administrative | 13,643 | $ | 12,158 | 1,485 | 12.2 | % | ||||||
Total | $ | 31,628 | $ | 29,114 | $ | 2,514 | 8.6 | % |
Total operating expenses were $31.6 million in fiscal year 2020 compared to $29.1 million in fiscal year 2019. This represented an increase of $2.5 million, or 8.6%, from fiscal year 2019 to fiscal year 2020. As a percentage of total revenue, operating expenses increased 20 basis points from 18.1% in fiscal year 2019 to 18.3% in fiscal year 2020. Selling, marketing and warehouse expenses increases were due to commissions and incentives as a result of increased selling activities to support our revenue growth. The year-over-year increase in General and Administrative expenses was primarily due to our continued investment in technology and process infrastructure improvements and Operational Excellence initiatives.
Provision for Income Taxes:
For the Fiscal Years Ended | |||||||||||||
March 28, | March 30, | Change | |||||||||||
2020 | 2019 | $ | % | ||||||||||
Provision for Income Taxes | $ | 1,663 | $ | 2,090 | $ | (427 | ) | (20.4 | %) |
Our effective tax rates for fiscal years 2020 and 2019 were 17.1% and 22.6%, respectively. The reduction in tax rate is due to the increased discrete tax benefits from share-based compensation activity. Our provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in fiscal years 2020 and 2019 were $0.9 million and $0.1 million, respectively. 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 in the future.
Net Income:
For the Fiscal Years Ended | Change | |||||||||||
March 28, | March 30, | |||||||||||
2020 | 2019 | $ | % | |||||||||
Net Income | $ | 8,067 | $ |
7,145 |
$ | 922 | 12.9 | % |
Net income for fiscal year 2020 showed a $0.9 million or 12.9% improvement when compared to fiscal year 2019. As a percentage of revenue, net income was 4.7% in fiscal year 2020, up from 4.4% in fiscal year 2019. This year-over-year change reflects higher operating income and a lower effective tax rate.
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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 and non-cash loss on sale of building), 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, and stock-based compensation expense, 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.
For the Fiscal Years Ended | |||||||
March 28, | March 30, | ||||||
2020 | 2019 | ||||||
Net Income | $ | 8,067 | $ | 7,145 | |||
+ Interest Expense | 934 | 903 | |||||
+ Other Expense / (Income) | 186 | 91 | |||||
+ Tax Provision | 1,663 | 2,090 | |||||
Operating Income | 10,850 | 10,229 | |||||
+ Depreciation & Amortization | 6,658 | 6,361 | |||||
+ Other (Expense) / Income | 15 | (91 | ) | ||||
+ Noncash Stock Compensation | 884 | 1,327 | |||||
Adjusted EBITDA | $ | 18,407 | $ | 17,826 |
During fiscal year 2020, Adjusted EBITDA was $18.4 million, an increase of $0.6 million or 3.3% compared to fiscal year 2019. As a percentage of revenue, Adjusted EBITDA was 10.6% during fiscal year 2020 versus 11.1% during fiscal year 2019, a 50 basis point decrease. The increase in Adjusted EBITDA during fiscal year 2020 is primarily driven by the increase in net income, offset by a decrease in provision for income taxes and noncash stock compensation expense.
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 (as defined below).
Because of the COVID-19 pandemic, there is significant uncertainty surrounding the potential impact on our results of operations and cash flows. We are proactively taking steps to increase available cash on hand including, but not limited to, targeted reductions in discretionary operating expenses and capital expenditures, and utilizing funds available under our Revolving Credit Facility. We may pursue additional sources of financing to improve liquidity. However, the disruption of the capital markets caused by the COVID-19 outbreak could make any financing more challenging and there can be no assurance that we will be able to obtain such additional financing on commercially reasonable terms or at all.
On October 30, 2017, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), which amended and restated our prior credit facility agreement. The Credit Agreement extended the term of our $30.0 million revolving credit facility (the “Revolving Credit Facility”) to October 29, 2021. As of March 28, 2020, $30.0 million was available under the Revolving Credit Facility, of which $17.7 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. Subsequent to fiscal year 2020, we amended our Revolving Credit Facility to provide for, among other things, $10.0 million in additional borrowing capacity and financial covenant modifications. See “Note 11 - Subsequent Event” in the financial notes to this report for additional information.
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On December 10, 2018, we entered into an Amended and Restated Credit Agreement Amendment 1 (the “2018 Agreement”). The 2018 Agreement has a term loan (the “2018 Term Loan”) in the amount of $15.0 million, which replaced the previous term loan. As of March 28, 2020, $12.6 million was outstanding on the 2018 Term Loan, of which $2.0 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.
Under the Credit Agreement, borrowings that may be used for business acquisitions are limited to $20.0 million per fiscal year. During fiscal year 2020, $13.8 million was used for business acquisitions, including holdback payments. During fiscal year 2019, $3.9 million was used for business acquisitions, including holdback payments.
The allowable leverage ratio under the Credit Agreement is a maximum multiple of 3.0 of total debt outstanding compared to earnings before income taxes, depreciation and amortization, or EBITDA, and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. The Credit Agreement provides that the trailing twelve-month pro forma EBITDA of an acquired business be included in the allowable leverage calculation.
The Credit Agreement has certain covenants with which we must comply, including a fixed charge ratio covenant and a leverage ratio covenant. We were in compliance with all loan covenants and requirements during fiscal years 2020 and 2019. Our leverage ratio, as defined in the Credit Agreement, was 1.53 at March 28, 2020, compared with 1.12 at March 30, 2019.
Interest on the Revolving Credit Facility continues to accrue, at our election, at either the variable one-month London Interbank Offered Rate (“LIBOR”) or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case, plus a margin. Interest on outstanding borrowings of the 2018 Term Loan accrues at a fixed rate of 4.15% over the term of the loan with principal and interest payments made monthly. Commitment fees accrue based on the average daily amount of unused credit available under the Credit Agreement. Interest rate margins and commitment fees are determined on a quarterly basis based upon our calculated leverage ratio, as defined in the Credit Agreement.
Cash Flows: The following table is a summary of our Consolidated Statements of Cash Flows (dollars in thousands):
For the Fiscal Years Ended | ||||||||
March 28, | March 30, | |||||||
2020 | 2019 | |||||||
Cash Provided by (Used in): | ||||||||
Operating Activities | $ | 11,561 | $ | 12,561 | ||||
Investing Activities | $ | (20,242 | ) | $ | (10,904 | ) | ||
Financing Activities | $ | 8,247 | $ | (1,708 | ) |
Operating Activities: Net cash provided by operating activities was $11.6 million during fiscal year 2020 compared to $12.6 million during fiscal year 2019 primarily due to changes in net working capital (defined as current assets less current liabilities). The significant changes in net working capital were:
● | Cash: Cash decreased by $0.3 million during fiscal year 2020. The decrease was primarily due to the timing of payments towards our long-term debt. |
● | Receivables: Accounts receivable increased by a net amount of $3.5 million during fiscal year 2020, including $0.8 million of accounts receivable acquired as part of the TTE acquisition completed within the period. Accounts receivable increased by a net amount of $2.8 million during fiscal year 2019, including $0.6 million of accounts receivable acquired from the Angel’s acquisition completed within the period. The year-over-year change reflects the increases in our revenues plus the timing of collections. The following table illustrates our days sales outstanding as of March 28, 2020 and March 30, 2019: |
For the Fiscal Years Ended | ||||||
March 28, | March 30, | |||||
2020 | 2019 | |||||
Net Sales, for the last two fiscal months | $ | 34,241 | $ | 33,283 | ||
Accounts Receivable, net | $ | 30,952 | $ | 27,469 | ||
Days Sales Outstanding | 54 | 50 |
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● | Inventory: Our inventory strategy includes making appropriate large quantity, high dollar purchases with key manufacturers for various reasons, including maximizing on-hand availability of key products, expanding the number of SKUs stocked in anticipation of customer demand, reducing backorders for products with long lead times and optimizing vendor purchase and sales volume discounts. As a result, inventory levels may vary from quarter-to-quarter based on the timing of these large orders in relation to our quarter end. Our inventory balance increased $0.1 million during fiscal year 2020, including $0.1 million of inventory acquired from the TTE acquisition completed within the period. Our inventory balance increased $1.7 million during fiscal year 2019, including $0.2 million of inventory acquired as part of the assets acquired from the Angel’s acquisition completed within the period. The year-over-year change represents the timing of strategic purchases in fiscal year 2020. |
● | 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 by $2.6 million during fiscal year 2020 and $1.0 million during fiscal year 2019, largely due to the timing of inventory purchases and other payments in the respective periods. |
● | Accrued Compensation and Other Liabilities: Accrued compensation and other 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 the timing of payments to employees. During fiscal year 2020, accrued compensation and other liabilities increased by $1.5 million, due primarily to the adoption of the new lease accounting standard. During fiscal year 2019, accrued compensation and other liabilities increased by $0.2 million, including $1.1 million of contingent consideration and other accrued holdbacks included as part of the Angel’s acquisition completed within the period. |
● | Income Taxes Payable: In any given period, net working capital may be affected by the timing and amount of income tax payments. During fiscal year 2020, income taxes payable decreased by $0.1 million while during fiscal year 2019, the income taxes payable balance was flat. The year-over-year difference is due to timing of income tax payments. |
Investing Activities: During fiscal year 2020, we invested $6.6 million in capital expenditures that was used primarily for technology infrastructure to drive operational excellence, fund organic growth opportunities within both operating segments and to purchase new equipment to expand the number and type of assets available to rent. During fiscal year 2019, we invested $7.0 million in capital expenditures, that was also largely used primarily for assets for our rental business and customer-driven expansion of Service segment capabilities. The purchase of assets from GRS during fiscal year 2020 and NBS during fiscal year 2019 are included in our capital expenditures above.
During fiscal year 2020, we used $13.0 million for business acquisitions. During fiscal year 2019, we used $3.6 million for a business acquisition. During fiscal year 2020, we used $0.9 million for holdback payments related to a business acquisition. During fiscal year 2019, we used $0.3 million for holdback payments related to a business acquisition.
Financing Activities: During fiscal year 2020, we received $11.2 million from our Revolving Credit Facility and $1.7 million in cash was generated from the issuance of our common stock. We used $1.9 million for scheduled repayments of our term loan and used $2.8 million for the “net” award of certain share awards to cover tax-withholding obligations for share award activity in the period which are shown as a repurchase of shares of our common stock.
During fiscal year 2019, we received $2.5 million from the issuance of our term loan and $0.3 million in cash was generated from the issuance of common stock. We used $2.3 million to repay our Revolving Credit Facility, $2.1 million for scheduled repayments of our term loan and $0.1 million for the “net” award of certain share awards to cover tax-withholding obligations for share award activity in the period which are shown as a repurchase of shares of our common stock.
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Contractual Obligations and Commercial Commitments: The table below contains aggregated information about future payments related to contractual obligations and commercial commitments such as debt and lease agreements as of March 28, 2020 (in millions):
Payments Due By Period | |||||||||||||||
Less Than | 1-3 | 4-5 | More Than | ||||||||||||
1 Year | Years | Years | 5 Years | Total | |||||||||||
Revolving Line of Credit (1) | $ | - | $ | 17.7 | $ | - | $ | - | $ | 17.7 | |||||
Term Loan | 2.0 | 4.2 | 4.6 | 1.8 | 12.6 | ||||||||||
Operating Leases | 3.2 | 4.9 | 3.1 | 4.1 | 15.3 | ||||||||||
Total Contractual Cash | |||||||||||||||
Obligations | $ | 5.2 | $ | 26.8 | $ | 7.7 | $ | 5.9 | $ | 45.6 |
(1) | Due to the uncertainty of forecasting expected variable rate interest payments, this amount excludes the interest portion of our debt obligation. |
OUTLOOK
We believe our focus on highly-regulated and critical industries, especially within life sciences, will continue to provide a degree of resilience as we navigate this unprecedented environment. We are proud to service ventilator and test kit manufacturers as well as pharmaceutical companies conducting research and development on a COVID-19 vaccine. We have seen certain Service customers delaying some project decisions, but Service pipelines are robust and general discussions seem to be productive and which we believe indicates forward-moving momentum. However, the Distribution segment sales will reflect economic conditions, despite the upside we expect to be provided by rentals and used equipment sales.
While the duration and ultimate severity of this pandemic is unknown, we have run various scenarios and at this date believe our first quarter ending June 27, 2020 of the fiscal year ending March 27, 2021 (“fiscal year 2021”) will be the low point of fiscal year 2021 based on the evolving COVID-19 containment and economic recovery programs being implemented by federal and state authorities. We expect to be in range of breaking even on a consolidated operating income basis for the first quarter of fiscal year 2021, which would result in positive Adjusted EBITDA results. Under our analyses, we expect to generate cash even as we continue to invest in our long-term growth initiatives. If the environment were to worsen, we are prepared to take additional actions. In fact, as things improve, we believe our scale will work in our favor to capitalize on growth opportunities, both organic and acquisitions.
We expect to receive certain federal, state and Canadian tax credits in future years. We also expect to receive discrete tax benefits related to share-based compensation awards in fiscal year 2021. As such, we expect our effective tax rate in fiscal year 2021 to be between 24.0% and 25.0%.
The Company anticipates total capital expenditures to be approximately $5.0 million to $5.5 million in fiscal year 2021, with the majority of the capital expenditures planned for technology infrastructure to drive operational excellence and organic growth opportunities within both operating segments, and for rental pool assets. Maintenance and existing asset replacements in fiscal year 2021 are expected to be consistent with fiscal year 2020 at approximately $1.0 million to $1.5 million.
ITEM 7A. 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 $0.1 million assuming our average borrowing levels remained constant on our variable rate Revolving Credit Facility. As of March 28, 2020, $30.0 million was available under our Revolving Credit Facility, of which $17.7 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. As of March 28, 2020, $12.6 million was outstanding on the term loan and was included in long-term debt and current portion of long-term debt on the Consolidated Balance Sheets. The term loan requires total principal and interest repayments of $0.2 million per month through December 2025. Subsequent to fiscal year 2020, we amended our Revolving Credit Facility to provide for, among other things, $10.0 million in additional borrowing capacity and certain financial covenant modifications. See “Note 11 - Subsequent Event” in the financial notes to this report for additional information.
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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 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. As of March 28, 2020, the one-month LIBOR was 1.0%. Our interest rate during fiscal year 2020 for our Revolving Credit Facility ranged from 1.8% to 3.7%. Interest on outstanding borrowings of the 2018 Term Loan accrues at a fixed rate of 4.15% over the term of the loan. On March 28, 2020, we had no hedging arrangements in place to limit our exposure to upward movements in interest rates.
FOREIGN CURRENCY
Approximately 92% of our total revenues for fiscal years 2020 and 2019 were denominated in U.S. dollars, with the remainder denominated in Canadian dollars. A 10% change in the value of the Canadian dollar to the U.S. dollar would impact our revenue by less than 1%. Since the onset of the COVID-19 pandemic in North America, the Canadian dollar has weakened compared to the U.S. dollar. We monitor the relationship between the U.S. and Canadian currencies on a monthly basis and adjust sales prices for products and services sold in Canadian dollars as we believe to be appropriate, including in response to the COVID-19 pandemic.
We continually utilize short-term foreign exchange forward contracts to reduce the risk that future earnings 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 net loss of loss of less than $0.1 million in fiscal year 2020 and a net gain of less than $0.2 million in fiscal year 2019, respectively, 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 receivables denominated in Canadian dollars being hedged. On March 28, 2020, we had a foreign exchange contract, which matured in April 2020, outstanding in the notional amount of $4.0 million. The foreign exchange contract was renewed in April 2020 and continues to be in place. We do not use hedging arrangements for speculative purposes.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Annual Report on Internal Control Over Financial Reporting
Management of Transcat, Inc. (the “Company”) is responsible for establishing and maintaining an adequate system of internal control over financial reporting. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.
Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on that evaluation, management concluded that the Company’s internal control over financial reporting was effective as of March 28, 2020.
The effectiveness of the Company’s internal control over financial reporting has been audited by Freed Maxick CPAs, P.C. an independent registered public accounting firm, as stated in their report which is included herein.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Transcat, Inc.
Rochester, New York
To the Shareholders and the Board of Directors of Transcat, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Transcat, Inc. and its subsidiaries (the "Company") as of March 28, 2020 and March 30, 2019, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the years ended March 28, 2020 and March 30, 2019, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company's internal control over financial reporting as of March 28, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 28, 2020 and March 30, 2019, and the results of its operations and its cash flows for each of the years ended March 28, 2020 and March 30, 2019 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 28, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Basis for Opinion
The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Freed Maxick CPAs, P.C.
We have served as the Company's auditor since 2012.
Rochester, New York
June 8, 2020
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TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
For the Fiscal Years Ended | ||||||
March 28, | March 30, | |||||
2020 | 2019 | |||||
Service Revenue | $ | 93,003 | $ | 84,041 | ||
Distribution Sales | 80,096 | 76,857 | ||||
Total Revenue | 173,099 | 160,898 | ||||
Cost of Services Sold | 69,517 | 63,096 | ||||
Cost of Distribution Sales | 61,104 | 58,459 | ||||
Total Cost of Revenue | 130,621 | 121,555 | ||||
Gross Profit | 42,478 | 39,343 | ||||
Selling, Marketing and Warehouse Expenses | 17,985 | 16,956 | ||||
General and Administrative Expenses | 13,643 | 12,158 | ||||
Total Operating Expenses | 31,628 | 29,114 | ||||
Operating Income | 10,850 | 10,229 | ||||
Interest and Other Expenses, net | 1,120 | 994 | ||||
Income Before Provision for Income Taxes | 9,730 | 9,235 | ||||
Provision for Income Taxes | 1,663 | 2,090 | ||||
Net Income | $ | 8,067 | $ | 7,145 | ||
Basic Earnings Per Share | $ | 1.10 | $ | 0.99 | ||
Average Shares Outstanding | 7,331 | 7,196 | ||||
Diluted Earnings Per Share | $ | 1.08 | $ | 0.95 | ||
Average Shares Outstanding | 7,487 | 7,515 |
See accompanying notes to consolidated financial statements.
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TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
For the Fiscal Years Ended | ||||||||
March 28, | March 30, | |||||||
2020 | 2019 | |||||||
Net Income | $ | 8,067 | $ | 7,145 | ||||
Other Comprehensive Loss: | ||||||||
Currency Translation Adjustment | (277 | ) | (181 | ) | ||||
Other, net of tax effects of $42 and $51 for the years ended March 28, 2020 and March 30, 2019, respectively. | (122 | ) | (149 | ) | ||||
Total Other Comprehensive Loss | (399 | ) | (330 | ) | ||||
Comprehensive Income | $ | 7,668 | $ | 6,815 |
See accompanying notes to consolidated financial statements.
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TRANSCAT, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
March 28, | March 30, | |||||||
2020 | 2019 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash |
$ | 499 | $ | 788 | ||||
Accounts Receivable, less allowance for doubtful accounts of $480 and $338 as of March 28, 2020 and March 30, 2019, respectively |
30,952 | 27,469 | ||||||
Other Receivables |
1,132 | 1,116 | ||||||
Inventory, net |
14,180 | 14,304 | ||||||
Prepaid Expenses and Other Current Assets |
1,697 | 1,329 | ||||||
Total Current Assets |
48,460 | 45,006 | ||||||
Property and Equipment, net | 20,833 | 19,653 | ||||||
Goodwill | 41,540 | 34,545 | ||||||
Intangible Assets, net | 7,977 | 5,233 | ||||||
Right to Use Assets, net | 8,593 | - | ||||||
Other Assets | 719 | 793 | ||||||
Total Assets |
$ | 128,122 | $ | 105,230 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts Payable |
$ | 11,947 | $ | 14,572 | ||||
Accrued Compensation and Other Current Liabilities |
6,907 | 5,450 | ||||||
Income Taxes Payable |
86 | 228 | ||||||
Current Portion of Long-Term Debt |
1,982 | 1,899 | ||||||
Total Current Liabilities |
20,922 | 22,149 | ||||||
Long-Term Debt | 28,362 | 19,103 | ||||||
Deferred Tax Liabilities, net | 3,025 | 2,450 | ||||||
Lease Liabilities | 6,832 | - | ||||||
Other Liabilities | 1,894 | 1,898 | ||||||
Total Liabilities |
61,035 | 45,600 | ||||||
Shareholders' Equity: | ||||||||
Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,381,180 and 7,210,882 shares issued and outstanding as of March 28, 2020 and March 30, 2019, respectively |
3,691 | 3,605 | ||||||
Capital in Excess of Par Value |
17,929 | 16,467 | ||||||
Accumulated Other Comprehensive Loss |
(1,010 | ) | (611 | ) | ||||
Retained Earnings |
46,477 | 40,169 | ||||||
Total Shareholders' Equity |
67,087 | 59,630 | ||||||
Total Liabilities and Shareholders' Equity |
$ | 128,122 | $ | 105,230 |
See accompanying notes to consolidated financial statements.
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TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For the Fiscal Years Ended | ||||||||
March 28, | March 30, | |||||||
2020 | 2019 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Income |
$ | 8,067 | $ | 7,145 | ||||
Adjustments to Reconcile Net Income to Net Cash |
||||||||
Provided by Operating Activities: |
||||||||
Loss on Disposal of Property and Equipment |
460 | 8 | ||||||
Deferred Income Taxes |
575 | 741 | ||||||
Depreciation and Amortization |
6,659 | 6,361 | ||||||
Provision for Accounts Receivable and Inventory Reserves |
371 | 297 | ||||||
Stock-Based Compensation Expense |
884 | 1,327 | ||||||
Changes in Assets and Liabilities, net of acquisitions: |
||||||||
Accounts Receivable and Other Receivables |
(3,303 | ) | (2,385 | ) | ||||
Inventory |
875 | (1,100 | ) | |||||
Prepaid Expenses and Other Assets |
(467 | ) | (39 | ) | ||||
Accounts Payable |
(2,767 | ) | 963 | |||||
Accrued Compensation and Other Liabilities |
307 | (804 | ) | |||||
Income Taxes Payable |
(100 | ) | 47 | |||||
Net Cash Provided by Operating Activities |
11,561 | 12,561 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchase of Property and Equipment |
(6,579 | ) | (6,998 | ) | ||||
Proceeds from Sale of Property and Equipment |
184 | 16 | ||||||
Business Acquisitions, net of cash acquired |
(12,983 | ) | (3,614 | ) | ||||
Payment of Contingent Consideration and Holdbacks Related to Business Acquisitions |
(864 | ) | (308 | ) | ||||
Net Cash Used in Investing Activities |
(20,242 | ) | (10,904 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from (Repayment of) Revolving Credit Facility, net |
11,241 | (2,261 | ) | |||||
Proceeds from Term Loan |
- | 2,500 | ||||||
Repayments of Term Loan |
(1,899 | ) | (2,087 | ) | ||||
Issuance of Common Stock |
1,727 | 285 | ||||||
Repurchase of Common Stock |
(2,822 | ) | (145 | ) | ||||
Net Cash Provided by (Used In) Financing Activities |
8,247 | (1,708 | ) | |||||
Effect of Exchange Rate Changes on Cash | 145 | 262 | ||||||
Net (Decrease) Increase in Cash | (289 | ) | 211 | |||||
Cash at Beginning of Fiscal Year | 788 | 577 | ||||||
Cash at End of Fiscal Year | $ | 499 | $ | 788 | ||||
Supplemental Disclosures of Cash Flow Activity: | ||||||||
Cash paid during the fiscal year for: |
||||||||
Interest |
$ | 938 | $ | 906 | ||||
Income Taxes |
$ | 1,371 | $ | 1,298 | ||||
Supplemental Disclosure of Non-Cash Investing and Financing Activities: | ||||||||
Payment of Contingent Consideration and Holdback Amounts Related to Business Acquisition |
$ | 864 | $ | 308 |
See accompanying notes to consolidated financial statements.
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TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands, Except Per Share Amounts)
Capital | |||||||||||||||||||||||
Common Stock | In | Accumulated | |||||||||||||||||||||
Issued | Excess | Other | |||||||||||||||||||||
$0.50 Par Value | of Par | Comprehensive | Retained | ||||||||||||||||||||
Shares | Amount | Value | Loss | Earnings | Total | ||||||||||||||||||
Balance as of March 31, 2018 | 7,155 | $ | 3,578 | $ | 14,965 | $ | (281 | ) | $ | 33,086 | $ | 51,348 | |||||||||||
Issuance of Common Stock | 15 | 7 | 278 | - | - | 285 | |||||||||||||||||
Repurchase of Common Stock | (8 | ) | (4 | ) | (79 | ) | - | (62 | ) | (145 | ) | ||||||||||||
Stock-Based Compensation | 49 | 24 | 1,303 | - | - | 1,327 | |||||||||||||||||
Other Comprehensive Income | - | - | - | (330 | ) | - | (330 | ) | |||||||||||||||
Net Income | - | - | - | - | 7,145 | 7,145 | |||||||||||||||||
Balance as of March 30, 2019 | 7,211 | 3,605 | 16,467 | (611 | ) | 40,169 | 59,630 | ||||||||||||||||
Issuance of Common Stock | 168 | 85 | 1,642 | - | - | 1,727 | |||||||||||||||||
Repurchase of Common Stock | (118 | ) | (59 | ) | (1,004 | ) | - | (1,759 | ) | (2,822 | ) | ||||||||||||
Stock-Based Compensation | 120 | 60 | 824 | - | - | 884 | |||||||||||||||||
Other Comprehensive Loss | - | - | - | (399 | ) | - | (399 | ) | |||||||||||||||
Net Income | - | - | - | - | 8,067 | 8,067 | |||||||||||||||||
Balance as of March 28, 2020 | 7,381 | $ | 3,691 | $ | 17,929 | $ | (1,010 | ) | $ | 46,477 | $ | 67,087 |
See accompanying notes to consolidated financial statements.
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TRANSCAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share and Per Unit Amounts)
NOTE 1 – GENERAL
Description of Business: Transcat, Inc. (“Transcat” or the “Company”) is a leading provider of accredited calibration and laboratory instrument services and a 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 and alternative energy; 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.
Principles of Consolidation: The consolidated financial statements of Transcat include the accounts of Transcat and the Company’s wholly-owned subsidiaries, Transcat Canada Inc., United Scale & Engineering Corporation, WTT Real Estate Acquisition, LLC and Anmar Metrology, Inc. (which merged with and into the Company on March 28, 2020). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of Transcat’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires that the Company make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to, allowance for doubtful accounts and returns, inventory reserves, estimated levels of achievement for performance-based restricted stock units, fair value of stock options, depreciable lives of fixed assets, estimated lives of major catalogs and intangible assets, and the valuation of assets acquired and liabilities assumed in business acquisitions. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes. Actual results could differ from those estimates. Such changes and refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to the Consolidated Financial Statements.
Fiscal Year: Transcat operates on a 52/53 week fiscal year, ending the last Saturday in March. In a 52-week fiscal year, each of the four quarters is a 13-week period. In a 53-week fiscal year, the last quarter is a 14-week period. The fiscal years ended March 28, 2020 (“fiscal year 2020”) and March 30, 2019 (“fiscal year 2019”) both consisted of 52 weeks.
Accounts Receivable: Accounts receivable represent amounts due from customers in the ordinary course of business. These amounts are recorded net of the allowance for doubtful accounts and returns in the Consolidated Balance Sheets. The allowance for doubtful accounts is based upon the expected collectability of accounts receivable. The Company applies a specific formula to its accounts receivable aging, which may be adjusted on a specific account basis where the formula may not appropriately reserve for loss exposure. After all attempts to collect a receivable have failed, the receivable is written-off against the allowance for doubtful accounts. The returns reserve is calculated based upon the historical rate of returns applied to revenues over a specific timeframe. The returns reserve will increase or decrease as a result of changes in the level of revenue and/or the historical rate of returns.
Inventory: Inventory consists of products purchased for resale and is valued at the lower of cost or net realizable value. Costs are determined using the average cost method of inventory valuation. The Company performs physical inventory counts and cycle counts on inventory throughout the year and adjusts the recorded balance to reflect the results. Inventory is reduced by a reserve for items not saleable at or above cost by applying a specific loss factor, based on historical experience, to specific categories of inventory. The Company evaluates the adequacy of the reserve on a quarterly basis. The Company had reserves for inventory losses totaling $0.5 million at March 28, 2020 and $0.4 million at March 30, 2019.
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Property and Equipment, Depreciation and Amortization: Property and equipment are stated at cost. Depreciation and amortization are computed primarily under the straight-line method over the following estimated useful lives:
Years | ||
Machinery, Equipment and Software | 2 – 15 | |
Rental Equipment | 5 – 8 | |
Furniture and Fixtures | 3 – 10 | |
Leasehold Improvements | 2 – 10 |
The Company tests property and equipment for impairment on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. Property and equipment determined to have no value are written off at their then remaining net book value. The Company capitalizes certain costs incurred in the procurement and development of computer software used for internal purposes. Leasehold improvements are amortized under the straight-line method over the estimated useful life or the lease term, whichever is shorter. Maintenance and repairs are expensed as incurred. See Note 2 for further information on property and equipment.
Business Acquisitions: The Company applies the acquisition method of accounting for business acquisitions. Under the acquisition method, the purchase price of an acquisition is assigned to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The Company uses a valuation hierarchy, as further described under Fair Value of Financial Instruments below, to determine the fair values used in this allocation. Historically, we have relied, in part, upon the use of reports from third-party valuation specialists to assist in the estimation of fair values. Purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. Costs to acquire a business may include, but are not limited to, fees for accounting, legal and valuation services, and are expensed as incurred in the Consolidated Statements of Income.
Goodwill and Intangible Assets: Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value and whether it is necessary to perform the goodwill impairment process. The Company determined that no impairment was indicated as of March 28, 2020 and March 30, 2019.
Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. The Company estimates the fair value of its reporting units using the fair market value measurement requirement. Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. A summary of changes in the Company’s goodwill and intangible assets is as follows:
Goodwill | Intangible Assets | ||||||||||||||||||||||
Distribution | Service | Total | Distribution | Service | Total | ||||||||||||||||||
Net Book Value as of March 31, 2018 | $ | 9,759 | $ | 22,981 | $ | 32,740 | $ | 487 | $ | 5,018 | $ | 5,505 | |||||||||||
Additions (see Note 9) |
- | 2,012 | 2,012 | - | 1,650 | 1,650 | |||||||||||||||||
Amortization |
- | - | - | (177 | ) | (1,713 | ) | (1,890 | ) | ||||||||||||||
Currency Translation |
|||||||||||||||||||||||
Adjustment | - | (207 | ) | (207 | ) | - | (32 | ) | (32 | ) | |||||||||||||
Net Book Value as of March 30, 2019 | 9,759 | 24,786 | 34,545 | 310 | 4,923 | 5,233 | |||||||||||||||||
Additions (see Note 9) |
1,695 | 5,580 | 7,275 | 1,133 | 3,397 | 4,530 | |||||||||||||||||
Amortization |
- | - | - | (146 | ) | (1,619 | ) | (1,765 | ) | ||||||||||||||
Currency Translation |
|||||||||||||||||||||||
Adjustment | - | (280 | ) | (280 | ) | - | (21 | ) | (21 | ) | |||||||||||||
Net Book Value as of March 28, 2020 | $ | 11,454 | $ | 30,086 | $ | 41,540 | $ | 1,297 | $ | 6,680 | $ | 7,977 |
The intangible assets are being amortized on an accelerated basis over their estimated useful lives of up to 10 years. Amortization expense relating to intangible assets is expected to be $2.4 million in fiscal year 2021, $1.7 million in fiscal year 2022, $1.3 million in fiscal year 2023, $0.9 million in fiscal year 2024 and $0.7 million in fiscal year 2025.
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Catalog Costs: Transcat capitalizes the cost of each Master Catalog mailed and amortizes the cost over the respective catalog’s estimated productive life. The Company reviews response results from catalog mailings on a continuous basis, and if warranted, modifies the period over which costs are recognized. The Company amortizes the cost of each Master Catalog over an eighteen-month period and amortizes the cost of each catalog supplement over a three-month period. Total unamortized catalog costs, included as a component of prepaid expenses and other current assets on the Consolidated Balance Sheets, were $0.1 million as of March 28, 2020 and March 30, 2019.
Deferred Taxes:
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement carrying amounts and the tax bases of its assets and liabilities. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the Consolidated Statements of Income in the period that includes the enactment date. The Company establishes valuation allowances if it believes that it is more-likely-than-not that some or all of its deferred tax assets will not be realized. See Note 4 for further discussion on income taxes.
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 March 28, 2020 and March 30, 2019, investment assets totaled $0.4 million and $0.5 million, respectively, and are included as a component of other assets (non-current) on the Consolidated Balance Sheets.
Stock-Based Compensation: The Company measures the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. The Company records compensation cost related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period of 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 fiscal years 2020 and 2019, the Company recorded non-cash stock-based compensation cost in the amount of $0.9 million and $1.3 million, respectively, in the Consolidated Statements of Income.
Revenue Recognition: Distribution sales are recorded when an order’s title and risk of loss transfers to the customer. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. The majority of the Company’s revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue over time. Revenue is measured as the amount of consideration it expects to receive in exchange for product shipped or services performed. Sales taxes and other taxes billed and collected from customers are excluded from revenue. The Company generally invoices its customers for freight, shipping, and handling charges. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data.
Revenue recognized from prior period performance obligations for fiscal year 2020 was immaterial. As of March 28, 2020, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606 (defined below), 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 March 28, 2020 and March 30, 2019 were immaterial. Payment terms are generally 30 to 45 days. See Note 7 for disaggregated revenue information.
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Vendor Rebates: Vendor rebates are generally based on specified cumulative levels of purchases and/or incremental distribution sales and are recorded as a reduction of cost of distribution sales. Purchase rebates are calculated and recorded quarterly based upon the volume of purchases with specific vendors during the quarter. Point of sale rebate programs that are based on year-over-year sales performance on a calendar year basis are recorded as earned, on a quarterly basis, based upon the expected level of annual achievement. Point of sale rebate programs that are based on year-over-year sales performance on a quarterly basis are recorded as earned in the respective quarter. The Company recorded vendor rebates of $1.6 million and $1.3 million in fiscal years 2020 and 2019, respectively, as a reduction of cost of distribution sales.
Cooperative Advertising Income:
The Company participates in co-op advertising programs with certain of its vendors. The Company records cash consideration received from these vendors for advertising as a reduction of cost of distribution sales. The Company recorded consideration in the amount of $1.4 million and $1.6 million in fiscal years 2020 and 2019, respectively, in connection with these programs.
Advertising Costs: Advertising costs, other than catalog costs, are expensed as they are incurred and are included in selling, marketing and warehouse Expenses in the Consolidated Statements of Income. Advertising costs were approximately $1.2 million and $1.4 million in fiscal years 2020 and 2019, respectively.
Shipping and Handling Costs: Freight expense and direct shipping costs are included in the cost of revenue. These costs totaled approximately $2.6 million in each of fiscal years 2020 and 2019, respectively. Direct handling costs, the majority of which represent direct compensation of employees who pick, pack, and prepare merchandise for shipment to customers, are reflected in selling, marketing and warehouse expenses. Direct handling costs were approximately $0.9 million and $1.0 million in fiscal years 2020 and 2019, respectively.
Foreign Currency Translation and Transactions: The accounts of Transcat Canada Inc. are maintained in the local currency 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 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 loss was less than $0.1 million in each of the fiscal years 2020 and 2019. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its earnings would be adversely affected by changes in currency exchange rates. The Company does not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a net loss of less than $0.1 million in fiscal year 2020 and a net gain of $0.2 million in fiscal year 2019, 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 March 28, 2020, the Company had a foreign exchange contract, which matured in April 2020, outstanding in the notional amount of $4.0 million. This contract was subsequently renewed and remains in place. The Company does not use hedging arrangements for speculative purposes.
Other Comprehensive Income: Comprehensive income is composed of currency translation adjustments, unrecognized prior service costs, net of tax, and unrealized gains or losses on other assets, net of tax.
For the Company’s Canadian subsidiary, the local currency is Canadian dollars. Assets and liabilities of that subsidiary are translated into United States dollars at the period-end exchange rate or historical rates as appropriate. Consolidated statements of earnings (loss) amounts are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheets as a component of accumulated other comprehensive loss in shareholders’ equity. Transaction gains and losses are included in the consolidated statements of income.
The Company determines the expense and obligations for its post-retirement plans using assumptions related to discount rates, expected long-term rates of return on invested plan assets, and certain other factors. The Company determines the fair value of plan assets and benefit obligations as of the end of each fiscal year. The unrecognized portion of the gain or loss on plan assets is included in the consolidated balance sheets as a component of accumulated other comprehensive loss in shareholders’ equity and is recognized into the plans’ expense over time. See Note 5 for further discussion on the company’s post retirement plan.
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The Company has a non-qualified deferred compensation plan for the benefit of certain management employees and non-employee directors. Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds. The unrecognized portion of the gain or loss on plan assets is included in the consolidated balance sheets as a component of accumulated other comprehensive loss in shareholders’ equity.
At March 28, 2020, accumulated other comprehensive loss consisted of cumulative currency translation losses of $0.6 million, unrecognized prior service costs, net of tax, of $0.3 million and an unrealized gain on other assets, net of tax, of $0.1 million. At March 30, 2019, accumulated other comprehensive loss consisted of cumulative currency translation losses of $0.3 million, unrecognized prior service costs, net of tax, of $0.2 million and an unrealized gain on other assets, net of tax, of less than $0.1 million.
Earnings per Share: Basic earnings per share of common stock are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of stock options and unvested restricted stock units using the treasury stock method in periods in which they have a dilutive effect. In computing the per share effect of assumed conversion, 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 fiscal years 2020 and 2019, the net additional common stock equivalents had a $0.02 and $0.04 per share effect on the calculation of dilutive earnings per share, respectively. The average shares outstanding used to compute basic and diluted earnings per share are as follows:
For the Fiscal Years Ended | ||||
March 28, | March 30, | |||
2020 | 2019 | |||
Average Shares Outstanding – Basic | 7,331 | 7,196 | ||
Effect of Dilutive Common Stock Equivalents | 156 | 319 | ||
Average Shares Outstanding – Diluted | 7,487 | 7,515 | ||
Anti-dilutive Common Stock Equivalents | 15 | 20 |
Shareholders’ Equity: During fiscal year 2020, the Company repurchased and subsequently retired 0.1 million shares of its common stock. During fiscal year 2019, the Company repurchased and subsequently retired less than 0.1 million shares of its common stock. There were no stock option redemptions during either fiscal year 2020 or fiscal year 2019.
Recently Issued Accounting Pronouncements:
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC Topic 842), which requires lessees to recognize substantially all leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right of use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
In July 2018, FASB issued ASU 2018-11, Leases (ASC Topic 842), which provides entities with an additional transition method to adopt the new lease standard. Under this method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the prior comparative period's financials will remain the same as those previously presented.
The Company adopted the new lease standard on March 31, 2019, during the first quarter of fiscal year 2020. The Company adopted the package of practical expedients permitted under the transition guidance which allowed us to carry forward the historical lease classification. Upon adoption, the Company used hindsight in determining lease terms. The most significant impact of adoption was adding ROU lease assets and lease liabilities on the Consolidated Balance Sheets by the present value of the Company’s leasing obligations, which are primarily related to facility and vehicle leases. The present value of the remaining lease payments is recognized as lease liabilities on the Consolidated Balance Sheets with corresponding ROU assets. The value of the assets and liabilities added to the Consolidated Balance Sheets was approximately $8 million each. The ROU assets are shown separately on the face of the Consolidated Balance Sheets. $1.7 million of the lease liabilities was included in Accrued Compensation and Other Liabilities on the Consolidated Balance Sheets with the remainder included in Lease Liabilities. Adopting the new standard did not have a material impact on our Consolidated Statement of Income or Consolidated Statement of Cash Flows.
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Credit Losses
In June 2016, the 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, 2023. 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 the consolidated financial statements.
Reclassification of Amounts: Certain reclassifications of financial information for prior fiscal years have been made to conform to the presentation for the current fiscal year.
NOTE 2 – PROPERTY AND EQUIPMENT
Property and equipment consists of:
March 28, | March 30, | |||||||
2020 | 2019 | |||||||
Machinery, Equipment and Software | $ | 46,206 | $ | 41,818 | ||||
Rental Equipment | 7,111 | 6,441 | ||||||
Furniture and Fixtures | 2,668 | 2,573 | ||||||
Leasehold Improvements | 3,051 | 2,716 | ||||||
Buildings and Land | - | 500 | ||||||
Total Property and Equipment | 59,036 | 54,048 | ||||||
Less: Accumulated Depreciation and Amortization | (38,203 | ) | (34,395 | ) | ||||
Total Property and Equipment, net | $ | 20,833 | $ | 19,653 |
Total depreciation and amortization expense relating to property and equipment amounted to $4.8 million and $4.4 million in fiscal years 2020 and 2019, respectively.
NOTE 3 – LONG-TERM DEBT
Description: On October 30, 2017, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), which amended and restated our prior credit facility agreement. The Credit Agreement extended the term of our $30.0 million revolving credit facility (the “Revolving Credit Facility”) to October 29, 2021. As of March 28, 2020, $30.0 million was available under the Revolving Credit Facility, of which $17.7 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. As of March 30, 2019, $30.0 million was available under the Revolving Credit Facility, of which $6.5 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. See Note 11 - Subsequent Event for additional information about our Credit Agreement.
On December 10, 2018, we entered into an Amended and Restated Credit Agreement Amendment 1 (the “2018 Agreement”). The 2018 Agreement has a term loan (the “2018 Term Loan”) in the amount of $15.0 million, which replaced the previous term loan. As of March 28, 2020, $12.6 million was outstanding on the 2018 Term Loan, of which $2.0 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. As of March 30, 2019, $14.5 million was outstanding on the 2018 Term Loan, of which $1.9 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.
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Under the Credit Agreement, borrowings that may be used for business acquisitions are limited to $20.0 million per fiscal year. During fiscal year 2020, $13.8 million was used for business acquisitions, including holdback payments. During fiscal year 2019, $3.9 million was used for business acquisitions, including holdback payments.
The allowable leverage ratio under the Credit Agreement is a maximum multiple of 3.0 of total debt outstanding compared to earnings before income taxes, depreciation and amortization, or EBITDA, and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. The Credit Agreement provides that the trailing twelve-month pro forma EBITDA of an acquired business be included in the allowable leverage calculation.
The Credit Agreement has certain covenants with which we must comply, including a fixed charge ratio covenant and a leverage ratio covenant. We were in compliance with all loan covenants and requirements during fiscal years 2020 and 2019. Our leverage ratio, as defined in the Credit Agreement, was 1.53 at March 28, 2020, compared with 1.12 at March 30, 2019.
Interest on the Revolving Credit Facility continues to accrue, at our election, at either the variable one-month London Interbank Offered Rate (“LIBOR”) or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case, plus a margin. Interest on outstanding borrowings of the 2018 Term Loan accrues at a fixed rate of 4.15% over the term of the loan with principal and interest payments made monthly. Commitment fees accrue based on the average daily amount of unused credit available under the Credit Agreement. Interest rate margins and commitment fees are determined on a quarterly basis based upon our calculated leverage ratio, as defined in the Credit Agreement. The one-month LIBOR at March 28, 2020 was 1.0%. The Company’s interest rate for the Revolving Credit Facility during fiscal year 2020 ranged from 1.8% to 3.7%.
The Company has pledged all of its U.S. tangible and intangible personal property, the equity interests of its U.S. based subsidiaries, and a majority of the common stock of Transcat Canada Inc. as collateral security for the loans made under the Revolving Credit Facility.
NOTE 4 – INCOME TAXES
On December 22, 2017, the Tax Act was signed into law. The Tax Act includes numerous changes to existing tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%. Since the Company is a fiscal year taxpayer, the lower corporate income tax rate was effective for fiscal years 2020 and 2019. The Tax Act also caused the Company’s U.S. deferred tax assets and liabilities to be remeasured as of March 31, 2018 based on the rates at which they are expected to reverse, which is generally 21% plus the applicable state rates.
In addition, the Tax Act provided for a one-time “deemed repatriation” of accumulated foreign earnings for post-1986 undistributed foreign subsidiary earnings and profits through fiscal year 2018. The Company finalized the additional provision for income tax expense on the deemed repatriation at less than $0.1 million with the filing of its fiscal year 2018 U.S. federal income tax return. No additional provision for U.S. federal or foreign taxes has been made as the foreign subsidiary’s undistributed earnings are considered to be permanently reinvested. It is not practicable to determine the amount of other taxes that would be payable if these amounts were repatriated to the U.S.
While the Tax Act provides for a territorial tax system, effective for tax years beginning after December 31, 2017, it includes the Global Intangible Low-Taxed Income (“GILTI”) and Foreign Derived Intangible Income (“FDII”) provisions. The Company has elected to account for the GILTI tax in the period in which it is incurred. During fiscal years 2020 and 2019, the Company recorded net income tax benefits of less than $0.1 million each year as a result of these provisions.
Transcat’s income before income taxes on the Consolidated Statements of Income is as follows:
FY 2020 | FY 2019 | |||||
United States | $ | 8,783 | $ | 8,561 | ||
Foreign | 947 | 674 | ||||
Total | $ | 9,730 | $ | 9,235 |
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The provision for income taxes for fiscal years 2020 and 2019 is as follows:
FY 2020 | FY 2019 | |||||||
Current Tax Provision: | ||||||||
Federal | $ | 630 | $ | 701 | ||||
State | 285 | 349 | ||||||
Foreign | 329 | 259 | ||||||
$ | 1,244 | $ | 1,309 | |||||
Deferred Tax (Benefit) Provision: | ||||||||
Federal | $ | 371 | $ | 926 | ||||
State | 77 | (63 | ) | |||||
Foreign | (29 | ) | (82 | ) | ||||
$ | 419 | $ | 781 | |||||
Provision for Income Taxes | $ | 1,663 | $ | 2,090 |
A reconciliation of the income tax provision computed by applying the statutory U.S. federal income tax rate and the income tax provision reflected in the Consolidated Statements of Income is as follows:
FY 2020 | FY 2019 | |||||||
Federal Income Tax at Statutory Rate | $ | 2,044 | $ | 1,939 | ||||
State Income Taxes, net of federal benefit | 294 | 213 | ||||||
Research and Development Credits | (97 | ) | (70 | ) | ||||
Tax Impact of Equity Awards | (876 | ) | (78 | ) | ||||
Other, net | 298 | 86 | ||||||
Total | $ | 1,663 | $ | 2,090 |
The components of net deferred tax assets (liabilities) are as follows:
March 28, | March 30, | |||||||
2020 | 2019 | |||||||
Deferred Tax Assets: | ||||||||
Accrued Liabilities | $ | 531 | $ | 285 | ||||
Lease Liabilities | 2,253 | - | ||||||
Performance-Based Stock Award Grants | 432 | 503 | ||||||
Inventory Reserves | 105 | 98 | ||||||
Non-Qualified Deferred Compensation Plan | 98 | 121 | ||||||
Post-Retirement Health Care Plans | 385 | 334 | ||||||
Stock-Based Compensation | 70 | 192 | ||||||
Capitalized Inventory Costs | 126 | 126 | ||||||
Other | 265 | 217 | ||||||
Total Deferred Tax Assets | $ | 4,265 | $ | 1,876 | ||||
Deferred Tax Liabilities: | ||||||||
Goodwill and Intangible Assets | $ | (1,162 | ) | $ | (1,087 | ) | ||
Right of Use Assets | (2,198 | ) | - | |||||
Depreciation | (3,858 | ) | (3,196 | ) | ||||
Other | (72 | ) | (43 | ) | ||||
Total Deferred Tax Liabilities | $ | (7,290 | ) | $ | (4,326 | ) | ||
Net Deferred Tax Liabilities | $ | (3,025 | ) | $ | (2,450 | ) |
The Company files income tax returns in the U.S. federal jurisdiction, various states and Canada. The Company is no longer subject to examination by U.S. federal income tax authorities for fiscal years 2016 and prior, by state tax authorities for fiscal years 2014 and prior, and by Canadian tax authorities for fiscal years 2013 and prior. There are no income tax years currently under examination by U.S. federal, or state income tax authorities. The examination of the Company’s Scientific Research and Experimental Development credit reflected on its Canadian corporation income tax return for the period ended March 31, 2018 was concluded in fiscal year 2020, resulting in an assessment of less than $0.1 million.
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During fiscal years 2020 and 2019, there were no uncertain tax positions. No interest or penalties related to uncertain tax positions were recognized in fiscal years 2020 and 2019 or were accrued at March 28, 2020 and March 30, 2019.
The Company’s effective tax rate for fiscal years 2020 and 2019 was 17.1% and 22.6%, respectively. Its tax rate is affected by recurring items, such as state income taxes and tax credits, which the Company expects to be fairly consistent in the near term. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. The discrete benefits related to share-based compensation awards in each of fiscal years 2020 and 2019 were $0.9 and $0.1 million, respectively.
The Company expects to receive certain federal, state and Canadian tax credits in future years. The Company also expects to receive discrete tax benefits related to share-based compensation awards in fiscal year 2021. As such, it expects its effective tax rate in fiscal year 2021 to be between 24.0% and 25.0%.
NOTE 5 – EMPLOYEE BENEFIT PLANS
Defined Contribution Plan. All of Transcat’s U.S. based employees are eligible to participate in a defined contribution plan, the Long-Term Savings and Deferred Profit Sharing Plan (the “Plan”), provided they meet certain qualifications. In fiscal years 2020 and 2019, the Company matched 50% of the first 6% of pay that eligible employees contribute to the Plan.
In the long-term savings portion of the Plan (the “401K Plan”), plan participants are entitled to a distribution of their vested account balance upon termination of employment or retirement. Plan participants are fully vested in their contributions while Company contributions are fully vested after three years of service. The Company’s matching contributions to the 401K Plan were approximately $0.9 million and $0.8 million in fiscal years 2020 and 2019, respectively.
In the deferred profit sharing portion of the Plan, Company contributions are made at the discretion of the board of directors. The Company made no profit sharing contributions in fiscal years 2020 and 2019.
Employee Stock Purchase Plan. The Company has an Employee Stock Purchase Plan (the “ESPP”) that allows for eligible employees as defined in the ESPP to purchase common shares of the Company through payroll deductions at a price that is 85% of the closing market price on the second last business day of each calendar month (the “Investment Date”). 650,000 shares can be purchased under the ESPP. The difference between the closing market price on the Investment Date and the price paid by employees is recorded as a general and administrative expense in the accompanying Consolidated Statements of Income. The expense related to the ESPP was less than $0.1 million in each of fiscal years 2020 and 2019.
Non-Qualified Deferred Compensation Plan. The Company has available a non-qualified deferred compensation plan (the “NQDC Plan”) for directors and officers. Participants are fully vested in their contributions. At its discretion, the Company may elect to match employee contributions, subject to legal limitations in conjunction with the 401K Plan, which fully vest after three years of service. During fiscal years 2020 and 2019, the Company did not match any employee contributions. Participant accounts are adjusted to reflect performance, whether positive or negative, of selected investment options chosen by each participant during the deferral period. In the event of bankruptcy, the assets of the NQDC Plan are available to satisfy the claims of the Company’s general creditors. The liability for compensation deferred under the NQDC Plan was $0.4 million and $0.5 million as of March 28, 2020 and March 30, 2019, respectively, and is included as a component of other liabilities (non-current) on the Consolidated Balance Sheets.
Post-retirement Health Care Plans. The Company has a defined benefit post-retirement health care plan which provides long-term care insurance benefits, medical and dental insurance benefits and medical premium reimbursement benefits to eligible retired corporate officers and their eligible spouses (the “Officer Plan”).
The change in the post-retirement benefit obligation is as follows:
FY 2020 | FY 2019 | |||||||
Post-retirement benefit obligation, at beginning of fiscal year | $ | 1,311 | $ | 1,153 | ||||
Service cost | 77 | 40 | ||||||
Interest cost | 48 | 44 | ||||||
Benefits paid | (98 | ) | (86 | ) | ||||
Actuarial loss | 171 | 160 | ||||||
Post-retirement benefit obligation, at end of fiscal year | 1,509 | 1,311 | ||||||
Fair value of plan assets, at end of fiscal year | - | - | ||||||
Funded status, at end of fiscal year | $ | (1,509 | ) | $ | (1,311 | ) | ||
Accumulated post-retirement benefit obligation, at end of fiscal year | $ | 1,509 | $ | 1,311 |
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The accumulated post-retirement benefit obligation is included as a component of other liabilities (non-current) in the Consolidated Balance Sheets. The components of net periodic post-retirement benefit cost and other amounts recognized in other comprehensive income are as follows:
FY 2020 | FY 2019 | |||||||
Net periodic post-retirement benefit cost: | ||||||||
Service cost | $ | 77 | $ | 40 | ||||
Interest cost | 48 | 44 | ||||||
Amortization of prior service cost | 1 | 1 | ||||||
126 | 85 | |||||||
Benefit obligations recognized in other comprehensive income: | ||||||||
Amortization of prior service cost | (1 | ) | (1 | ) | ||||
Net gain | 113 | 171 | ||||||
112 | 170 | |||||||
Total recognized in net periodic benefit cost and other comprehensive income | $ | 238 | $ | 255 | ||||
Amount recognized in accumulated other comprehensive income, at end of fiscal year: | ||||||||
Unrecognized prior service cost | $ | 518 | $ | 405 |
The prior service cost is amortized over the average remaining life expectancy of active participants in the Officer Plan. The estimated prior service cost that will be amortized from accumulated other comprehensive income into net periodic post-retirement benefit cost during fiscal year 2020 is less than $0.1 million.
The post-retirement benefit obligation was computed by an independent third-party actuary. Assumptions used to determine the post-retirement benefit obligation and the net periodic postretirement benefit cost were as follows:
March 28, | March 30, | |||
2020 | 2019 | |||
Weighted average discount rate | 3.3% | 3.8% | ||
Medical care cost trend rate: | ||||
Trend rate assumed for next year | 6.8% | 8.5% | ||
Ultimate trend rate | 3.8% | 6.0% | ||
Year that rate reaches ultimate trend rate | 2075 | 2025 | ||
Dental care cost trend rate: | ||||
Trend rate assumed for next year and remaining at that level thereafter | 3.5% | 5.0% |
Benefit payments are funded by the Company as needed. Payments toward the cost of a retiree’s medical and dental coverage are initially determined as a percentage of a base coverage plan in the year of retirement and are limited to increase at a rate of no more than 50% of the annual increase in medical and dental costs, as defined in the plan document. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
Fiscal | |||
Year | Amount | ||
2021 | $ | 136 | |
2022 | 145 | ||
2023 | 129 | ||
2024 | 108 | ||
2025 | 99 | ||
Thereafter | $ | 892 |
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Increasing the assumed health care cost trend rate by one percentage point would increase the accumulated post-retirement benefit obligation and the annual net periodic post-retirement benefit cost by $0.1 million. A one percentage point decrease in the healthcare cost trend would decrease the accumulated post-retirement benefit obligation and the annual net periodic post-retirement benefit cost by $0.1 million.
NOTE 6 – STOCK-BASED COMPENSATION
The Company has a share-based incentive plan (the “2003 Plan”) that 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 March 28, 2020, 1.0 million restricted stock units or stock options were available for future grant under the 2003 Plan.
The Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete benefits related to share-based compensation awards in fiscal years 2020 and 2019 were $0.9 million and $0.1 million, respectively.
Restricted Stock: The Company grants time-based and performance-based restricted stock units as a component of executive and key employee compensation. Expense for restricted stock 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 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.
Beginning in fiscal year 2020, the annual performance-based award for the Company’s non-employee directors was replaced with an annual grant of restricted stock units valued at $50,000 that vest after one year. The restricted stock unit grants to non-employee directors were made in September 2019.
Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the number of units 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.
During fiscal year 2020, 47,000 shares granted were time vested and 28,000 shares were subject to performance targets. During fiscal year 2019, 42,000 shares granted were time vested and 30,000 shares were subject to performance targets.
The following table summarizes the restricted stock units vested and shares issued during fiscal years 2020 and 2019 (amounts in thousands):
Grant | |||||||||||||
Total | Date | Number | |||||||||||
Number | Fair | Target | Of | Date | |||||||||
Date | Measurement | of Units | Value | Level | Shares | Shares | |||||||
Granted | Period | Granted | Per Unit | Achieved | Issued | Issued | |||||||
April 2015 | April 2015 – March 2018 | 63 | $ | 9.59 | 50% | 32 | May 2018 | ||||||
June 2017 | June 2017 – May 2018 | 1 | $ | 12.00 | Time Vested | 1 | June 2018 | ||||||
January 2019 | January 2019 | 1 | $ | 19.04 | Time Vested | 1 | January 2019 | ||||||
April 2018 | April 2018 – March 2019 | 1 | $ | 15.65 | Time Vested | 1 | April 2019 | ||||||
April 2016 | April 2016 – March 2019 | 82 | $ | 10.13 | 131% | 107 | May 2019 | ||||||
June 2017 | June 2017 – May 2019 | 1 | $ | 12.00 | Time Vested | 1 | June 2019 | ||||||
October 2018 | October 2018 – September 2019 | 1 | $ | 20.81 | Time Vested | 1 | October 2019 |
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The following table summarizes the non-vested restricted stock units outstanding as of March 28, 2020:
Total | Grant Date | Estimated | |||||||
Number | Fair | Level of | |||||||
Date | Measurement | of Units | Value | Achievement at | |||||
Granted | Period | Granted | Per Unit | March 28, 2020 | |||||
April 2017 | April 2017 – March 2020 | 62 | $ | 12.90 | 79% of target level | ||||
April 2018 | April 2018 – March 2020 | 1 | $ | 15.65 | Time Vested | ||||
May 2018 | April 2018 – March 2021 | 23 | $ | 15.30 | 90% of target level | ||||
May 2018 | April 2018 – March 2021 | 24 | $ | 15.30 | Time Vested | ||||
October 2018 | October 2018 – September 2027 | 9 | $ | 20.81 | Time Vested | ||||
May 2019 | April 2019 – March 2022 | 24 | $ | 23.50 | 90% of target level | ||||
May 2019 | April 2019 – March 2022 | 24 | $ | 23.50 | Time Vested | ||||
August 2019 | August 2019 – July 2020 | 1 | $ | 23.00 | Time Vested | ||||
September 2019 | September 2019 – September 2020 | 18 | $ | 22.77 | Time Vested |
Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $0.8 million and $1.1 million in fiscal years 2020 and 2019, respectively. Unearned compensation totaled $1.3 million as of March 28, 2020.
Stock Options: The Company grants stock options to employees and directors 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-lined 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.
During fiscal year 2020, the Company’s Board of Directors granted an option for 5,000 shares of common stock to a Company employee that vest over three years, and an option for 10,000 shares of common stock to a new member of the Board of Directors that vest over 5 years. During fiscal year 2019, the Company’s Board of Directors granted stock options for 25,000 shares of common stock to Company employees. 5,000 shares pursuant to these options immediately vested. 20,000 shares pursuant to these options vest over five years. The expense related to all stock option awards was $0.1 million in each of fiscal year 2020 and 2019.
The following table summarizes the Company’s options for fiscal years 2020 and 2019:
Weighted | Weighted | ||||||||||
Average | Average | ||||||||||
Number | Exercise | Remaining | Aggregate | ||||||||
Of | Price Per | Contractual | Intrinsic | ||||||||
Shares | Share | Term (in Years) | Value | ||||||||
Outstanding as of March 31, 2018 | 272 | $ | 10.27 | ||||||||
Granted | 25 | 19.95 | |||||||||
Exercised | (2 | ) | 9.66 | ||||||||
Forfeited | (4 | ) | 6.75 | ||||||||
Outstanding as of March 30, 2019 | 291 | 11.16 | |||||||||
Granted | 15 | 25.06 | |||||||||
Exercised | (156 | ) | 9.16 | ||||||||
Forfeited | - | - | |||||||||
Outstanding as of March 28, 2020 | 150 | 14.63 | 4 | $ | 1,619 | ||||||
Exercisable as of March 28, 2020 | 115 | $ | 12.20 | 3 | $ | 1,514 |
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 fiscal year 2020 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 March 28, 2020. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.
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Total unrecognized compensation cost related to non-vested stock options as of March 28, 2020 was $0.2 million, which is expected to be recognized over a period of five years. The aggregate intrinsic value of stock options exercised in fiscal years 2020 and 2019 was $2.5 million and less than $0.1 million, respectively. Cash received from the exercise of options in fiscal years 2020 and 2019 was $1.4 million and less than $0.1 million, respectively.
NOTE 7 – SEGMENT AND GEOGRAPHIC DATA
Transcat has two reportable segments: Distribution and Service. The accounting policies of the reportable segments are described above in Note 1. The Company has no inter-segment sales. The following table presents segment and geographic data for fiscal years 2020 and 2019:
FY 2020 | FY 2019 | |||||
Revenue: | ||||||
Service | $ | 93,003 | $ | 84,041 | ||
Distribution | 80,096 | 76,857 | ||||
Total | 173,099 | 160,898 | ||||
Gross Profit: | ||||||
Service | 23,486 | 20,945 | ||||
Distribution | 18,992 | 18,398 | ||||
Total | 42,478 | 39,343 | ||||
Operating Expenses: | ||||||
Service (1) | 17,814 | 15,743 | ||||
Distribution (1) | 13,814 | 13,371 | ||||
Total | 31,628 | 29,114 | ||||
Operating Income: | ||||||
Service | 5,672 | 5,202 | ||||
Distribution | 5,178 | 5,027 | ||||
Total | 10,850 | 10,229 | ||||
Unallocated Amounts: | ||||||
Interest and Other Expense, net | 1,120 | 994 | ||||
Provision for Income Taxes | 1,663 | 2,090 | ||||
Total | 2,783 | 3,084 | ||||
Net Income | $ | 8,067 | $ | 7,145 | ||
Total Assets: | ||||||
Service | $ | 67,023 | $ | 58,373 | ||
Distribution | 47,952 | 43,378 | ||||
Unallocated | 13,147 | 3,479 | ||||
Total | $ | 128,122 | $ | 105,230 | ||
Depreciation and Amortization (2): | ||||||
Service | $ | 4,930 | $ | 4,754 | ||
Distribution | 1,729 | 1,607 | ||||
Total | $ | 6,659 | $ | 6,361 | ||
Capital Expenditures: | ||||||
Service | $ | 3,974 | $ | 3,880 | ||
Distribution | 2,605 | 3,118 | ||||
Total | $ | 6,579 | $ | 6,998 | ||
Geographic Data: | ||||||
Revenues to Unaffiliated Customers (3): | ||||||
United States (4) | $ | 157,744 | $ | 145,576 | ||
Canada | 13,827 | 13,484 | ||||
Other International | 1,528 | 1,838 | ||||
Total | $ | 173,099 | $ | 160,898 | ||
Property and Equipment: | ||||||
United States (4) | $ | 18,672 | $ | 18,574 | ||
Canada | 2,161 | 1,079 | ||||
Total | $ | 20,833 | $ | 19,653 |
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(1) |
Operating expense allocations between segments are based on actual amounts, a percentage of revenues, headcount, and management’s estimates. |
(2) |
Including amortization of catalog costs and intangible assets. |
(3) |
Revenues are attributed to the countries based on the destination of a product shipment or the location where service is rendered. |
(4) |
United States includes Puerto Rico. |
NOTE 8 – COMMITMENTS
Leases: Transcat leases facilities, equipment, and vehicles under various non-cancelable operating leases. Total rental expense was approximately $3.7 million and $3.4 million in fiscal years 2020 and 2019, respectively. The minimum future annual rental payments under the non-cancelable leases at March 28, 2020 are as follows (in millions):
Fiscal Year | |||
2020 | $ | 3.2 | |
2021 | 2.7 | ||
2022 | 2.2 | ||
2023 | 1.8 | ||
2024 | 1.3 | ||
Thereafter | 4.1 | ||
Total minimum lease payments | $ | 15.3 |
Effective December 2018, the Company has term loan repayments (principal plus interest) of $0.2 million per month through December 2025. These amounts are not reflected in the table above.
NOTE 9 – BUSINESS ACQUISITIONS
TTE: Effective, February 21, 2020, Transcat acquired substantially all of the assets of TTE Laboratories, Inc. (“TTE") a Boston, MA-based provider of pipette calibration services and equipment. 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. TTE’s focus on pipettes complements the current offerings Transcat provides to the life science sector.
The Company applies the acquisition method of accounting for business acquisitions. Under the acquisition method, the purchase price of an acquisition is assigned to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The Company uses a valuation hierarchy, as further described under Fair Value of Financial Instruments in Note 1 above, and typically utilizes independent third-party valuation specialists to determine the fair values used in this allocation. Purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. 75% of the goodwill and intangible assets relating to the TTE acquisition has been allocated to the Service segment with the remaining 25% allocated to the Distribution segment. Intangible assets related to the TTE acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to 10 years and are deductible for tax purposes. Amortization of goodwill related to the TTE acquisition is deductible for tax purposes only.
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The total purchase price paid for the assets of TTE was approximately $12.2 million. $1.2 million of the purchase price has been put into escrow as a holdback for indemnification claims, if any. The following is a preliminary summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of TTE’s assets and liabilities acquired during the period presented:
FY 2020 | |||||
Goodwill | $ | 6,779 | |||
Intangible Assets – Customer Base & Contracts | 4,410 | ||||
Intangible Assets – Covenant Not to Compete | 120 | ||||
11,309 | |||||
Plus: | Current Assets | 939 | |||
Non-Current Assets | 261 | ||||
Less: | Current Liabilities | (278 | ) | ||
Total Purchase Price | $ | 12,231 |
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 acquisition of TTE had occurred at the beginning of fiscal year 2020 and fiscal year 2019. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transaction had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods.
(Unaudited) | ||||||
Fiscal Years Ended | ||||||
March 28, | March 30, | |||||
2020 | 2019 | |||||
Total Revenue | $ | 180,053 | $ | 168,008 | ||
Net Income | $ | 8,560 | $ | 7,670 | ||
Basic Earnings Per Share | $ | 1.17 | $ | 1.07 | ||
Diluted Earnings Per Share | $ | 1.14 | $ | 1.02 |
IIS: Effective July 19, 2019, Transcat acquired Infinite Integral Solutions Inc. (“IIS”). IIS, headquartered in Mississauga, Ontario, Canada, is the owner and developer of the CalTree™ suite of software solutions for the automation of calibration procedures and datasheet generation. Total consideration for the shares of IIS was 1.4 million Canadian dollars, subject in part to the achievement of certain milestones. 1.0 million Canadian dollars was paid during fiscal year 2020 and is included as a business acquisition in the Consolidated Statement of Cash Flows. 1.0 million Canadian dollars has been allocated to software and property and equipment and 0.3 million Canadian has been allocated to goodwill. Due to the immaterial amount of pre-acquisition revenue and expenses, no pro forma table of results has been presented.
GRS: Effective April 1, 2019, Transcat acquired substantially all of the assets of Gauge Repair Service (“GRS”), a California-based provider of calibration services. This transaction leveraged the Company’s infrastructure while also increasing the depth and breadth of the Company’s service capabilities. Due to the immaterial amount of the purchase price of the GRS assets, it has been included in the purchases of property and equipment in the Consolidated Statement of Cash Flows.
Angel’s: Effective August 31, 2018, Transcat acquired substantially all of the assets of Angel’s Instrumentation, Inc. (“Angel’s”), a Virginia-based provider of calibration services. This transaction expanded the Company’s geographic reach while also increasing the depth and breadth of the Company’s service capabilities.
The Company applies the acquisition method of accounting for business acquisitions. Under the acquisition method, the purchase price of an acquisition is assigned to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The Company uses a valuation hierarchy, as further described under Fair Value of Financial Instruments in Note 1 above, and typically utilizes independent third-party valuation specialists to determine the fair values used in this allocation. Purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. All of the goodwill and intangible assets relating to the Angel’s acquisition have been allocated to the Service segment. Intangible assets related to the Angel’s acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to 10 years and are deductible for tax purposes. Amortization of goodwill related to the Angel’s acquisition is deductible for tax purposes only.
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The total purchase price paid for the assets of Angel’s was approximately $4.7 million, net of $0.1 million cash acquired. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Angel’s assets and liabilities acquired during the period presented:
FY 2019 | |||||
Goodwill | $ | 1,902 | |||
Intangible Assets – Customer Base & Contracts | 1,470 | ||||
Intangible Assets – Covenant Not to Compete | 130 | ||||
3,502 | |||||
Plus: | Current Assets | 786 | |||
Non-Current Assets | 473 | ||||
Less: | Current Liabilities | (24 | ) | ||
Total Purchase Price | $ | 4,737 |
Certain of the Company’s acquisition agreements, including Angel’s, 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 March 28, 2020, there were no unpaid contingent consideration or holdback amounts reflected in the Consolidated Balance Sheets. $0.9 million of holdback amounts were paid during fiscal year 2020. As of March 30, 2019, $0.4 million of contingent consideration and $0.5 million of other holdback amounts were unpaid and reflected in current liabilities on the Consolidated Balance Sheets. During fiscal year 2019, $0.3 million of contingent consideration or other holdbacks were paid.
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 acquisition of Angel’s had occurred at the beginning of fiscal year 2019. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transaction had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods.
(Unaudited) | |||
Fiscal Years | |||
Ended | |||
March 30, | |||
2019 | |||
Total Revenue | $ | 163,039 | |
Net Income | $ | 7,725 | |
Basic Earnings Per Share | $ | 1.07 | |
Diluted Earnings Per Share | $ | 1.03 |
NBS: Effective June 12, 2018, Transcat acquired substantially all of the assets of NBS Calibration, Inc. (“NBS”), an Arizona-based provider of calibration services. This transaction aligned with the Company’s acquisition strategy of targeting businesses that expand the Company’s geographic reach and leverage its infrastructure while also increasing the depth and breadth of the Company’s service capabilities. Due to the immaterial amount of the purchase price of the NBS assets, it has been included in the purchases of property and equipment, net, in the consolidated statement of cash flows.
During fiscal year 2020, acquisition costs of $0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income. During fiscal year 2019, acquisition costs of less than $0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.
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NOTE 10 – QUARTERLY DATA (Unaudited)
The following table presents a summary of certain unaudited quarterly financial data for fiscal years 2020 and 2019:
Basic | Diluted | ||||||||||||||
Total | Gross | Net | Earnings | Earnings | |||||||||||
Revenues | Profit | Income | Per Share (a) | Per Share (a) | |||||||||||
FY 2020: | |||||||||||||||
Fourth Quarter | $ | 45,762 | $ | 12,053 | $ | 2,493 | $ | 0.34 | $ | 0.33 | |||||
Third Quarter | 43,179 | 9,928 | 1,477 | 0.20 | 0.20 | ||||||||||
Second Quarter | 41,763 | 10,445 | 2,379 | 0.32 | 0.32 | ||||||||||
First Quarter | 42,395 | 10,052 | 1,718 | 0.24 | 0.23 | ||||||||||
FY 2019: | |||||||||||||||
Fourth Quarter | $ | 44,493 | $ | 11,543 | $ | 2,660 | $ | 0.37 | $ | 0.35 | |||||
Third Quarter | 40,868 | 9,548 | 1,569 | 0.22 | 0.21 | ||||||||||
Second Quarter | 38,879 | 9,139 | 1,488 | 0.21 | 0.20 | ||||||||||
First Quarter | 36,658 | 9,113 | 1,428 | 0.20 | 0.19 |
(a) | Earnings per share calculations for each quarter include the weighted average effect of stock issuances and common stock equivalents for the quarter; therefore, the sum of quarterly earnings per share amounts may not equal full-year earnings per share amounts, which reflect the weighted average effect on an annual basis. Diluted earnings per share calculations for each quarter include the effect of stock options and non-vested restricted stock units, when dilutive to the quarter. In addition, basic earnings per share and diluted earnings per share may not add due to rounding. |
NOTE 11 SUBSEQUENT EVENT
On May 18, 2020, the Company entered into the Amended and Restated Credit Facility Agreement Amendment 2 (“Amendment Two”) with Manufacturers and Traders Trust Company that amended the Company’s Credit Agreement. Amendment Two extended the term of the Revolving Credit Facility to October 20, 2022 and increased the Revolving Credit Commitment to $40 million.
Amendment Two modified the definition of 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 amended the definition of Restricted Payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain tax obligations and added certain restrictions to the Company’s ability to repurchase its shares and pay dividends. Amendment Two modified the Leverage Ratio and Fixed Charge Coverage Ratio covenants with which the Company is required to comply and limited Capital Expenditures to $5.5 million for the fiscal year ending March 27, 2021. Amendment Two also established a LIBOR floor of 1% and included a mechanism for adoption of a different benchmark rate in the event LIBOR is discontinued.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) 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, (“Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this 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.
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(b) Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed 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 in the United States of America. In designing and evaluating our internal control system, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives and that the effectiveness of any system has inherent limitations including, but not limited to, the possibility of human error and the circumvention or overriding of controls and procedures. Management, including the principal executive officer and the principal financial officer, is required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected in a timely manner.
An evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our procedures and internal control over financial reporting using the framework and criteria described in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management, including our principal executive officer and our principal financial officer, concluded that our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles as of March 28, 2020.
This annual report includes an attestation report of our independent registered public accounting firm, Freed Maxick CPAs, P.C., regarding internal control over financial reporting.
(c) 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 annual report (our fourth fiscal quarter) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is incorporated herein by reference from our proxy statement for our 2020 Annual Meeting of Shareholders under the headings “Proposal One: Election of Directors,” “Corporate Governance,” and “Executive Officers and Senior Management,” which proxy statement will be filed pursuant to Regulation 14A within 120 days after the March 28, 2020 fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference from our proxy statement for our 2020 Annual Meeting of Shareholders under the headings “Executive Compensation” and “Director Compensation,” which proxy statement will be filed pursuant to Regulation 14A within 120 days after the March 28, 2020 fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
With the exception of the information presented in the table below, the information required by this Item 12 is incorporated herein by reference from our proxy statement for our 2020 Annual Meeting of Shareholders under the headings “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management,” which proxy statement will be filed pursuant to Regulation 14A within 120 days after the March 28, 2020 fiscal year end.
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Securities Authorized for Issuance Under Equity Compensation Plans as of March 28, 2020:
Equity Compensation Plan Information | |||||||||
(In Thousands, Except Per Share Amounts) | |||||||||
Number of securities | |||||||||
Number of securities | remaining available | ||||||||
to be issued | Weighted average | for future issuance under | |||||||
upon exercise of | exercise price of | equity compensation plans | |||||||
outstanding options, | outstanding options, | (excluding securities | |||||||
Plan category | warrants and rights | warrants and rights | reflected in column (a)) | ||||||
(a) | (b) | (c) | |||||||
Equity compensation plans | |||||||||
approved by security holders | 150 | (1) | $ | 14.63 | (2) | 970 | |||
Equity compensation plans | |||||||||
not approved by security holders | - | - | - | ||||||
Total | 150 | (1) | $ | 14.63 | (2) | 970 |
(1) | Includes performance-based restricted stock units granted to officers and key employees pursuant to our 2003 Incentive Plan. See Note 6 to our Consolidated Financial Statements in Item 8 of Part II. | |
(2) | Does not include restricted stock units. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated herein by reference from our proxy statement for our 2020 Annual Meeting of Shareholders under the headings “Corporate Governance” and “Certain Relationships and Related Transactions,” which proxy statement will be filed pursuant to Regulation 14A within 120 days after the March 28, 2020 fiscal year end.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated herein by reference from our proxy statement for our 2020 Annual Meeting of Shareholders under the heading “Proposal Three: Ratification of Selection of our Independent Registered Public Accounting Firm,” which proxy statement will be filed pursuant to Regulation 14A within 120 days after the March 28, 2020 fiscal year end.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) | See Index to Financial Statements included in Item 8 of Part II of this report. |
(b) | Exhibits. |
Index to Exhibits
60
61
(21) | Subsidiaries of the registrant | ||
* | 21.1 | Subsidiaries | |
(23) | Consents of experts and counsel | ||
* | 23.1 | Consent of Freed Maxick CPAs, P.C. | |
(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 | ||
____________________ | |||
* | Exhibit filed with this report. | ||
# | Management contract or compensatory plan or arrangement. |
62
Pursuant to the requirements of Section 13 or 15(d) 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: | June 8, 2020 | /s/ Lee D. Rudow | |
By: | Lee D. Rudow | ||
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date | Signature | Title | ||
June 8, 2020 | /s/ Lee D. Rudow | Director, President and Chief Executive Officer | ||
Lee D. Rudow | (Principal Executive Officer) | |||
June 8, 2020 | /s/ Michael J Tschiderer | Vice President of Finance and | ||
Michael J. Tschiderer | Chief Financial Officer | |||
(Principal Financial Officer) | ||||
June 8, 2020 | /s/ Scott D. Deverell | Controller and Principal Accounting Officer | ||
Scott D. Deverell | (Principal Accounting Officer) | |||
June 8, 2020 | /s/ Charles P. Hadeed | Chairman of the Board of Directors | ||
Charles P. Hadeed | ||||
June 8, 2020 | /s/ Oksana Dominach | Director | ||
Oksana Dominach | ||||
June 8, 2020 | /s/ Richard J. Harrison | Director | ||
Richard J. Harrison | ||||
June 8, 2020 | /s/ Gary J. Haseley | Director | ||
Gary J. Haseley | ||||
June 8, 2020 | /s/ Paul D. Moore | Director | ||
Paul D. Moore | ||||
June 8, 2020 | /s/ Angela J. Panzarella | Director | ||
Angela J. Panzarella | ||||
June 8, 2020 | /s/ Alan H. Resnick | Director | ||
Alan H. Resnick | ||||
June 8, 2020 | /s/ Carl E. Sassano | Director | ||
Carl E. Sassano | ||||
June 8, 2020 | /s/ John T. Smith | Director | ||
John T. Smith |
63
Exhibit 10.20
ASSET PURCHASE AGREEMENT
by and among
TRANSCAT, INC.,
TTE LABORATORIES, INC.
BENJAMIN LEVERONE
and
MICHAEL ANEMA
Dated as of February 21, 2020
Table of Contents
Article I Definitions | 1 | |||
1.1 | Definitions | 1 | ||
1.2 | Accounting Terms | 7 | ||
1.3 | Other Definitional Provisions | 7 | ||
Article II Purchase and Sale | 7 | |||
2.1 | Transfer of Purchased Assets | 7 | ||
2.2 | Excluded Assets | 9 | ||
2.3 | Use of Seller’s Name and Phone Numbers | 9 | ||
2.4 | Purchase Price | 9 | ||
2.5 | Payment of Purchase Price | 9 | ||
2.6 | Adjustment to Purchase Price | 10 | ||
2.7 | Escrow | 11 | ||
2.8 | Repayment of Indebtedness | 12 | ||
2.9 | Payment of Transaction Expenses | 12 | ||
Article III Liabilities and Contracts | 12 | |||
3.1 | No Assumption of Liabilities or Contracts | 12 | ||
3.2 | Liabilities Assumed | 12 | ||
Article IV Seller’s and Shareholders’ Representations and Warranties | 13 | |||
4.1 | Organization, Standing and Power | 13 | ||
4.2 | Authority for Transaction | 13 | ||
4.3 | No Conflict | 13 | ||
4.4 | Financial Statements | 14 | ||
4.5 | No Undisclosed Liabilities | 14 | ||
4.6 | Absence of Certain Changes | 15 | ||
4.7 | Title | 15 | ||
4.8 | Compliance with Laws; Permits | 15 | ||
4.9 | Condition and Sufficiency of Purchased Assets | 16 | ||
4.10 | Privacy Laws and Data Protection | 16 | ||
4.11 | Accounts Receivable | 17 | ||
4.12 | Inventory | 17 | ||
4.13 | Intellectual Property | 17 | ||
4.14 | Assigned Contracts | 18 | ||
4.15 | Other Contracts | 19 | ||
4.16 | Legal Proceedings | 19 | ||
4.17 | Tax Matters | 19 | ||
4.18 | Insurance | 19 | ||
4.19 | Labor Relations and Employment Issues | 20 | ||
4.20 | Employee Benefits | 21 | ||
4.21 | Environmental Matters | 23 | ||
4.22 | Real Property | 23 | ||
4.23 | Product and Service Warranties | 24 | ||
4.24 | Relationship with Customers and Suppliers | 24 | ||
4.25 | Officers, Directors and Shareholders | 25 | ||
4.26 | Brokers and Finders | 25 | ||
4.27 | Material Misstatements or Omissions | 25 |
i
Article V Buyer’s Representations and Warranties | 25 | |||
5.1 | Organization, Standing and Power | 25 | ||
5.2 | Authority for Transaction | 25 | ||
5.3 | No Conflict | 25 | ||
5.4 | Legal Proceedings | 26 | ||
5.5 | Brokers and Finders | 26 | ||
5.6 | Solvency | 26 | ||
5.7 | Financial Capacity | 26 | ||
5.8 | Material Misstatements or Omissions | 26 | ||
Article VI Survival and Indemnification | 27 | |||
6.1 | Survival or Representations, Warranties and Covenants | 27 | ||
6.2 | Indemnification by Seller and Shareholders | 27 | ||
6.3 | Indemnification by Buyer | 28 | ||
6.4 | Limitations | 28 | ||
6.5 | Indemnification Claim Procedures | 29 | ||
6.6 | Recoupment Against Escrow | 31 | ||
6.7 | Tax Treatment of Indemnification Payments | 31 | ||
6.8 | Effect of Investigation | 31 | ||
Article VII Closing | 32 | |||
7.1 | Closing | 32 | ||
7.2 | Closing Deliveries of Seller and Shareholders | 32 | ||
7.3 | Closing Deliveries of Buyer | 33 | ||
Article VIII Further Covenants | 34 | |||
8.1 | Taxes | 34 | ||
8.2 | Expenses of the Parties | 34 | ||
8.3 | Confidentiality | 34 | ||
8.4 | Non-Disclosure; Non-Solicitation and Non-Competition | 34 | ||
8.5 | Consulting Agreements | 35 | ||
8.6 | Notices to and Consents of Third Parties | 35 | ||
8.7 | Further Assurances | 35 | ||
8.8 | Employees and COBRA Compliance | 36 | ||
8.9 | Uncollected Receivables | 36 | ||
Article IX General Provisions | 37 | |||
9.1 | Amendment and Waiver | 37 | ||
9.2 | Assignment | 37 | ||
9.3 | Notices | 37 | ||
9.4 | Binding Effect | 38 | ||
9.5 | Governing Law; Venue | 38 | ||
9.6 | Effect of Agreement | 38 | ||
9.7 | Severability | 38 | ||
9.8 | Negotiated Transaction | 38 | ||
9.9 | Headings; Counterparts | 38 |
ii
Asset Purchase Agreement
This Asset Purchase Agreement, dated as of February 21, 2020 is made by and among Transcat, Inc., an Ohio corporation (“Buyer”), TTE Laboratories, Inc, a Massachusetts corporation (“Seller”), and Benjamin Leverone and Michael Anema (each, a “Shareholder” and, collectively, “Shareholders”). Buyer, Seller and Shareholders are collectively referred to herein as the “Parties”, and each is a “Party.”
RECITALS:
A. Seller wishes to sell, transfer and assign to Buyer, and Buyer wishes to purchase from Seller, the Purchased Assets (as defined in Section 1.1), subject to the terms and conditions set forth in this Agreement.
B. Shareholders are all of the shareholders of Seller and collectively own, in the aggregate, 100% of the issued and outstanding capital stock of Seller.
NOW, THEREFORE, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. As used in this Agreement and, unless the context requires otherwise, in each other agreement, document or instrument delivered under or in connection with this Agreement:
“Accounting Referee” shall have the meaning set forth in Section 2.6(b).
“Accounts Receivable” has the meaning given to it in Section 2.1(d).
“Action” means any claim, action, cause of action, demand, lawsuit, arbitration, inquiry, audit, notice of violation, proceeding, litigation, citation, summons, subpoena or investigation of any nature, civil, criminal, administrative, regulatory or otherwise, whether at law or in equity.
“Adverse Effect” means, with respect to Seller, an effect in the condition (financial or otherwise), properties, assets, liabilities, rights, obligations, Business or prospects of Seller, which effect, individually or in the aggregate, is materially adverse to such condition, properties, assets, liabilities, rights, obligations, operations, Business or prospects of Seller, or which is materially adverse to Seller’s ability to consummate the transactions contemplated hereby.
“Affiliate” means, with respect to a Party, any Person that directly or indirectly controls, is controlled by, or under common control with, such Party.
“Agreement” means this Asset Purchase Agreement, together with all Exhibits and Schedules hereto.
“Anti-Corruption Laws” means the US Foreign Corrupt Practices Act and any other applicable anti-corruption Laws.
“Assigned Contracts” has the meaning given to it in Section 2.1(f).
“Assignment and Assumption Agreement” has the meaning given to it in Section 7.2(d).
“Assumed Liabilities” has the meaning given to it in Section 3.2.
“Balance Sheet Date” means December 31, 2019.
“Benefits Transition Period” has the meaning given to it in Section 8.8.
“Business” means Seller’s business of providing calibration and repair services for pipettes and other liquid handling devices, scales and balances, and related product sales.
“Buyer” has the meaning given to it in the preamble.
“Buyer Indemnified Parties” has the meaning given to it in Section 6.2
“Closing” means the closing of the purchase and sale hereunder.
“Closing Date” means the date of the Closing, as defined in Section 7.1.
“Closing Date Indebtedness” has the meaning given to it in Section 2.8.
“Closing Date Working Capital” means the value, as of the Closing, of the portion of the Purchased Assets which would be identified as current assets, less the aggregate amount of current Liabilities included in the Assumed Liabilities, all as determined in accordance with GAAP and in accordance with the terms and conditions of, and subject to the adjustments described in, Section 2.6 and Schedule 2.6.
“Closing Statement” has the meaning given to it in Section 2.4.
“COBRA” means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, Section 4980B of the Code, Title I Part 6 of ERISA, and any similar state group health plan continuation Law.
“Code” means the Internal Revenue Code of 1986, as amended.
“Consulting Agreements” has the meaning given to it in Section 8.5.
“Contracts” means and includes all contracts, subcontracts, agreements, leases, options, notes, bonds, mortgages, indentures, deeds of trust, collateral assignments of lease and rights, guarantees, warranties, licenses, franchises, permits, purchase orders, arrangements, transactions, commitments, undertakings and understandings of every kind, written or oral.
“Customer” has the meaning given to it in Section 4.24.
“Deemed Acceptance” has the meaning given to it in Section 6.5(b).
“Dispute Notice” has the meaning given to it in Section 6.5(b).
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“Employee Benefit Plan” has the meaning given to it in Section 4.20.
“Encumbrances” means and includes all liens, options, pledges, mortgages, security interests, charges, adverse claims, rights, restrictions, burdens and encumbrances of every kind.
“Environmental Laws” means any applicable Law, and any Governmental Order or binding agreement with any Governmental Authority: (a) relating to pollution (or the cleanup thereof) or the protection of natural resources, endangered or threatened species, human health or safety, or the environment (including ambient air, soil, surface water or groundwater, or subsurface strata); or (b) concerning the presence of, exposure to, or the management, manufacture, use, containment, storage, recycling, reclamation, reuse, treatment, generation, discharge, transportation, processing, production, disposal or remediation of any Hazardous Substance.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
“ERISA Affiliate” means any Person that is a member of “controlled group of corporations” with, or is under “common control” with, or is a member of the same “affiliated service group” with Seller, as defined in Section 414 of the Code or is otherwise required to be aggregated with Seller under Section 414(o) of the Code.
“Escrow Amount” has the meaning given to it in Section 2.7.
“Escrow Period” means the period beginning on the Closing Date and ending on the first anniversary of the Closing Date.
“Estimated Adjusted Purchase Price” means (i) the Purchase Price, plus (ii) the amount, if any, by which the Estimated Closing Date Working Capital exceeds the Target Working Capital Ceiling, minus (iii) the amount, if any, by which the Estimated Closing Date Working Capital is less than the Target Working Capital Floor. For the avoidance of doubt, if the Estimated Closing Date Working Capital equals or exceeds the Target Working Capital Floor but is less than or equal to the Target Working Capital Ceiling, then there shall be no adjustment to the Purchase Price in respect of Estimated Closing Date Working Capital.
“Estimated Closing Date Working Capital” has the meaning given to it in Section 2.6(a).
“Excluded Assets” has the meaning given to it in Section 2.2.
“Existing Leases” has the meaning given to it in Section 4.22(b).
“Final Adjusted Purchase Price” means (i) the Purchase Price, plus (ii) the amount, if any, by which the Final Closing Date Working Capital exceeds the Target Working Capital Ceiling, minus (iii) the amount, if any, by which the Final Closing Date Working Capital is less than the Target Working Capital Floor. For the avoidance of doubt, if the Final Closing Date Working Capital equals or exceeds the Target Working Capital Floor but is less than or equal to the Target Working Capital Ceiling, then there shall be no adjustment to the Purchase Price in respect of Final Closing Date Working Capital.
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“Final Closing Date Working Capital” has the meaning given to it in Section 2.6(b).
“Final Resolution” has the meaning given to it in Section 6.6.
“Financial Statements” has the meaning given to it in Section 4.4.
"Fraud" shall mean an actual and intentional misrepresentation of fact with respect to the making of the representations and warranties set forth in Article IV (Seller’s and Shareholders’ Representations and Warranties) or Article V (Buyer’s Representations and Warranties), as applicable.
“Fundamental Cap” has the meaning given to it in Section 6.4(c).
“Fundamental Representation” has the meaning given to it in Section 6.1.
“GAAP” means, at any time, United States generally accepted accounting principles, methods and practices, consistently maintained and applied throughout the periods referenced.
“General Cap” has the meaning given to it in Section 6.4(c).
“Governmental Authority” means any federal, state, local or foreign government or political subdivision thereof, or any agency or instrumentality of such government or political subdivision, or any self-regulated organization or other non-governmental regulatory authority or quasi-governmental authority (to the extent that the rules, regulations or orders of such organization or authority have the force of Law), or any arbitrator, court or tribunal of competent jurisdiction.
“Governmental Order” means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.
“Government Official” means (i) any director, officer, employee, agent or representative (including anyone elected, nominated, or appointed to be an officer, employee, or representative) of any Governmental Authority, or anyone otherwise acting in an official capacity on behalf of a Governmental Authority; (ii) any candidate for public or political office; (iii) any royal or ruling family member; or (iv) any agent or representative of any of those persons listed in subcategories (i) through (iii).
“Hazardous Substance” means any (a) substance, gas, material or chemical which poses or may pose a hazard to human health or safety, (b) toxic substance or hazardous waste, substance or related material, or any pollutant or contaminant, or (c) asbestos, urea formaldehyde foam insulation, petroleum and petroleum by-products and which, in each case described above in (a), (b) and (c), is now subject to any Environmental Law.
“Indebtedness Repayment Amount” has the meaning given to it in Section 2.8.
“Indemnified Party” has the meaning given to it in Section 6.5(a).
“Indemnifying Party” has the meaning given to it in Section 6.5(a).
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“Intellectual Property” has the meaning given to it in Section 4.13(a).
“Inventory” has the meaning given to it in Section 2.1(c).
“IT Systems” has the meaning given to it in Section 4.13(g).
“Knowledge” means, with respect to an individual, the actual knowledge of such individual after due inquiry or, with respect to a Person that is not an individual, the actual knowledge of the officers and management of such Person after due inquiry.
“Law” means any statute, law, ordinance, regulation, rule, code, order, constitution, treaty, common law, judgment, decree, or other requirement of any Governmental Authority.
“Leased Real Property” has the meaning given to it in Section 4.22.
“Liability” means any liability, obligation, claim against or Contract of Seller of any kind or nature, at any time existing or asserted, whether or not accrued, whether fixed, contingent or otherwise, whether known or unknown, and whether or not recorded on the books and records of Seller, arising out of or by reason of this or any other transaction or event occurring prior or subsequent to the Closing.
“Losses” means losses, damages, liabilities, deficiencies, Actions, judgments, interest, awards, penalties, fines, costs or expenses of whatever kind, including reasonable attorneys’ fees and the cost of enforcing any right to indemnification hereunder.
“MFA Fee” has the meaning given to it in Section 2.9.
“MFA Securities” has the meaning given to it in Section 2.9.
“Notice of Claim” has the meaning given to it in Section 6.5(a).
“Ordinary Course of Business” means, with respect to Seller, the ordinary course of business consistent with Seller’s past custom and practice (including with respect to quantity and frequency).
“Party” or “Parties” have the meanings given to such terms in the preamble.
“Permits” means all permits, licenses, franchises, approvals, authorizations, registrations, certificates, variances and similar rights obtained, or required to be obtained, from Governmental Authorities.
“Person” means and includes any individual, partnership, corporation, trust, unincorporated organization or other entity or Government Authority.
“Personal Information” means the type of information regulated or subject to Privacy Laws and collected, used, disclosed or retained by Seller including information regarding Seller’s clients, customers, suppliers, employees, agents, dependent and independent contractors including an individual’s name, address, age, gender, identification or social insurance number, income, citizenship, employment, assets, liabilities, payment records, credit information, personal and professional references and health and/or medical records.
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“Privacy Laws” means all applicable Laws governing the collection, use, disclosure or retention of Personal Information.
“Pro Rata Share” means, with respect to each Shareholder, such Shareholder’s pro rata share of the outstanding capital stock of Seller as of the Closing Date, which are as follows: Benjamin Leverone - ninety five percent (95%); and Michael Anema - five percent (5%).
“Purchased Assets” means the assets being purchased and sold hereunder, as defined in Section 2.1.
“Purchased IP” has the meaning given to it in Section 4.13(b).
“Purchase Price” has the meaning given to it in Section 2.4.
“Purchase Price Allocation” has the meaning given to it in Section 2.4.
“Representative” means, with respect to any Person, any and all directors, officers, employees, consultants, financial advisors, counsel, accountants and other agents of such Person.
“Restrictive Covenant Agreement” has the meaning given to it in Section 8.4.
“Restrictive Covenant Payment” has the meaning given to it in Section 2.5(b).
“Seller” has the meaning given to it in the preamble.
“Seller Indemnified Parties” has the meaning given to it in Section 6.3.
“Shareholders” has the meaning given to it in the preamble.
“Solvent” shall mean, with respect to any Person, that (a) the fair saleable value of the property of such Person and its Subsidiaries is, on the date of determination, greater than the total amount of liabilities of such Person and its Subsidiaries as of such date, (b) such Person and its Subsidiaries are able to pay all liabilities of such Person and its Subsidiaries as such liabilities mature, and (c) such Person and its Subsidiaries do not have unreasonably small capital for conducting the business theretofore or proposed to be conducted by such Person and its Subsidiaries. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.
“Special Cap” has the meaning given to it in Section 6.4(c).
“Special Representation” has the meaning given to it in Section 6.1.
“Target Working Capital Ceiling” means $984,280.
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“Target Working Capital Floor” means $805,320.
“Tax Clearance Certificate” has the meaning given to it in Section 8.1(c).
“Taxes” means all federal, state, local, foreign and other income, gross receipts, sales, use, production, ad valorem, transfer, documentary, franchise, registration, profits, license, lease, service, service use, withholding, payroll, employment, unemployment, estimated, excise, severance, environmental, stamp, occupation, premium, property (real or personal), real property gains, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties.
“Tax Return” means any return, declaration, report, claim for refund, information return or statement or other document relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.
“Third Party Action” has the meaning given to it in Section 6.5(d).
“Threshold” has the meaning given to it in Section 6.4(d).
“Transaction Documents” means this Agreement, the Escrow Agreement, the Consulting Agreements, the Restrictive Covenant Agreement, the Assignment and Assumption Agreement, the bill of sale and the other agreements and instruments required to be delivered at the Closing pursuant to Section 7.2 or Section 7.3.
1.2 Accounting Terms. As used in this Agreement and, unless the context requires otherwise, in each other agreement, document or instrument delivered under or in connection with this Agreement, all accounting terms not otherwise defined herein or therein shall have the meanings assigned to them in accordance with GAAP.
1.3 Other Definitional Provisions. Unless the context requires otherwise, references to “Articles” and “Sections” are to the Articles or Sections of this Agreement, and references to “Exhibits” and “Schedules” are to the Exhibits and Schedules annexed hereto. Any of the terms defined in this Article I may, unless the context requires otherwise, be used in the singular or the plural depending on the reference. Wherever used herein, the masculine pronoun shall include the feminine and the neuter, as appropriate in the context. With respect to any matter or thing, “including” or “includes” means including but not limited to such matter or thing. All references to currency contained in this Agreement shall be to United States currency. Except as otherwise specifically provided in this Agreement, all references to numbers of “days” shall mean calendar days.
ARTICLE II
PURCHASE AND SALE
2.1 Transfer of Purchased Assets. Subject to all of the terms and conditions of this Agreement, at the Closing Seller shall sell, transfer, convey, assign and deliver to Buyer, free and clear of all Encumbrances, and Buyer shall purchase and accept from Seller, all of the assets, of every nature and description whatsoever and wherever situated, tangible or intangible, owned by Seller on the Closing Date (collectively, the “Purchased Assets”), including the following (but excluding the Excluded Assets):
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(a) Seller’s leasehold interest in the Leased Real Property;
(b) all of Seller’s tangible personal property, including equipment, machinery, furniture, fixtures, leasehold improvements, vehicles and supplies, including, without limitation, those described in Schedule 2.1(b), together with related product warranties;
(c) all of Seller’s inventory, repair parts and supplies, work in progress and finished goods (collectively, the “Inventory”);
(d) all of Seller’s accounts receivable and notes receivable and interest receivable thereon (collectively, the “Accounts Receivable”);
(e) all of Seller’s deposits (excluding security deposits and refunds) and prepaid expenses, all as more particularly described in Schedule 2.1(e);
(f) all of Seller’s interest in and to all of the Contracts identified in Schedule 2.1(f) (collectively, the “Assigned Contracts”);
(g) all of Seller’s interest in and to (1) all patents, applications for patents, copyrights, license agreements (including software license agreements), assumed names, trade names, trademark and/or service mark registrations, applications for trademark and/or service mark registrations, trademarks and service marks of Seller, as more particularly described in Schedule 2.1(g), and all variants thereof, including all of Seller’s rights to use the names “TTE Laboratories” and “www.pipettes.com”, to the exclusion of Seller; (2) all of Seller’s rights in and to customer information, customer lists, and candidate/prospect lists; (3) all telephone numbers, fax numbers, telephone directory advertising, web sites, domain names, domain leases, social media accounts, and e-mail addresses used or held for use in the Business, all as identified on Schedule 2.1(g); (4) all of Seller’s other proprietary information, including trade secrets, know-how, product designs and specifications, operating data and other information pertaining to the Business; and (5) the goodwill associated with the Business;
(h) all Permits necessary for or incident to the operation of the Business, to the extent assignable;
(i) all of Seller’s business and operational records relating to the Business, including employee records (to the extent permitted under applicable Law), office and sales records, blueprints, marketing strategies, business plans, studies and inventory lists and records (but expressly excluding Seller’s capital stock records, corporate minute books, bank account records and Tax Returns); and
(j) all other assets of Seller, not described above, which are either (1) reflected on the Financial Statements and not disposed of by Seller in the Ordinary Course of Business between the Balance Sheet Date and the Closing Date, or (2) acquired by Seller in the Ordinary Course of Business between the Balance Sheet Date and the Closing Date.
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2.2 Excluded Assets. Notwithstanding the provisions of Section 2.1, the “Purchased Assets” shall not include, and Buyer shall not acquire hereunder (collectively, the “Excluded Assets”): (i) any of the shares of the capital stock of Seller, (ii) any Employee Benefit Plan, or any interest therein or right thereunder (including, without limitation, any assets of any Employee Benefit Plans), (iii) Seller’s stock records, company minute books, bank account records and Tax Returns, (iv) Seller’s cash, cash-equivalents and securities (including, but not limited to, Seller’s security deposits, whether related to the Leased Real Property or otherwise, and refunds), or (v) the assets identified on Schedule 2.2.
2.3 Use of Seller’s Name and Phone Numbers. In furtherance of the purchase and sale of the Purchased Assets hereunder, within two (2) business days from the Closing Date, Seller and Shareholders shall cause Seller’s corporate name to be changed to a name completely dissimilar to “TTE Laboratories, Inc.”, and thereafter shall not adopt, use, cause to be used, or approve or sanction the use of such name, or any name so similar as to cause confusion therewith, or any other trade name or assumed name listed in Schedule 2.1(g). Promptly after the Closing, Seller shall discontinue use of its existing business telephone numbers and shall take all reasonable action (at no cost to Seller) and sign all documents as may be reasonably necessary to make such telephone numbers available for use by Buyer.
2.4 Purchase Price. Subject to the provisions of this Agreement (including, without limitation, the adjustments set forth in Section 2.6), the total purchase price for the Purchased Assets and the Restrictive Covenant Agreement shall be $12,300,000 (the “Purchase Price”). The Purchase Price shall be allocated among the Purchased Assets and to the Restrictive Covenant Agreement in the manner described in Schedule 2.4, subject to modification based on adjustments to the Purchase Price pursuant to Section 2.6 or as otherwise agreed upon in writing by Buyer and Seller (the “Purchase Price Allocation”). The Purchase Price shall be payable to Seller and Shareholders in accordance with the provisions of Section 2.5. At the Closing, the Parties shall execute a funds flow memorandum and closing statement in a form acceptable to the Parties (the “Closing Statement”) that sets forth the calculation of the Closing Cash Payment pursuant to Section 2.5(a). The Purchase Price Allocation is intended to comply with the requirements of Section 1060 of the Code. Seller and Buyer shall file Form 8594 with their respective Tax Returns consistent with such Purchase Price Allocation. Buyer and Seller shall treat and report the transaction contemplated by this Agreement in all respects consistently for purposes of any federal, state or local Taxes, including the calculation of gain, loss and basis with reference to the Purchase Price Allocation. Buyer and Seller shall not take any action or position inconsistent with the obligations set forth in this Section 2.4, except as may otherwise be required by applicable Law.
2.5 Payment of Purchase Price. Subject to the adjustment described in Section 2.6 and all of the terms and conditions of this Agreement, at the Closing:
(a) Buyer shall pay to Seller, by wire transfer of immediately available funds to an account designated in writing by Seller, an amount (the “Closing Cash Payment”) equal to (i) the Estimated Adjusted Purchase Price, (ii) less the Escrow Amount, (iii) less the Restricted Covenant Payment, (iv) less the Indebtedness Repayment Amount; (v) less the MFA Fee.
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(b) Buyer shall pay to Shareholders the aggregate sum of $100,000 (collectively, the “Restrictive Covenant Payment”), by wire transfer of immediately available funds to an account or accounts designated in writing by Shareholders, in consideration for each Shareholder’s execution and delivery of the Restrictive Covenant Agreement, which Restrictive Covenant Payment shall be allocated between Shareholders based on their respective Pro Rata Shares or as otherwise agreed upon by Shareholders;
(c) Buyer shall pay the Indebtedness Repayment Amount in accordance with Section 2.8;
(d) Buyer shall pay the Escrow Amount to the Escrow Agent in accordance with Section 2.7;
(e) Buyer shall pay the MFA Fee in accordance with Section 2.9.
2.6 Adjustment to Purchase Price. The Purchase Price shall be subject to adjustment in accordance with the following procedures:
(a) Prior to the Closing Date, Seller shall deliver to Buyer a good faith estimate of the Closing Date Working Capital, which shall be determined in accordance with GAAP and in accordance with the sample calculation set forth in Schedule 2.6 (the “Estimated Closing Date Working Capital”) and which the Parties shall use for purposes of determining the Estimated Adjusted Purchase Price. Seller shall include with such estimate, statements setting forth in detail the Purchased Assets (including, without limitation, an itemized list of Accounts Receivable, with aging schedule, and prepaid expenses) and the Assumed Liabilities included in its calculation of the Estimated Closing Date Working Capital. The Estimated Closing Date Working Capital shall be adjusted as necessary on the Closing Date to reflect any adjustments reasonably requested by Buyer and satisfactory to Seller in its reasonable discretion.
(b) Within sixty (60) days after the Closing Date, Buyer shall prepare and deliver to Seller the calculation of the Closing Date Working Capital. The calculation of Closing Date Working Capital shall be prepared in accordance with GAAP and in accordance with the sample calculation set forth in Schedule 2.6. Buyer’s calculation of the Closing Date Working Capital shall be final and binding on the Parties for purposes of this Section 2.6 unless, within ten (10) business days after delivery thereof to Seller, Seller delivers to Buyer a written notice of dispute specifying in reasonable detail the items in dispute. After delivery of such a dispute notice, Seller and Buyer shall promptly negotiate in good faith to reach agreement on the disputed items or amounts in order to determine, as may be required, the amount of Closing Date Working Capital, which amount shall not be less than the amount thereof shown in Buyer’s calculation delivered pursuant to this Section 2.6(b) nor more than the amount thereof shown in Seller’s calculation of the Estimated Closing Date Working Capital delivered pursuant to Section 2.6(a). If, during such period, Seller and Buyer are unable to reach such agreement, they shall promptly thereafter cause an independent certified public accounting firm mutually acceptable to the Parties (the “Accounting Referee”) to review this Agreement and the disputed items or amounts for the purpose of calculating Closing Date Working Capital. In making such calculation, the Accounting Referee shall consider only those still unresolved items or amounts in Buyer’s calculation of Closing Date Working Capital as to which Seller has duly objected in accordance with this Section 2.6(b). The Accounting Referee shall deliver to Seller and Buyer, as promptly as practicable (but in any case no later than thirty (30) days from the date of engagement of the Accounting Referee), a report setting forth such calculation. Such report shall be final and binding upon Seller and Buyer. The cost of such review and report shall be borne by the Party whose determination of the Closing Date Working Capital (as set forth in the statement submitted by Buyer pursuant to Section 2.6(a) or in Seller’s notice of disagreement delivered in accordance with this Section 2.6(b)) was furthest from the determination of the Final Closing Date Working Capital determined by the Accounting Referee, or equally if the determination of the Final Closing Date Working Capital by the Accounting Referee is equidistant between the determinations of Buyer and Seller. The Closing Date Working Capital finally determined under this Section 2.6(b) shall be referred to as the “Final Closing Date Working Capital”.
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(c) The Purchase Price shall be subject to adjustment, upwards or downwards, based on the Final Closing Date Working Capital, as follows:
(i) If the Final Adjusted Purchase Price is less than the Estimated Adjusted Purchase Price, then Seller and Shareholders, jointly, shall pay to Buyer the amount of such deficiency pursuant to the provisions of Section 2.6(c)(iii) (or authorize Buyer in writing to receive payment of such amount from the Escrow Amount in accordance with Section 6.6). If Seller and Shareholders fail to pay when due the amount due from them pursuant to this Section then, in addition to any other rights and remedies available to Buyer (and notwithstanding any failure by Seller and Shareholders to authorize such payment as provided above), Buyer shall have the right to receive payment of such amount from the Escrow Amount, subject to and in accordance with the terms of Section 6.6.
(ii) If the Final Adjusted Purchase Price is greater than the Estimated Adjusted Purchase Price, then Buyer shall pay to Seller an amount equal to such excess, pursuant to the provisions of Section 2.6(c)(iii).
(iii) Payments in respect of this Section 2.6(c) shall be made within ten (10) business days of the final determination of the Final Closing Date Working Capital pursuant to the provisions of this Section 2.6 by wire transfer of immediately available funds to such account or accounts as may be designated in writing by the Party entitled to such payment at least two (2) business days prior to such payment date. Any reduction or increase in the Purchase Price made pursuant to this Section 2.6 shall be treated by the Parties as an adjustment to the Purchase Price for income tax purposes, and the Parties shall adjust the allocation of the Purchase Price as necessary to reflect such adjustment.
2.7 Escrow. At the Closing, Buyer shall pay to the Escrow Agent the sum of $1,230,000 (the “Escrow Amount”). The Escrow Agent shall hold the Escrow Amount pursuant to an escrow agreement among Buyer, Seller and the Escrow Agent in substantially the form attached hereto as Exhibit A (the “Escrow Agreement”), during the Escrow Period (or as otherwise set forth in this Agreement or the Escrow Agreement), as security for the obligations of Seller and Shareholders pursuant to Section 2.6, Section 6.2 and Section 8.9. Upon termination of the Escrow Period, the balance of the Escrow Amount, if any, remaining in escrow shall be distributed to Seller, subject to and in accordance with the terms of the Escrow Agreement and this Agreement including, without limitation, Section 6.6.
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2.8 Repayment of Indebtedness. Seller hereby authorizes and directs Buyer to pay at the Closing, on Seller’s behalf, the outstanding Liabilities of Seller as of the Closing Date that are secured by any Encumbrances on the Purchased Assets as set forth on Schedule 2.8 (the “Closing Date Indebtedness”). Seller has delivered to Buyer (a) payoff statements indicating the full payoff amounts (including principal, interest, prepayment penalties or fees, and all other charges due or payable in connection with the payoff of the Closing Date Indebtedness) of the Closing Date Indebtedness (collectively, the “Indebtedness Repayment Amount”) and (b) wire instructions for the repayment of the Indebtedness Repayment Amount. At the Closing, Buyer shall pay or cause to be paid to the holders of the Closing Date Indebtedness, in accordance with the payoff statements and wire instructions so provided by Seller, the Indebtedness Repayment Amount, and Buyer’s payment of the Indebtedness Repayment Amount shall be treated as payment of the Purchase Price payable to Seller pursuant to this Agreement, to the full extent of the Indebtedness Repayment Amount so paid by Buyer.
2.9 Payment of Transaction Expenses. Seller hereby authorizes and directs Buyer to pay at the Closing, on Seller’s behalf, the outstanding Liabilities of Seller as of the Closing Date to MFA Securities, LLC (“MFA Securities”) relating to the transactions contemplated by this Agreement (the “MFA Fee”). Seller has delivered to Buyer an invoice from MFA Securities setting forth the MFA Fee and including wire instructions for the payment of the MFA Fee. At the Closing, Buyer shall pay or cause to be paid to MFA Securities, on Seller’s behalf and in accordance with the wire instructions so provided by Seller, the MFA Fee, and Buyer’s payment of the MFA Fee shall be treated as payment of the Purchase Price payable to Seller pursuant to this Agreement, to the full extent of the MFA Fee so paid by Buyer.
ARTICLE III
LIABILITIES AND CONTRACTS
3.1 No Assumption of Liabilities or Contracts. It is expressly understood and agreed that Buyer does not assume nor shall it be liable for any Liability other than the Assumed Liabilities that Buyer expressly assumes under Section 3.2. Seller shall pay or make adequate provision for the payment of all of the Liabilities of every kind and nature other than the Assumed Liabilities, and Seller and Shareholders shall jointly indemnify Buyer, as provided by Section 6.2, with respect to all such Liabilities other than the Assumed Liabilities.
3.2 Liabilities Assumed. Subject to all of the terms and conditions of this Agreement, at the Closing Buyer shall assume and become responsible to perform and discharge when due, to the extent the same have not been performed or discharged by Seller prior to the Closing, only the following Liabilities (collectively, the “Assumed Liabilities”):
(a) any trade account payable (other than a trade account payable to any Affiliate of Seller or either Shareholder) incurred by Seller in the Ordinary Course of Business that (i) remains unpaid at the Closing Date and (ii) is set forth in a schedule provided with Seller’s calculation of the Estimated Closing Date Working Capital pursuant to Section 2.6(a); and
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(b) the Liabilities arising after the Closing Date under the Assigned Contracts, but only to the extent that such Liabilities do not relate to any breach, default or violation by Seller of the Assigned Contracts on or before the Closing Date.
Upon assumption by Buyer of the Assigned Contracts at Closing, Buyer shall be entitled to all of Seller’s rights and benefits thereunder and shall relieve Seller of its obligations to perform the same; provided, however, that nothing herein contained shall relieve Seller of its obligations or Liabilities arising thereunder or in connection therewith prior to such assumption by Buyer at the Closing. Buyer shall indemnify Seller, as provided by Section 6.3, with respect to all of the Assumed Liabilities from and after the Closing Date.
ARTICLE IV
SELLER’S AND SHAREHOLDERS’ REPRESENTATIONS AND WARRANTIES
Seller and Shareholders jointly represent and warrant to Buyer, as of the Closing Date, as follows:
4.1 Organization, Standing and Power. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the Commonwealth of Massachusetts. Seller has all necessary corporate power and authority to own, use and transfer its properties and assets and to transact the Business as now being conducted. Schedule 4.1 sets forth each jurisdiction in which Seller is licensed or qualified to do business and Seller is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the ownership of the Purchased Assets or the operation of the Business as currently conducted makes such licensing or qualification necessary. Seller has no subsidiaries. Schedule 4.1 includes a list of all of the holders of the outstanding capital stock of Seller, and the number of shares held by each such holder.
4.2 Authority for Transaction. Seller’s execution and delivery of this Agreement and all other Transaction Documents to which it is a party, its compliance with the provisions hereof and thereof and the consummation of all of the transactions contemplated hereby and thereby, have all been duly and validly authorized by all necessary corporate action on the part of Seller, and this Agreement and all other Transaction Documents to which Seller is a party are valid and binding upon Seller in accordance with their respective terms. Each Shareholder has full power and authority to execute and deliver this Agreement and all other Transaction Documents to which such Shareholder is a party, to comply with the provisions hereof and thereof and to consummate the transactions contemplated hereby and thereby. This Agreement and all other Transaction Documents to which each Shareholder is a party are valid and binding upon such Shareholder in accordance with their respective terms.
4.3 No Conflict. Neither the execution and delivery of this Agreement or any other Transaction Document by Seller or either Shareholder, nor compliance by Seller or either Shareholder with the provisions hereof or thereof, nor the consummation of the transactions contemplated hereby or thereby, will:
(a) conflict with or result in a breach of any provision of Seller’s articles of organization or bylaws;
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(b) except as set forth in Schedule 4.3, result in a default, or give rise to any right of termination, cancellation or acceleration, under any term, condition or provision of any Contract, Encumbrance or other instrument or obligation to which Seller or either Shareholder is a party or by which they or any of their respective properties or assets may be bound;
(c) violate any Governmental Order or Law applicable to Seller or any of its properties or assets; or
(d) require any consent, waiver or approval by, notice to or filing with any Person, except for such consents, waivers, approvals, notices or filings set forth in Schedule 4.3, all of which have been obtained, given or made.
4.4 Financial Statements. Seller has heretofore delivered to Buyer a true, correct and complete copy of the following (collectively, the “Financial Statements”): (i) the unaudited balance sheets and related statements of income for Seller for the fiscal years ended December 31, 2016, December 31, 2017 and December 31, 2018, respectively; and (ii) the unaudited balance sheet of Seller as of the Balance Sheet Date, and related unaudited statement of income for the 12-month period then ended. The Financial Statements are in accordance with the books of account and records of Seller and, except as provided in Schedule 4.4, have been prepared in accordance with GAAP, except that the Financial Statements may be subject to normal audit adjustments, none of which adjustments are expected to be material. The Financial Statements fairly and in all material respects present (i) Seller’s financial position as at the dates thereof and the results of Seller’s operations, (ii) changes in Seller’s financial position and (iii) other information of Seller included therein for the periods or as at the dates therein set forth.
4.5 No Undisclosed Liabilities. Seller has no Liabilities with respect to the Business, except (a) those which are adequately reflected or reserved against in the Financial Statements as of the Balance Sheet Date, and (b) those which have been incurred in the Ordinary Course of Business since the Balance Sheet Date and which are not, individually in excess of $10,000 or in the aggregate in excess of $50,000.
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4.6 Absence of Certain Changes. Except as disclosed in Schedule 4.6, since December 31, 2018, (a) Seller has conducted the Business only in the Ordinary Course of Business, (b) there has not been any material adverse change in the condition (financial or otherwise), assets, Liabilities or Business of Seller, or any damage, destruction or loss, whether or not covered by insurance, materially adversely affecting its properties or the Business, and (c) Seller has not experienced any other change in the Business resulting in or which could have an Adverse Effect. Without limiting the foregoing, except as set forth on Schedule 4.6, since December 31, 2018, Seller has not (a) issued, purchased or redeemed any of its equity securities, or granted or issued any option, warrant or other right to purchase or acquire any such equity securities, (b) incurred or discharged any Liabilities, except Liabilities incurred or discharged in the Ordinary Course of Business, (c) encumbered any of its properties or assets, tangible or intangible, except for Encumbrances incurred in the Ordinary Course of Business, (d) (i) granted any increase in the salaries (other than normal increases for employees averaging not in excess of five percent per annum made in the Ordinary Course of Business) or other compensation or benefits payable or to become payable to, or any advance (excluding advances for ordinary business expenses consistent with past practice) or loan to, any officer, director, shareholder, member, partner, employee or independent contractor of Seller, (ii) made any payments to any pension, retirement, profit-sharing, bonus or similar plan except payments in the Ordinary Course of Business made pursuant to the Employee Benefit Plans, (iii) granted or made any other payment of any kind to or on behalf of any officer, director, member, partner, shareholder, employee or independent contractor other than payment of base compensation and reimbursement for reasonable expenses in the Ordinary Course of Business, or (iv) adopted, amended or terminated any employee benefit plan (including any Employee Benefit Plan) or any stay bonus, retention bonus, transaction bonus or change in control bonus plan or arrangement, other than, in any case, amendments required by applicable Law, (e) suffered any change or, to the Knowledge of Seller and Shareholders, received any threat of any change in any of its relations with, or any loss or, to the Knowledge of Seller and Shareholders, threat of loss of, any of the suppliers, clients, distributors, customers or employees that are material to the Business, including any loss or change which may result from the transactions contemplated by this Agreement, (f) disposed of or failed to keep in effect any rights in, to or for the use of any Permit material to the Business, (g) changed any method of keeping of its books of account or accounting practices, (h) disposed of or failed to keep in effect any rights in, to or for the use of any of the Intellectual Property material to the Business, (i) sold, transferred or otherwise disposed of any assets, properties or rights of the Business with a value in excess of $25,000, except inventory sold in the Ordinary Course of Business, (j) entered into any transaction or Contract outside the Ordinary Course of Business or with any partner, shareholder, member, officer, director or other Affiliate of Seller, (k) made or authorized any single capital expenditure in excess of $25,000, or capital expenditures in excess of $50,000 in the aggregate which would constitute an Assumed Liability, (l) changed or modified in any manner its existing credit, collection and payment policies, procedures and practices with respect to accounts receivable and accounts payable, respectively, including acceleration of collections of receivables, failure to make or delay in making collections of receivables (whether or not past due), acceleration of payment of payables or failure to pay or delay in payment of payables, (m) incurred any material damage, destruction, theft, loss or business interruption, (n) made any declaration, payment or setting aside for payment of any distribution (whether in equity or property) with respect to any securities or interests of Seller, (o) made (except as consistent with past practice) or revoked any Tax election or settled or compromised any material Liability for Taxes with any Governmental Authority, (p) waived or released any material right or claim of Seller or incurred any modifications, amendments or terminations of any Contracts which are in the aggregate materially adverse to Seller or its Business, or (q) instituted any material change in its conduct of the Business or any material change in Seller’s accounting practices or methods of cash management.
4.7 Title. Seller has, and shall transfer to Buyer at the Closing, good title to each item comprising the Purchased Assets, free and clear of all Encumbrances.
4.8 Compliance with Laws; Permits.
(a) Since January 1, 2017, Seller has complied, and Seller is now complying, with all Laws applicable to ownership and use of the Purchased Assets or the operation of the Business and, to the Knowledge of Seller and Shareholders, there is no basis for any Action arising out of or in connection therewith. Seller has not received any notice of any violation of any Law, and Seller is not party to any settlement agreement or consent decree with continuing obligations or restrictions on Seller. Each item comprising the Purchased Assets and the current uses thereof conform in all material respects to all applicable Laws.
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(b) All Permits required for Seller to conduct the Business as currently conducted or for the ownership and use of the Purchased Assets have been obtained by Seller and are valid and in full force and effect. All fees and charges with respect to such Permits as of the date hereof have been paid in full. Schedule 4.8(b) lists all current Permits issued to Seller which are related to the conduct of the Business as currently conducted or the ownership and use of the Purchased Assets, including the names of the Permits and their respective dates of issuance and expiration. No event has occurred that, with or without notice or lapse of time or both, would reasonably be expected to result in the revocation, suspension, lapse or limitation of any Permit set forth in Schedule 4.8(b).
(c) Without limiting the generality of Section 4.8(a), since January 1, 2017, none of Seller, Shareholders or, to the Knowledge of Seller and Shareholders, anyone acting on Seller’s behalf has: (i) violated, or engaged in any activity, practice or conduct which would violate, any Anti-Corruption Law; (ii) used corporate funds or assets for any unlawful contribution, gift, entertainment or other unlawful expense, or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment; or (iii) directly, or indirectly through its agents, representatives or any other person authorized to act on its behalf, offered, promised, paid, given, or authorized the payment or giving of money or anything else of value; in each case, to any Government Official or Person while knowing or having reason to believe that some portion or all of the payment or thing of value will be offered, promised, or given, directly or indirectly, to a Government Official or another Person; for the purpose of (x) influencing any act or decision of such Government Official or such Person in his, her or its official capacity, including a decision to do or omit to do any act in violation of his, her or its lawful duties or proper performance of functions, (y) inducing such Government Official or such person or entity to use his, her or its influence or position with any Governmental Authority or other person or entity to influence any act or decision, or (z) in order to obtain or retain business for, direct business to, or secure an improper advantage for, Seller.
4.9 Condition and Sufficiency of Purchased Assets. Each material item of tangible property included in the Purchased Assets is in good condition and repair, ordinary wear and tear excepted, and except as set forth on Schedule 4.9, none of such tangible personal property is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost. Except for the Excluded Assets, the Purchased Assets (i) constitute all of the assets, tangible and intangible, of any nature whatsoever, used to operate the Business in the manner presently operated by Seller, and (ii) include all of the operating assets of Seller. None of the assets used or useful in the operation of the Business are owned by either Shareholder.
4.10 Privacy Laws and Data Protection. Since January 1, 2017, to the Knowledge of Seller and Shareholders, Seller has complied, and Seller is now complying, with all applicable Privacy Laws. There are no restrictions on the collection, use, disclosure and retention of Personal Information by Seller except as provided by Privacy Laws. With respect to the Business, Seller has established, implemented, updated, maintained and enforced such policies, programs, procedures, contracts and systems with respect to the collection, use, storage, transfer, retention, deletion, destruction, disclosure and other forms of processing of any and all Personal Information as are consistent and compliant in all material respects with accepted industry practice and standards typical for companies of comparable size to Seller that conduct businesses similar to the Business. Seller and Shareholders do not have any Knowledge of any actual, suspected or threatened (i) breach, misappropriation, or unauthorized disclosure, access, use, dissemination or modification of any Personal Information; or (ii) breach or violation of any of Seller’s policies, programs, procedures, contracts and systems described in this Section 4.10.
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4.11 Accounts Receivable. The Accounts Receivable (a) have arisen from bona fide transactions entered into by Seller involving the sale of goods or the performance of services in the Ordinary Course of Business; (b) constitute only valid, undisputed claims of Seller that, to the Knowledge of Seller, are not subject to any claims of set-off or other defenses or counterclaims or disputes, other than normal cash discounts accrued in the Ordinary Course of Business; and (c) subject to the reserve for bad debts, if any, shown on the Financial Statements or, with respect to Accounts Receivable arising after the Balance Sheet Date, on the accounting records of the Business, are collectible in full within ninety (90) days after billing.
4.12 Inventory. All of the Inventory (i) consists of inventories of the kind, quality and quantity regularly and currently used in the Business, and (ii) is in good and saleable condition.
4.13 Intellectual Property.
(a) “Intellectual Property” means any and all of the following in any jurisdiction throughout the world: (A) trademarks and service marks, including all applications and registrations and the goodwill connected with the use of and symbolized by the foregoing; (B) copyrights, including all applications and registrations related to the foregoing; (C) trade secrets and confidential know-how; (D) patents and patent applications; (E) websites, internet domain name registrations, and social media accounts; and (F) other intellectual property and related proprietary rights, interests and protections (including all rights to sue and recover and retain damages, costs and attorneys' fees for past, present and future infringement and any other rights relating to any of the foregoing).
(b) Schedule 2.1(g) lists all Intellectual Property included in the Purchased Assets (“Purchased IP”). Seller is the sole and exclusive legal and beneficial owner of all of the Purchased IP, free and clear of all Encumbrances, and has the valid right to use all other Intellectual Property used in or necessary for the conduct of the Business as currently conducted. Schedule 4.13(b) sets forth a true and complete list of all Intellectual Property licensed to Seller and the license or agreement pursuant to which Seller obtained a license to such Intellectual Property, other than any shrink-wrap, click-wrap or similar licenses provided in connection with off-the-shelf or pre-loaded software or online services.
(c) Except as set forth on Schedule 4.13(c): (a) Seller owns or possesses adequate licenses or other valid rights to use all Intellectual Property used in the conduct of the Business; (b) to the Knowledge of Seller and Shareholders, the conduct of the Business of Seller does not infringe, misappropriate, dilute or conflict with, and has not conflicted with any Intellectual Property of any other Person; (c) neither Seller nor either Shareholder has received any notices alleging that the conduct of the Business, including the marketing, sale and distribution of the products and services of the Business, infringes, dilutes, misappropriates or otherwise violates any Person’s Intellectual Property (including, for the avoidance of doubt, any cease and desist letter or offer of license); (d) there is no agreement or other contractual restriction affecting the use by Seller of any of the Purchased IP; and (e) to the Knowledge of Seller and Shareholders, there has been no infringement, dilution, misappropriation or other violation of any of the Purchased IP by any Person.
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(d) There are no Actions (including any oppositions, interferences or re-examinations) settled, pending or, to the Knowledge of Seller and Shareholders, threatened (including in the form of offers to obtain a license): (i) alleging any infringement, misappropriation, dilution or violation of the Intellectual Property of any Person by Seller in connection with the Business; (ii) challenging the validity, enforceability, registrability or ownership of any of the Purchased IP or Seller’s rights with respect to any Purchased IP; or (iii) by Seller or any other Person alleging any infringement, misappropriation, dilution or violation by any Person of any Purchased IP. Seller is not subject to any outstanding or, to the Knowledge of Seller and Shareholders, prospective Governmental Order (including any motion or petition therefor) that does or would restrict or impair the use of any Purchased IP or restrict the licensing thereof to any Person.
(e) None of the past or present employees, officers, directors or shareholders of Seller has any rights in any of the Purchased IP or in any inventions, whether or not patented, which have been or are used by Seller in the Business or which pertain to the Business.
(f) The Intellectual Property (including the Purchased IP) owned and licensed by Seller and included in the Purchased Assets is sufficient to enable Buyer to conduct the Business after the Closing in the manner in which the Business has been conducted by Seller prior to the Closing.
(g) The information technology systems owned, leased, licensed or otherwise used in the conduct of the Business, including all computer software, hardware, firmware, process automation systems and telecommunications systems used by Seller in the Business (the “IT Systems”) perform reliably and in material conformance with the documentation and specifications for such systems. Seller has taken commercially reasonable steps to ensure that the IT Systems do not contain any viruses, “worms,” disabling or malicious code, or other anomalies that would materially impair the functionality of the IT Systems. Seller has taken commercially reasonable steps to provide for the backup, archival and recovery of the critical business data of Seller. Seller has taken commercially reasonable measures to maintain the confidentiality and value of all of its trade secrets.
4.14 Assigned Contracts. Each of the Assigned Contracts is valid and binding, in full force and effect and, except for obtaining any consents, waivers or approvals or giving any notice listed in Schedule 4.3, is fully assignable to and assumable by Buyer, so that immediately after the Closing, Buyer will be entitled to the full benefits thereof. None of Seller or, to the Knowledge of Seller and Shareholders, any other party thereto is in breach of or default under (or is alleged to be in breach of or default under), or has provided or received any notice of any intention to terminate, any Assigned Contract. To the Knowledge of Seller and Shareholders, no event or circumstance has occurred that, with or without notice or lapse of time or both, would constitute an event of default under any Assigned Contract or result in a termination thereof or would cause or permit the acceleration or other changes of any right or obligation or the loss of benefit thereunder. Seller has made available to Buyer complete and correct copies of each Assigned Contract. There are no disputes pending or, to the Knowledge of Seller and Shareholders, threatened under any Assigned Contract.
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4.15 Other Contracts. Other than the Assigned Contracts, Seller is not a party to, or otherwise bound by, any Contract or other instrument which is material or necessary to the ownership of the Purchased Assets or the operation of the Business or which is adverse, or otherwise harmful, to any of the Purchased Assets or the Business.
4.16 Legal Proceedings. There are no Actions pending or, to the Knowledge of Seller and Shareholders, threatened against or by Seller (a) relating to or affecting the Business, the Purchased Assets or the Assumed Liabilities; or (b) that challenge or seek to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement. Except as set forth in Schedule 4.16, no event has occurred or circumstances exist that may give rise to, or serve as a basis for, any such Action. There are no outstanding Governmental Orders and no unsatisfied judgments, penalties or awards against, relating to or affecting the Business.
4.17 Tax Matters. Except as set forth on Schedule 4.17, Seller has filed all federal, state, county and local Tax Returns which are required to be filed prior to the date of this Agreement and has paid or has reserved for the payment of all Taxes which have become due and payable. All such Tax Returns are complete and accurate in all material respects and disclose all Taxes required to be paid. No event has occurred which could impose on Buyer any successor or transferee liability for any Taxes in respect of Seller. No examination or audit of any Tax Return is currently in progress and no Governmental Authority is asserting, or, to the Knowledge of Seller and Shareholders, has threatened in writing to assert, against Seller any deficiency, proposed deficiency or claim for additional Taxes or any adjustment thereof with respect to any period for which a Tax Return has been filed, for which Tax Returns have not yet been filed or for which Taxes are not yet due and payable. All amounts required to be withheld by Seller (including from employees for income Taxes and social security and other payroll Taxes) have been collected or withheld, and either paid to the respective Taxing authorities, set aside in accounts for such purpose, or accrued, reserved against and entered upon the books of Seller.
4.18 Insurance. Schedule 4.18 contains (a) a list and general description of all fire, theft, casualty, liability, life, hospitalization, medical reimbursement and other insurance coverage insuring the Purchased Assets, Seller and its personnel and Business operations specifying, with respect to each, the risk insured against, the limits of coverage, the deductible amount (if any), and the premium rate; and (b) with respect to the Business, the Purchased Assets or the Assumed Liabilities, a list of all pending claims and the claims history for Seller since January 1, 2018. There are no claims related to the Business, the Purchased Assets or the Assumed Liabilities pending under any such insurance policies as to which coverage has been questioned, denied or disputed or in respect of which there is an outstanding reservation of rights. Seller has provided to Buyer true and complete copies of the insurance policies identified on Schedule 4.18.
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4.19 Labor Relations and Employment Issues.
(a) Seller has made available to Buyer a true, correct and complete list setting forth the names, date of hire, the rate of compensation (and the portions thereof attributable to salary and bonuses, respectively), the amount of accrued but unused vacation time (or other paid-time off) as of the date of this Agreement, and work location of all current employees of Seller. Seller has made available to Buyer a true, correct and complete list setting forth the names of all employees of Seller currently on short-term or long-term disability leave, workers’ compensation leave, leave under the Family Medical Leave Act, and any other leave.
(b) Except as set forth in Schedule 4.19, (1) Seller has not entered into any collective bargaining agreement or other Contract with any employee, union, labor organization or other employee representative or group of employees and, to the Knowledge of Seller and Shareholders, no such organization or Person has made or is making any attempt to organize or represent employees of Seller; (2) there is no pending grievance or arbitration and no unsatisfied or unremedied grievance or arbitration award against Seller or any agent, representative or employee of Seller and, to the Knowledge of Seller and Shareholders, there is no basis for any such grievance or arbitration; (3) there is no unfair labor practice charge, pending trial of unfair labor practice charges, unremedied unfair labor practice finding or adverse decision of the National Labor Relations Board or administrative law judge thereof, against Seller or any agent, representative or employee of Seller and, to the Knowledge of Seller and Shareholders, there is no basis for any such unfair labor practice charge; and (4) there is not pending or, to the Knowledge of Seller and Shareholders, threatened with respect to Seller or its employees any labor dispute, strike or work stoppage.
(c) Without limiting the generality of Section 4.8, except as set forth on Schedule 4.19, Seller is and for the past five (5) years has been in compliance with all applicable Laws, standards, internal policies, and Contracts relating to employment and employment practices, the payment and withholding of Taxes and other similar obligations, terms and conditions of employment and wages and hours, including, without limitation, any such Laws respecting employment discrimination, classification of “exempt” employees (within the meaning of the Fair Labor Standards Act of 1938, as amended), classification of independent contractors, withholding of Taxes, pay equity, workers’ compensation, family and medical leave, immigration and work authorization, and occupational safety and health requirements, and Seller has not received any notice of any violation of any such Law, standard, policy or Contract.
(d) Except as set forth in Schedule 4.19, no current or former employee of Seller is owed by Seller overtime pay (other than overtime pay for the current payroll period), wages or salary for any period other than the current payroll period, vacation, holiday or other time off or pay in lieu thereof (other than time off or pay in lieu thereof earned in respect of the current year), or any amount arising from any violation of any Law, or Contract relating to the payment of wages, fringe benefits, wage supplements or hours of work.
(e) Except as set forth on Schedule 4.19, Seller has properly classified all employees, leased employees, consultants, independent contractors and all other Persons providing services to Seller for all purposes (including, without limitation, for all Tax purposes and for purposes related to eligibility to participate in or accrue a benefit under the Employee Benefit Plans), and has withheld and paid all applicable Taxes and made all appropriate filings in connection with services provided by such Persons to Seller. Except as set forth on Schedule 4.19, Seller has properly classified all employees as “exempt” or “non-exempt” under the Fair Labor Standards Act and similar state or local Law.
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4.20 Employee Benefits.
(a) Schedule 4.20 lists all employee benefit plans and collective bargaining, employment or severance agreements or other similar arrangements which Seller or any ERISA Affiliate, has within the past five (5) years sponsored, or maintained, or to which contributions are made or have ever been made, or for which obligations have been incurred, for the benefit of employees or former employees of Seller or any ERISA Affiliate, or with respect to which Seller or any ERISA Affiliate could have any Liability including, without limitation, (1) any “employee benefit plan” (within the meaning of Section 3(3) of ERISA), (2) any profit-sharing, stock bonus, deferred compensation, bonus, stock option, stock purchase, restricted stock, equity incentive, phantom equity, pension, retirement, retainer, compensation, consulting, severance, retention, indemnification, welfare, Code 125, or incentive plan, agreement or arrangement, (3) any plan, agreement or arrangement providing for “fringe benefits” or perquisites to employees, officers, directors or agents, including but not limited to benefits relating to automobiles, clubs, vacation, child care, parenting, sabbatical, sick leave, tuition reimbursement, medical, dental, hospitalization, life insurance, disability insurance and other types of insurance, whether written or unwritten, and (4) any employment agreement. The plans, agreements and arrangements described in this Section 4.20 are referred to herein as “Employee Benefit Plans.” Schedule 4.20 identifies whether any Employee Benefit Plan that is an “employee welfare benefit plan” (within the meaning of Section 3(1) of ERISA) is (i) unfunded, (ii) funded through a “welfare benefit fund”, as such term is defined in Section 419(e) of the Code, or other funding mechanism or (iii) insured.
(b) None of the Employee Benefit Plans is, and neither Seller nor any ERISA Affiliate has ever contributed to or had any obligation to contribute to: (i) a plan subject to Title IV of ERISA or Section 412 of the Code; (ii) a “multiemployer plan” (within the meaning of Section 3(37) of ERISA); (iii) a “multiple employer plan” (within the meaning of Section 413(c) of the Code); (iv) any “voluntary employees’ beneficiary association” (within the meaning of Section 501(c)(9) of the Code); or (v) any “multiple employer welfare arrangement” (within the meaning of Section 3(40) of ERISA).
(c) Seller has delivered to Buyer copies of all documents and summary plan descriptions of the Employee Benefit Plans or summary descriptions of any such Employee Benefit Plan not otherwise in writing, which documents and descriptions are true, correct and complete in all respects. Seller has delivered to Buyer true, correct and complete copies of the most recent determination letters, advisory letters and opinion letters and the Forms 5500 filed in the most recent three (3) plan years with respect to any Employee Benefit Plan, including all schedules thereto and financial statements with attached opinions of independent accountants. Seller has delivered to Buyer summaries of material modifications distributed since the most recent summary plan description and material communications distributed within the last year to the participants of each Employee Benefit Plan.
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(d) Except as set forth on Schedule 4.20, each Employee Benefit Plan (and any related trust agreement, insurance contract or fund) has been maintained, funded and administered in accordance with its terms and any applicable collective bargaining agreement, and each Employee Benefit Plan, Seller and each ERISA Affiliate, is in compliance with the applicable provisions of ERISA, the Code and all Laws applicable thereto. Seller has not incurred and could not reasonably be expected to incur an employer shared responsibility penalty under Section 4980H of the Code. To the Knowledge of Seller and Shareholders, none of Seller, any ERISA Affiliate, nor any Employee Benefit Plan fiduciary has, with respect to the Employee Benefit Plans, engaged in a breach of fiduciary duty or a non-exempt “prohibited transaction,” as such term is defined in Section 4975 of the Code or Section 406 of ERISA.
(e) No Actions (other than routine claims for benefits in the ordinary course) are pending or, to the Knowledge of Seller and Shareholders, threatened with respect to any Employee Benefit Plan. No audits, inquiries, reviews, proceedings, claims, or demands are pending with any Governmental Authority with respect to any Employee Benefit Plan. To the Knowledge of Seller and Shareholders, there are no facts which could give rise to any Liability in the event of any such Action, audit, review, or other proceeding.
(f) Each Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter (or an opinion or advisory letter on which it is entitled to rely) from the Internal Revenue Service that such Employee Benefit Plan is qualified under Section 401(a) of the Code. To the Knowledge of Seller and Shareholders, each Employee Benefit Plan that is intended to be qualified under Section 401(a) of the Code has been timely amended to reflect the provisions of all statutory or regulatory changes requiring amendments for which the deadline for amendment has passed. To the Knowledge of Seller and Shareholders, no event has occurred that will or could give rise to the revocation of any applicable determination letter or the loss of the right to rely on any applicable opinion or advisory letter, or the disqualification or loss of tax-exempt status of any such Employee Benefit Plan or trust under Sections 401(a) or 501(a) of the Code.
(g) No Employee Benefit Plan provides for or continues medical or health benefits, or life insurance or other welfare benefits (through insurance or otherwise) for any person or any dependent or beneficiary of any person after such person’s retirement or other termination of employment except as may be required by COBRA or applicable state Law, and there has been no communication to any person that could reasonably be expected to promise or guarantee any such benefits.
(h) To the Knowledge of Seller and Shareholders, no condition exists as a result of which Seller or any ERISA Affiliate would have any Liability, whether absolute or contingent, including any obligations under the Employee Benefit Plans, with respect to any misclassification of a Person performing services for Seller or an ERISA Affiliate as an independent contractor or the employee of another entity rather than as an employee of Seller or an ERISA Affiliate.
(i) Seller is not, and has not ever been, an “applicable large employer member” as determined under section 4980H of the Code and its implementing regulations.
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(j) Neither the execution of this Agreement nor the consummation of the transactions contemplated by this Agreement will (either alone or upon the occurrence of any additional or subsequent events): (i) entitle any individual to severance pay or any other payment; (ii) accelerate the time of payment, funding or vesting (other than vesting required due to the termination of tax-qualified retirement plans, which shall not require an additional contribution to such plans), or increase the amount of compensation due to any such individual; (iii) increase the amount payable under or result in any other material obligation pursuant to any Employee Benefit Plan; or (iv) result in “excess parachute payments” within the meaning of Section 280G(b) of the Code. No Person is entitled to receive any additional payment (including any tax gross-up or other payment) as a result of the imposition of the excise Taxes required by Section 4999 of the Code.
(k) Each Employee Benefit Plan that is a “nonqualified deferred compensation plan” (as defined in Section 409A(d)(1) of the Code) has been operated since January 1, 2005, in compliance with the applicable provisions of Section 409A of the Code, and since January 1, 2009 has been in documentary compliance with the applicable provisions of Section 409A of the Code; and neither Seller nor any ERISA Affiliate is or has been required to report any Taxes due as a result of a failure of an Employee Benefit Plan to comply with Section 409A of the Code. With respect to each Employee Benefit Plan, neither Seller nor any ERISA Affiliate has any indemnity obligation for any Taxes or interest imposed or accelerated under Section 409A of the Code.
4.21 Environmental Matters. Seller is in compliance in all material respects with all applicable Environmental Laws. Neither Seller nor either Shareholder has received any notice of any violation of Environmental Laws. Seller has not used the Leased Real Property in any manner at any previous time for the storage, disposal, treatment, processing, production, refinement, generation or other handling of, any Hazardous Substances. Neither Seller nor any of its employees or agents, has ever disposed of liquid, solid or semi-solid Hazardous Substances on the Leased Real Property or on any other premises on which the Business is or was conducted. To the Knowledge of Seller and Shareholders, (i) no portion of the Leased Real Property or any other premises on which the Business is conducted contains, or has been used in any manner at any previous time for the storage, disposal, treatment, processing, production, refinement, generation or other handling of, any Hazardous Substances; and (ii) there has been no contamination, whether of soil, groundwater or otherwise, on, in, under or about the Leased Real Property or such other premises.
4.22 Real Property.
(a) Except for its interest in the Leased Real Property, Seller does not own any right, title or interest in any real property nor has Seller ever owned any real property.
(b) Schedule 4.22 contains a list of all of the real property leased (or otherwise used) by Seller in connection with the Business (collectively, the “Leased Real Property”), and identifies each Contract under which such real property is leased (the “Existing Leases”). Seller has delivered to Buyer true, correct and complete copies of the Existing Leases, including all amendments, modifications, notices or memoranda of lease thereto.
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(c) With respect to each parcel of the Leased Real Property, except as set forth in Schedule 4.22, (i) the buildings and improvements (including, without limitation, the roof, the walls and all plumbing, wiring, electrical, heating, air conditioning, fire protection and other systems, as well as all paved areas, included therein or located thereat) are in good working order, condition and repair, reasonable wear and tear excepted, and are not in need of maintenance or repairs except for maintenance or repairs which are routine, ordinary and are not material in costs; (ii) Seller has received all approvals of all Governmental Authorities (including Permits) required in connection with Seller’s use and operation of the Leased Real Property, and Seller has operated and maintained the Leased Real Property in accordance with all applicable Laws; (iii) there are no Contracts granting to any person or entity (other than Seller) the right of use or occupancy of any portion of the Leased Real Property, and there are no Persons (other than Seller) in possession of any of the Leased Real Property, excepting Leased Real Property that is shared or multi-tenant property; and (iv) there are no outstanding options or rights of first refusal or similar rights to purchase any of the Leased Real Property or any portion thereof or interest therein. To the Knowledge of Seller and Shareholders, no event or condition currently exists which would create a legal or other impediment to the use of any of the Leased Real Property as currently used, or would increase the additional charges or other sums payable by the tenant under any Existing Lease (including, without limitation, any pending Tax reassessment or other special assessment affecting the Leased Real Property). Neither Seller nor either Shareholder has received notice from any Governmental Authority of any violations of any Law affecting any portion of the Leased Real Property. The Leased Real Property is sufficient for the continued conduct of the Business after the Closing in substantially the same manner as conducted prior to the Closing and constitutes all of the real property necessary to conduct the Business as currently conducted.
4.23 Product and Service Warranties. Except for warranties under applicable Law (if any) and except as set forth on Schedule 4.23, (a) there are no warranties, express or implied, written or oral, with respect to the products and services of the Business, and (b) there are no pending or, to the Knowledge of Seller and Shareholders, threatened claims or Liabilities with respect to any such warranties. All certifications that Seller has issued to its customers with respect to calibration and testing services performed by Seller are true and correct in all material respects, and Seller has performed for such customers all calibration and testing services set forth in all such certifications.
4.24 Relationship with Customers and Suppliers. Seller has delivered to Buyer a true, correct and complete list of each customer of Seller to whom Seller sold products or services during the years ended December 31, 2017, December 31, 2018, and December 31, 2019, and the current year, together with, in each case, the amount billed during such periods (each, a “Customer”). Neither Seller nor either Shareholder has received notice from any Customer that such Customer is canceling or otherwise materially reducing its usage or purchase of the products and services of Seller. Seller and Shareholders have no grounds to believe that any Customer will cancel or otherwise materially reduce its usage or purchase of the products and services of the Business following the Closing. Except as set forth on Schedule 4.24, to the Knowledge of Seller and Shareholders, no current supplier to Seller of items material to the conduct of the Business has threatened to terminate or change the terms of its business relationship with Seller for any reason.
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4.25 Officers, Directors and Shareholders. Except as set forth on Schedule 4.25, Seller does not have any business relationship, whether under any Contract or otherwise, with any Person who is an officer, director or shareholder of Seller, or any of their respective spouses, children or Affiliates, other than employment relationships in the Ordinary Course of Business. Except as set forth on Schedule 4.25, no officer, director or shareholder of Seller, nor any spouse, child or Affiliate thereof, has any interest in any competitor, supplier or customer of Seller, except for immaterial interests in publicly held companies.
4.26 Brokers and Finders. Except as set forth on Schedule 4.26, none of Seller, Shareholders or any of their respective officers, directors, employees or agents has employed any broker or finder or incurred any Liability for any brokerage fees, commissions or finders’ fees in connection with the transactions contemplated hereby.
4.27 Material Misstatements or Omissions. No representation or warranty of Seller or Shareholders made in this Agreement, nor any Schedule, document, statement, certificate or other information furnished or to be furnished to Buyer by or on behalf of Seller or Shareholders pursuant hereto or in connection with the transactions contemplated hereby, contains (or will when furnished contain) any untrue statement of a material fact, or omits (or will then omit) to state a material fact necessary in order to make the statement of facts made therein not misleading.
ARTICLE V
BUYER’S REPRESENTATIONS AND WARRANTIES
Buyer represents and warrants to Seller and Shareholders, as of the Closing Date, as follows:
5.1 Organization, Standing and Power. Buyer is a corporation duly formed, validly existing and in good standing under the Laws of the State of Ohio. Buyer has all necessary corporate power and authority to execute and deliver this Agreement and each other Transaction Document to which Buyer is a party, to comply with the provisions hereof and thereof and to consummate the transactions contemplated hereby and thereby.
5.2 Authority for Transaction. Buyer’s execution and delivery of this Agreement and each other Transaction Document to which Buyer is a party, its compliance with the provisions hereof and thereof and the consummation of all of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of Buyer, and this Agreement and each other Transaction Document to which Buyer is a party is valid and binding upon Buyer in accordance with their respective terms.
5.3 No Conflict. Neither the execution and delivery of this Agreement or any other Transaction Document by Buyer, nor compliance by Buyer with any of the provisions hereof or thereof, nor the consummation of the transactions contemplated hereby or thereby will:
(a) conflict with or result in a breach of any provision of Buyer’s articles of incorporation or code of regulations;
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(b) result in a default, or give rise to any right of termination, cancellation or acceleration, under any term, condition or provision of any Contract, Encumbrance or other instrument or obligation to which Buyer is a party or by which it or any of its properties or assets may be bound;
(c) violate any Governmental Order or Law applicable to Buyer or any of its properties or assets; or
(d) require any consent, waiver or approval by, notice to or filing with any Person, except for such consents, waivers, approvals, notices or filings set forth in Schedule 5.3, all of have been obtained, given or made.
5.4 Legal Proceedings. There is no investigation or review pending (or, to the Knowledge of Buyer, threatened) by any Governmental Authority with respect to Buyer or any of its Subsidiaries which would reasonably be expected to have an adverse effect on Buyer’s ability to consummate the transactions contemplated hereunder. There is no Action pending or, to the Knowledge of Buyer, threatened against or affecting Buyer or any of its assets which, if adversely determined, would adversely affect the ability of Buyer to consummate the transactions contemplated hereby.
5.5 Brokers and Finders. Neither Buyer nor any of its officers, directors, employees or agents has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders’ fees in connection with the transactions contemplated hereby.
5.6 Solvency. Immediately after giving effect to the transactions contemplated hereby, Buyer shall be Solvent and shall: (a) be able to pay its debts as they become due; (b) own property that has a fair saleable value greater than the amounts required to pay its debts (including a reasonable estimate of the amount of all contingent liabilities); and (c) have adequate capital to carry on its business. No transfer of property is being made and no obligation is being incurred in connection with the transactions contemplated hereby with the intent to hinder, delay, or defraud either present or future creditors of Buyer. In connection with the transactions contemplated hereby, Buyer has not incurred, nor plans to incur, debts beyond its ability to pay as they become absolute and matured.
5.7 Financial Capacity. Buyer has adequate cash and other sources of liquidity available to permit Buyer to make the payments to Seller as described in this Agreement on the dates and in the amounts described herein.
5.8 Material Misstatements or Omissions. No representation or warranty of Buyer made in this Agreement, nor any Schedule, document, statement, certificate or other information furnished or to be furnished to Seller or Shareholders by or on behalf of Buyer pursuant hereto or in connection with the transactions contemplated hereby, contains (or will when furnished contain) any untrue statement of a material fact, or omits (or will then omit) to state a material fact necessary in order to make the statement of facts made therein not misleading.
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ARTICLE VI
SURVIVAL AND INDEMNIFICATION
6.1 Survival or Representations, Warranties and Covenants. Subject to the provisions of this Agreement, the representations and warranties contained in this Agreement shall survive the Closing and shall remain in full force and effect until the second anniversary of the Closing Date; provided, however, that the representations and warranties in Section 4.1 (Organization, Standing and Power), Section 4.2 (Authority for Transaction), Section 4.7 (Title), Section 4.26 (Brokers and Finders), Section 5.1 (Organization, Standing and Power), Section 5.2 (Authority for Transaction), Section 5.5 (Brokers and Finders) and Section 5.6 (Solvency) (collectively, the “Fundamental Representations”), and the representations and warranties in Section 4.17 (Tax Matters), Section 4.20 (Employee Benefits), Section 4.21 (Environmental Matters) (collectively, the “Special Representations”), shall survive as hereafter provided. The Special Representations shall survive the Closing and shall remain in full force and effect for the full period of all applicable statutes of limitations (giving effect to any waiver, mitigation or extension thereof) plus sixty (60) days. The Fundamental Representations shall survive the Closing indefinitely. All covenants and agreements of the Parties contained herein shall survive the Closing indefinitely or for the period explicitly specified therein.
6.2 Indemnification by Seller and Shareholders. Subject to all of the terms and conditions of this Agreement including, without limitation, Section 6.4, Seller and each Shareholder jointly agree to defend, indemnify and hold harmless each of Buyer and its Affiliates and their respective Representatives, successors and assigns (collectively, the “Buyer Indemnified Parties”), from and against any and all Losses suffered, sustained, incurred or required to be paid by any Buyer Indemnified Party arising out of, based upon, in connection with or as a result of:
(a) any Liability, other than the Assumed Liabilities;
(b) any breach of any representation or warranty of Seller or either Shareholder made in this Agreement or any other Transaction Document;
(c) any breach or nonfulfillment of any covenant or agreement of Seller or either Shareholder made in this Agreement or in any other Transaction Document;
(d) any Excluded Asset;
(e) any arrangements or agreements made or alleged to have been made by Seller or either Shareholder with any broker, finder or other agent in connection with the transactions contemplated by this Agreement;
(f) any failure by Seller to comply with the Massachusetts Equal Pay Act; or
(g) any matter described on Schedule 4.16.
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6.3 Indemnification by Buyer. Subject to all of the terms and conditions of this Agreement including, without limitation, Section 6.4, Buyer shall be responsible for, and hereby agrees to defend, indemnify and hold harmless Seller and Shareholders and their respective Representatives, successors and assigns (collectively, “Seller Indemnified Parties”), from and against any and all Losses suffered, sustained, incurred or required to be paid by any Seller Indemnified Party arising out of, based upon, in connection with or as a result of:
(a) any Assumed Liability;
(b) any breach of any representation or warranty of Buyer made in this Agreement or any other Transaction Document;
(c) any breach or nonfulfillment of any covenant or agreement of Buyer made in this Agreement or any other Transaction Document;
(d) any arrangements or agreements made or alleged to have been made by Buyer with any broker, finder or other agent in connection with the transactions contemplated by this Agreement; or
(e) Buyer’s ownership of the Purchased Assets or operation of the Business after the Closing; provided that there shall be no indemnification under this Section 6.3 for any Losses against which Buyer is entitled to indemnification pursuant to Section 6.2.
6.4 Limitations.
(a) The obligation of Seller and Shareholders to indemnify Buyer Indemnified Parties under Section 6.2(b) shall expire, with respect to any representation or warranty, on the date on which the survival of such representation or warranty shall expire in accordance with Section 6.1, except with respect to any Notice of Claim which any Buyer Indemnified Parties have delivered to Seller and Shareholders prior to such date, in which case the obligation of Seller and Shareholders to indemnify Buyer Indemnified Parties shall continue until any Losses payable to Buyer Indemnified Parties with respect to such Notice of Claim are finally determined. Notwithstanding anything in this Agreement to the contrary, any claims based on any facts or circumstances which constitute Fraud by Seller or either Shareholder shall not be subject to the time limitations set forth in this Section.
(b) The obligation of Buyer to indemnify Seller Indemnified Parties under Section 6.3(b) shall expire, with respect to any representation or warranty, on the date on which the survival of such representation or warranty shall expire in accordance with Section 6.1, except with respect to any Notice of Claim which any Seller Indemnified Parties have delivered to Buyer prior to such date, in which case the obligation Buyer to indemnify Seller Indemnified Parties shall continue until any Losses payable to Seller Indemnified Parties with respect to such Notice of Claim are finally determined. Notwithstanding anything in this Agreement to the contrary, any claims based on any facts or circumstances which constitute Fraud by Buyer shall not be subject to the time limitations set forth in this Section.
(c) The maximum aggregate amount of all Losses for which Seller and Shareholders shall be liable pursuant to Section 6.2(b) related to all representations and warranties other than Fundamental Representations and the Special Representations shall not exceed an amount equal to $1,230,000 (the “General Cap”); provided, however, that the maximum aggregate amount of all Losses for which an individual Shareholder shall be liable pursuant to Section 6.2(b) related to all representations and warranties other than Fundamental Representations and the Special Representations shall not exceed an amount equal to the product of the General Cap multiplied by such Shareholder’s Pro Rata Share. The maximum aggregate amount of all Losses for which Seller and Shareholders shall be liable pursuant to Section 6.2(b) related to Fundamental Representations shall not exceed the Purchase Price (the “Fundamental Cap”); provided, however, that the maximum aggregate amount of all Losses for which an individual Shareholder shall be liable pursuant to Section 6.2(b) related to Fundamental Representations shall not exceed an amount equal to the product of the Fundamental Cap multiplied by such Shareholder’s Pro Rata Share. The maximum aggregate amount of all Losses for which Seller and Shareholders shall be liable pursuant to Section 6.2(b) related to Special Representations shall not exceed an amount equal to $6,150,000 (the “Special Cap”); provided, however, that the maximum aggregate amount of all Losses for which an individual Shareholder shall be liable pursuant to Section 6.2(b) related to Special Representations shall not exceed an amount equal to the product of the Special Cap multiplied by such Shareholder’s Pro Rata Share. The General Cap, the Fundamental Cap, the Special Cap, and the limitations set forth in this Section 6.2(b) shall not apply to any Losses resulting from Fraud by Seller or either Shareholder.
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(d) Notwithstanding the provisions of Section 6.2(b), Seller and Shareholders shall not be obligated to provide any indemnification for Losses pursuant to claims for breaches of representations and warranties (other than Fundamental Representations) under Section 6.2(b) unless the aggregate amount of Losses incurred by Buyer Indemnified Parties with respect to such breaches of representations and warranties exceeds $100,000 (the “Threshold”), in which case Seller and Shareholders will be liable for the full amount of such Losses, including amounts below the Threshold (subject to the limitations in Section 6.4(c)). The Threshold and the limitations set forth in this Section 6.4(d) shall not apply to any Losses resulting from (1) a breach of a Fundamental Representation or a Special Representation, or (2) Fraud by Seller or either Shareholder.
6.5 Indemnification Claim Procedures.
(a) If any Buyer Indemnified Party or Seller Indemnified Party (an “Indemnified Party”) believes that it has suffered or incurred or will suffer or incur any Losses for which it is entitled to indemnification under this Article VI, such Indemnified Party shall deliver to the Party or Parties from whom indemnification is being claimed (an “Indemnifying Party”) reasonably prompt written notice of such claim setting forth, in reasonable detail, the nature and basis of the claim and the amount thereof, to the extent known, and any other relevant information in the possession of the Indemnified Party (a “Notice of Claim”). The Notice of Claim shall be accompanied by any relevant documents in the possession of the Indemnified Party relating to the claim. Subject to the provisions of this Agreement including, without limitation, Section 6.4(a) and Section 6.4(b), the failure of an Indemnified Party to give any Notice of Claim required by this Section shall not affect any of such Party’s rights under this Article VI or otherwise except and to the extent that such failure is actually prejudicial to the rights and obligations of the Indemnifying Party. Notwithstanding anything herein to the contrary, if any Notice of Claim relates to a Third Party Action, the procedures of Section 6.5(d) shall apply to such Third Party Action.
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(b) After an Indemnified Party has delivered a Notice of Claim requesting payment from an Indemnifying Party for any Losses, the Indemnifying Party shall, within thirty (30) days of receipt of such Notice of Claim, (i) pay to the Indemnified Party, in immediately available funds, the amount of Losses, or (ii) deliver to the Indemnified Party written notice (a “Dispute Notice”) advising the Indemnified Party that it disputes the claim for indemnification. If, within thirty (30) days of receipt of such Notice of Claim, the Indemnifying Party fails to pay said amount to the Indemnified Party or deliver to the Indemnified Party a Dispute Notice the Indemnifying Party shall be deemed to have accepted and agreed to such claim for indemnification (a “Deemed Acceptance”) and the Indemnified Party may exercise any and all legal or equitable remedies available to the Indemnified Party under this Agreement or otherwise with respect to such Losses.
(c) If, within such thirty (30) day period following receipt of the Notice of Claim, the Indemnifying Party delivers a Dispute Notice with respect to the Indemnified Party’s claim for indemnification for Losses, the Indemnifying Party and the Indemnified Party agree that, prior to commencing any litigation or other proceedings against the other concerning any matter in which such Party intends to claim a right of indemnification, they will negotiate in good faith to resolve any dispute with respect to such claim and to provide each other with all relevant information relating to such dispute. If the Indemnifying Party and the Indemnified Party are unable to resolve any such dispute within thirty (30) days of the delivery of a Dispute Notice (or such longer period as the Parties may agree upon), the Indemnifying Party or the Indemnified Party may thereafter commence litigation or other proceedings to resolve such dispute. The successful Party in any such proceeding shall be entitled to reimbursement from the non-successful Party for any and all of the successful Party’s costs and expenses including, without limitation, reasonable attorneys’ fees, incurred in connection with such proceeding.
(d) If any Notice of Claim relates to any Action against any Indemnified Party by a third party (a “Third Party Action”), the Indemnifying Party shall be entitled to participate in such Third Party Action and, at its option, assume the defense thereof with its own counsel (to be reasonably satisfactory to the Indemnified Party), at the Indemnifying Party’s sole expense, by providing written notice to the Indemnified Party delivered within thirty (30) days after the Indemnifying Party receives the Notice of Claim; provided, however, that the Indemnifying Party shall not have the right to assume the defense of any Third Party Action if the Indemnified Party shall have one or more legal or equitable defenses available to the Indemnified Party which are different from or in addition to those available to the Indemnifying Party, and, in the reasonable opinion of counsel for the Indemnified Party, counsel for the Indemnifying Party could not adequately represent the interests of the Indemnified Party because such interests could be in conflict with those of the Indemnifying Party. If the Indemnifying Party shall assume the defense of any Third Party Action, the Indemnified Party shall be entitled to participate in any Third Party Action at its expense. The Indemnifying Party shall not consent to the entry of a judgment with respect to the Third Party Action or enter into any settlement that involves anything other than the payment of money by the Indemnified Party without the Indemnified Party’s prior written consent (which shall not be unreasonably withheld or delayed). Whether or not the Indemnifying Party assumes the defense of any Third Party Action, the Indemnified Party shall not admit any liability with respect to, or settle, compromise or discharge, such Third Party Action without the Indemnifying Party’s prior written consent (which consent shall not be unreasonably withheld). The Indemnified Party shall provide the Indemnifying Party with access to its records and personnel relating to any such Third Party Action during normal business hours and shall otherwise cooperate with the Indemnifying Party in the defense or settlement thereof.
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6.6 Recoupment Against Escrow. Buyer shall be entitled to receive from the Escrow Amount payment of: (a) any amount due from Seller or Shareholders pursuant to Section 2.6(c), which right may be exercised at any time after such amount is determined in accordance with Section 2.6(b) (provided Seller and Shareholders do not otherwise timely pay such amount to Buyer pursuant to Section 2.6(c)); (b) any amounts due from Seller or Shareholders with respect to any claim for Losses required to be paid by Seller or Shareholders pursuant to Section 6.2, provided that a Final Resolution with respect to such claim for Losses has occurred; and (c) any amount due from Seller or Shareholders for Uncollected Receivables pursuant to Section 8.9, which right may be exercised at any time after Buyer’s delivery of notice of the Uncollected Receivables in accordance with Section 8.9 (provided Seller and Shareholders do not otherwise timely pay the amount of Uncollected Receivables to Buyer pursuant to Section 8.9). As used in this Agreement, a “Final Resolution” with respect to a claim for Losses pursuant to this Article VI shall mean (i) a written agreement duly signed by Seller and Buyer; (ii) a Deemed Acceptance under Section 6.5(b)); or (iii) a final, non-appealable order issued by a court with proper jurisdiction. When Buyer becomes entitled to any payment from the Escrow Amount pursuant to this Agreement, Buyer and Seller shall sign and deliver to the Escrow Agent a written direction authorizing such payment to Buyer, in accordance with the terms of the Escrow Agreement. Within five (5) business days after expiration of the Escrow Period, Buyer and Seller shall sign and deliver to the Escrow Agent, in accordance with the Escrow Agreement, a written direction authorizing the payment of the remaining Escrow Amount, if any, together with any interest thereon, to Seller (subject to payment of any amounts due to Buyer for Uncollected Receivables pursuant to Section 8.9); provided, however that if, at the expiration of the Escrow Period there are any pending claims by a Buyer Indemnified Party against Seller or Shareholders for indemnification pursuant to this Article VI, but there has not been a Final Resolution of such claim, then Buyer and Seller shall include in such written direction an authorization directing the Escrow Agent to continue to hold in escrow the amount that Buyer reasonably deems necessary to fully satisfy such claim (up to the full remaining amount then held in escrow), until such time as there is a Final Resolution of such claim or claims (at which time Buyer and Seller shall sign and deliver to the Escrow Agent a written direction authorizing payment to Buyer or Seller, as appropriate, in accordance with the terms of the Escrow Agreement).
6.7 Tax Treatment of Indemnification Payments. All indemnification payments made under this Agreement shall be treated by the Parties as an adjustment to the Purchase Price for Tax purposes, unless otherwise required by Law.
6.8 Effect of Investigation. The representations, warranties and covenants of the Indemnifying Party, and the Indemnified Party’s right to indemnification with respect thereto, shall not be affected or deemed waived by reason of any investigation made by or on behalf of the Indemnified Party (including by any of its Representatives).
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ARTICLE VII
CLOSING
7.1 Closing. The Closing shall take place simultaneously with the execution of this Agreement on the date of this Agreement (the “Closing Date”), and the Closing shall be deemed to occur effective as of 11:59 p.m. on the Closing Date. The Closing shall take place at a location acceptable to the Parties, and may be completed remotely through the exchange of signature pages by electronic means. The Parties shall take such actions, including the delivery of documents in escrow or by facsimile or e-mail, in order to facilitate completion on the Closing Date of all of the transactions contemplated hereby. Each Party’s obligations to consummate the transactions contemplated pursuant to this Agreement shall be conditioned on the other Party delivering at the Closing each of the documents or items required to be delivered by such other Party under Section 7.2 or Section 7.3, as applicable.
7.2 Closing Deliveries of Seller and Shareholders. At (or prior to) the Closing, Seller and Shareholders shall deliver to Buyer the following:
(a) A certificate, duly executed by the Secretary of Seller, containing true, correct and complete copies of the following:
(i) Certificate of the Secretary of the Commonwealth of Massachusetts, attesting to the good standing of Seller in such jurisdiction as of a date reasonably proximate to the Closing Date;
(ii) A copy of the articles of organization of Seller and of all amendments thereto, certified by the Secretary of the Commonwealth of Massachusetts;
(iii) A copy of the bylaws of Seller as amended through the Closing Date; and
(iv) a copy of all actions taken by Seller’s Board of Directors and by Shareholders approving this Agreement and the transactions contemplated hereby;
(b) A Bill of Sale, duly executed by Seller, in a form reasonably acceptable to Buyer and Seller, conveying the Purchased Assets to Buyer free and clear of all Encumbrances;
(c) Certificates of title for all titled motor vehicles included in the Purchased Assets, duly endorsed for transfer to Buyer;
(d) The Escrow Agreement, duly executed by Seller;
(e) An Assignment and Assumption Agreement, duly executed by Seller, with respect to each of the Assigned Contracts, in a form or forms reasonably acceptable to Buyer and Seller (collectively, the “Assignment and Assumption Agreement”), together with all consents and approvals as may be required in connection with the assignment by Seller and the assumption by Buyer of the Assigned Contracts;
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(f) The Restrictive Covenant Agreement, duly executed by Seller and each Shareholder;
(g) A Consulting Agreement, duly executed by Benjamin Leverone;
(h) A Consulting Agreement, duly executed by Jennifer Leverone;
(i) The Closing Statement, duly executed by each of Seller and Shareholders; and
(j) Such other instruments and documents necessary to transfer title in the Purchased Assets to the Buyer or to consummate any of the other transactions contemplated hereby as shall have been reasonably requested by counsel to Buyer on or before the Closing Date.
7.3 Closing Deliveries of Buyer. At (or prior to) the Closing, Buyer shall deliver to Seller and Shareholders (or the other Persons identified below) the following:
(a) The Closing Cash Payment;
(b) The Restrictive Covenant Payment;
(c) The Escrow Amount, to the Escrow Agent;
(d) The Escrow Agreement, duly executed by Buyer;
(e) The Assignment and Assumption Agreement, duly executed by Buyer;
(f) The Consulting Agreement with Benjamin Leverone, duly executed by Buyer;
(g) The Consulting Agreement with Jennifer Leverone, duly executed by Buyer;
(h) The Closing Statement, duly executed by Buyer; and
(i) Such other instruments and documents necessary to consummate any of the transactions contemplated hereby as shall have been reasonably requested by counsel to Seller on or before the Closing Date.
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ARTICLE VIII
FURTHER COVENANTS
8.1 Taxes.
(a) All sales or use Taxes payable by reason of the sale and transfer of any of the Purchased Assets hereunder shall be paid by Seller.
(b) Without limiting the generality of Section 3.1, Seller shall be and remain responsible for all (and Buyer shall not assume any) Liabilities for Taxes of Seller of any kind or description including, without limitation, any Taxes relating to the Business, the Purchased Assets or the Assumed Liabilities for periods prior to and ending as of the Closing. Each of Seller and Buyer shall pay Taxes for which it is responsible (and file all Tax Returns) when due.
(c) Seller shall notify all of the Taxing authorities in the jurisdictions that impose Taxes on Seller or where Seller has a duty to file Tax Returns of the transactions contemplated by this Agreement in the form and manner required by such Taxing authorities, if the failure to make such notifications or receive any available tax clearance certificate (a “Tax Clearance Certificate”) could subject Buyer to any Taxes of Seller. If any Taxing authority asserts that Seller is liable for any Tax (or that Buyer is liable for any Tax of Seller), Seller shall promptly pay any and all such amounts and shall provide evidence to Buyer that such Liabilities have been paid in full or otherwise satisfied. In no event shall Buyer be liable for any Liabilities arising from Seller’s failure to make of file such notifications.
8.2 Expenses of the Parties. Except as otherwise expressly provided in this Agreement, all expenses involved in the preparation, negotiation, authorization and consummation of this Agreement and the transactions contemplated hereby, including all fees and expenses of Representatives, shall be borne solely by the Party who shall have incurred the same, and no other Party shall have any responsibility with respect thereto.
8.3 Confidentiality. Except for necessary disclosure to such Party’s directors, officers, employees, counsel, accountants, bankers and other agents, and except for the disclosure contemplated by Section 8.6 or this Section 8.3, each Party shall keep the provisions of this Agreement confidential both prior and subsequent to the Closing Date. Without limiting the generality of the foregoing and except as otherwise provided in this Section, no Party shall make any press release or announcement with respect to the transactions contemplated hereby without the prior consent of Buyer and Seller, unless such Party determines, upon the advice of counsel, that such action is required by Law or the rules or regulations of any stock exchange or relevant Governmental Authority to which such party is subject. Notwithstanding anything in this Section 8.3 to the contrary, following the Closing, Buyer may, subject to the prior review by Seller, disclose in a press release or other format the existence of this Agreement with Seller and such additional information related to the transactions contemplated hereby as Buyer may be required to disclose under Law or the rules or regulations of any stock exchange or relevant Governmental Authority.
8.4 Non-Disclosure; Non-Solicitation and Non-Competition. At the Closing, Seller and each Shareholder shall execute a Non-Competition, Non-Solicitation and Non-Disclosure Agreement in favor of Buyer in the form attached hereto as Exhibit B (the “Restrictive Covenant Agreement”).
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8.5 Consulting Agreements. At the Closing, Buyer and Benjamin Leverone and Jennifer Leverone shall execute Consulting Agreements in substantially the form attached hereto as Exhibit C-1 and Exhibit C-2, respectively (collectively, the “Consulting Agreements”).
8.6 Notices to and Consents of Third Parties. Buyer, Seller and each Shareholder shall in a timely fashion give all notices to and make all filings with all governmental authorities and other Persons required to be given or made by such Party under any license, authorization, Contract or other instrument or otherwise in connection with the transactions contemplated by this Agreement including, without limitation, those described on Schedule 4.3 and Schedule 5.3.
8.7 Further Assurances. Each Party shall cooperate with the others, take such further action, and execute and deliver such further documents, as may be reasonably requested by any other Party in order to carry out the terms and purposes of this Agreement. Without limiting the generality of the foregoing, from and after the Closing Date:
(a) Each Party shall file all Tax Returns consistent with the allocation of the Purchase Price set forth in Schedule 2.4, and no Party shall take any position on audit or in litigation which is inconsistent with such allocation if such position would result in the payment of any additional Tax by, or the disallowance of any deduction or credit to, any other Party; and
(b) On the request of Buyer, Seller and Shareholders shall take such action and deliver to Buyer such further instruments of assignment, conveyance or transfer and other documents of further assurance as in the reasonable opinion of counsel to Buyer may be reasonably desirable to assure, complete and evidence the full and effective transfer, conveyance and assignment of the Purchased Assets and possession thereof to Buyer, its successors and assigns, and the performance of this Agreement by Seller and Shareholders in all respects. In addition, on the request of Buyer, Seller and Shareholders shall provide Buyer with such advice and assistance as may be reasonably necessary or appropriate to convey to Buyer the proprietary information, know-how and other intellectual property included in the Purchased Assets.
(c) After the Closing, Seller and Shareholders shall promptly transfer or deliver to Buyer cash, checks (which shall be properly endorsed) or other property or assets that Seller or Shareholders may receive in respect of any deposit, prepaid expense, Accounts Receivable or other item that constitutes part of the Purchased Assets or relates to the Assumed Liabilities. After the Closing, Buyer shall promptly transfer or deliver to Seller cash, checks (which shall be properly endorsed) or other property or assets that Buyer may receive in respect of any item that is an Excluded Asset or relates to Liabilities other than the Assumed Liabilities.
35
8.8 Employees and COBRA Compliance. Whether or not Buyer hires after the Closing any employees of Seller, Seller shall be responsible for all compensation and benefits (including, without limitation, salary, bonus, accrued vacation, any benefits attributable to compensation and service earned prior to the Closing, and sick pay) accruing prior to the Closing Date. Without limiting the generality of Section 3.2, Buyer is not assuming any obligations or Liability (i) to any of Seller’s employees for sick or vacation pay or other benefits, or (ii) under any Employee Benefit Plan. Seller agrees and acknowledges that all COBRA obligations arising with respect to the Purchased Assets or Seller’s Business prior to the Closing are and shall remain the sole responsibility of Seller, regardless of which Party is responsible under the COBRA regulations. Notwithstanding the previous sentence, Buyer agrees and covenants that it shall provide COBRA coverage to Seller’s “M&A qualified beneficiaries” (as that term is defined in 26 CFR §54.4980B-9) from and after the Closing, as the “buying group” as described in 26 CFR §54.4980B-1 et seq.; provided, however, that to the extent permitted under applicable COBRA regulations, during the period after the Closing through February 29, 2020 (the “Benefits Transition Period”), Seller shall continue, and Seller’s employees shall continue their existing coverage under, the applicable Employee Benefit Plans that are “employee welfare benefit plans” within the meaning of ERISA. Seller shall terminate such Employee Benefits Plan as of February 29, 2020. Buyer agrees to reimburse Seller, within ten (10) days after receipt of invoice, for the pro-rated amount of Seller’s costs for premiums for such insurance (not including the amount paid by covered employees), and such other additional documented costs associated with Seller’s maintaining such Employee Benefit Plans during the Benefits Transition Period. This Section 8.8 shall survive the Closing.
8.9 Uncollected Receivables. If, during the one-year period beginning on the Closing Date (the “Collection Period”), Buyer does not collect in full any of the Accounts Receivable of Seller set forth on the list of Accounts Receivable that Seller delivers to Buyer with its calculation of Estimated Closing Date Working Capital pursuant to Section 2.6(a) (as such list may be modified pursuant to Section 2.6), then Buyer shall deliver to Seller and Shareholders written notice identifying all such Accounts Receivable that were not so collected (“Uncollected Receivables”). Within five (5) business days of receipt of such notice from Buyer, Seller and Shareholders, jointly, shall pay to Buyer an amount equal to the total amount of Uncollected Receivables (or authorize Buyer in writing to receive payment of such applicable amount from the Escrow Amount in accordance with Section 6.6). If Seller and Shareholders fail to pay when due the amount of Uncollected Receivables due pursuant to this Section then, in addition to any other rights and remedies available to Buyer (and notwithstanding any failure by Seller and Shareholders to authorize such payment as provided above), Buyer shall have the right to receive such applicable amounts from the Escrow Amount, subject to and in accordance with the terms of Section 6.6. Upon receipt of the applicable payment from Seller and Shareholders for the Uncollected Receivables (or upon receipt of such amount from the Escrow Amount), Buyer shall assign, without recourse, the Uncollected Receivables to Seller, and Seller shall thereafter be entitled to take reasonable actions to collect, for Seller’s benefit, the Uncollected Receivables. During the Collection Period, Buyer shall use commercially reasonable efforts to collect the Accounts Receivable (but Buyer shall not be obligated to bring collection actions to collect any such accounts from an account debtor). During the Collection Period, (i) while she is a consultant of Buyer, Jennifer Leverone shall be permitted to assist in coordinating and managing the collection of the Accounts Receivable, and (ii) during the remainder of the Collection Period, Jennifer Leverone shall be permitted to assist Buyer in the collection of the Accounts Receivable which shall include contacting such customers on behalf of and in collaboration with Buyer. Buyer agrees to cooperate with Jennifer Leverone in the collection of the Accounts Receivable, which shall include, but not be limited to, providing periodic reports and access to customer and account information. Buyer shall apply amounts received during the Collection Period from customers in payment of accounts receivables (including the Accounts Receivable) to the specific outstanding invoice to which such payment relates. This Section 8.9 shall survive the Closing.
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ARTICLE IX
GENERAL PROVISIONS
9.1 Amendment and Waiver. This Agreement may be amended only by a writing executed by each of the Parties. No waiver of compliance with any provision or condition hereof, and no consent provided for herein, shall be effective unless evidenced by an instrument in writing duly executed by the Party sought to be charged therewith. No failure on the part of any Party to exercise, and no delay in exercising, any of its rights hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by any Party of any right preclude any other or future exercise thereof or the exercise of any other right.
9.2 Assignment. No Party shall assign or attempt to assign any of its rights or obligations under this Agreement without the prior written consent of each of the other Parties.
9.3 Notices. Each notice, report, demand, waiver, consent and other communication required or permitted to be given hereunder shall be in writing and shall be sent by (i) nationally recognized overnight courier, (ii) registered or certified first-class mail, postage prepaid and return receipt requested, or (iii) by facsimile or e-mail, addressed as follows:
If to Buyer: | Transcat, Inc. | |
35 Vantage Point Drive | ||
Rochester, New York 14624 | ||
Attention: Chief Financial Officer | ||
Fax: (585) 352-7788 | ||
e-mail: mike.tschiderer@transcat.com | ||
with a copy to: | Harter, Secrest & Emery LLP | |
1600 Bausch & Lomb Place | ||
Rochester, New York 14604 | ||
Attention: James M. Jenkins | ||
Fax: (585) 232-2152 | ||
e-mail: jjenkins@hselaw.com | ||
If to Seller or [either] Shareholder, to: | ||
TTE Laboratories, Inc. | ||
c/o Benjamin Leverone | ||
77 Main Street | ||
Hopkinton, MA 01748 | ||
Fax: (508) 435-7302 | ||
e-mail: bleverone@pipettes.com |
37
with a copy to: | Partridge Snow & Hahn LLP 30 Federal Street Boston, Massachusetts 02110 Attention: Lawrence J. Sheh Fax: (617) 292-7910 e-mail: LSheh@psh.com |
Each such notice and other communication given by overnight courier shall be deemed to have been given on the next business day, mail shall be deemed to have been given three (3) business days after it is deposited in the United States mail in the manner specified herein, and each such notice and other communication given by facsimile or e-mail shall be deemed to have been given when it is so transmitted and the appropriate answerback is received. Any Party may change its address for the purpose hereof by giving notice in accordance with the provisions of this Section 9.3.
9.4 Binding Effect. Subject to the provisions of Section 9.2, this Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns. This Agreement creates no rights of any nature in any Person not a party hereto.
9.5 Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the Laws of the State of New York applicable to agreements made and to be performed entirely within such State. Any legal suit, action or proceeding arising out of or related to this Agreement or the matters contemplated hereunder shall be instituted exclusively in the federal courts of the United States or the courts of the State of New York in each case located in the City of Rochester and County of Monroe, and each Party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action or proceeding and waives any objection based on improper venue or forum non conveniens. Service of process, summons, notice or other document by mail to such Party’s address set forth herein shall be effective service of process for any suit, action or other proceeding brought in any such court. Each Party hereby waives the right to a trial by jury.
9.6 Effect of Agreement. This Agreement, together with all Schedules and Exhibits, sets forth the entire understanding of the Parties with respect to the subject matter hereof, and supersedes any and all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof.
9.7 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable Law, but if any provision of this Agreement shall be prohibited or invalid under applicable Law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement.
9.8 Negotiated Transaction. The provisions of this Agreement were negotiated by the Parties hereto and this Agreement shall be deemed to have been drafted by all the Parties hereto, notwithstanding any presumptions at law to the contrary. Each of the Parties hereto has had the opportunity to seek legal and/or other professional counsel in connection with the negotiation and drafting of this Agreement and with respect to the consummation of the transactions contemplated hereby.
9.9 Headings; Counterparts. The Article and Section headings of this Agreement are for convenience of reference only and do not form a part hereof and do not in any way modify, interpret or construe the intention of the Parties. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
[Signature page follows]
38
In Witness Whereof, the Parties have duly executed this Agreement on the date first written above.
Transcat, Inc. | |
By: | /s/ Michael J. Tschiderer |
Michael J. Tschiderer, Chief Financial Officer | |
TTE Laboratories, Inc. | |
By: | /s/ Benjamin Leverone |
Benjamin Leverone, President | |
/s/ Benjamin Leverone | |
Benjamin Leverone, individually | |
/s/ Michael Anema | |
Michael Anema, individually |
[Signature page to Asset Purchase Agreement]
Table of Schedules and Exhibits
Schedules |
Schedule 2.1(b) – Tangible Personal Property |
Schedule 2.1(e) - Deposits and Prepaid Expenses |
Schedule 2.1(f) - Assigned Contracts |
Schedule 2.1(g) – Intellectual Property |
Schedule 2.2 – Excluded Assets |
Schedule 2.4 – Purchase Price Allocation |
Schedule 4.1– Organization and Standing |
Schedule 4.3 – Seller Conflicts |
Schedule 4.4 – Financial Statements |
Schedule 4.6 – Absence of Change |
Schedule 4.8(b) – Compliance with Laws (Permits) |
Schedule 4.9 – Condition and Sufficiency of Purchased Assets |
Schedule 4.13(c) – Intellectual Property |
Schedule 4.16 – Legal Proceedings |
Schedule 4.17 – Tax Matters |
Schedule 4.18 – Insurance |
Schedule 4.19 – Labor Relations and Employment Issues |
Schedule 4.20 – Employee Benefits |
Schedule 4.22 – Leased Real Property; Existing Leases |
Schedule 4.23 – Product and Service Warranties |
Schedule 4.24 – Relationship with Customers and Suppliers |
Schedule 4.25 – Officers, Directors and Shareholders |
Schedule 4.26 – Brokers and Finders |
Schedule 5.3 – Buyer Conflicts |
Exhibits |
Exhibit A - Form of Escrow Agreement |
Exhibit B - Form of Restrictive Covenant Agreement |
Exhibit C-1 - Form of Consulting Agreement for Benjamin Leverone |
Exhibit C-2 - Form of Consulting Agreement for Jennifer Leverone |
Exhibit A
Form of Escrow Agreement
Exhibit B
Form of Restrictive Covenant Agreement
Exhibit C-1
Form of Consulting Agreement - Benjamin Leverone
Exhibit C-2
Form of Consulting Agreement - Jennifer Leverone
Exhibit 21.1
SUBSIDIARIES
Subsidiary | Jurisdiction | |
Transcat Canada Inc. | Canada | |
United Scale & Engineering Corporation | Wisconsin | |
WTT Real Estate Acquisition, LLC | New York |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Transcat, Inc.
Rochester, NY
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration Nos. 333-109985, 333-191438 and 333-191631) and Form S-3 (Registration No. 333-222188) of Transcat, Inc. of our report dated June 8, 2020 relating to the consolidated financial statements and the effectiveness of internal control over financial reporting of Transcat, Inc., which appear in this Form 10-K of Transcat, Inc. for the year ended March 28, 2020.
/s/ Freed Maxick CPAs, P.C.
Rochester, New York
June 8, 2020
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 annual report on Form 10-K 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: | June 8, 2020 | /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, Michael J. Tschiderer, Vice President of Finance and Chief Financial Officer of Transcat, Inc., certify that:
1. I have reviewed this annual report on Form 10-K 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: | June 8, 2020 | /s/ Michael J. Tschiderer | |
Michael J. Tschiderer | |||
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 annual report on Form 10-K of Transcat, Inc., Lee D. Rudow, the Chief Executive Officer of Transcat, Inc., and Michael J. Tschiderer, 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 annual report on Form 10-K for the fiscal year ended March 28, 2020 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 annual report on Form 10-K for the fiscal year ended March 28, 2020 fairly presents, in all material respects, the financial condition and results of operations of Transcat, Inc. |
Date: | June 8, 2020 | /s/ Lee D. Rudow | |
Lee D. Rudow | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: | June 8, 2020 | /s/ Michael J. Tschiderer | |
Michael J. Tschiderer | |||
Vice President of Finance and Chief Financial Officer | |||
(Principal Financial Officer) |
&(,(E_UBKM^ YCCE7,NOA/\++ZZ\+WU[\-? %Y>^"(8+?P7>77@WP[<77A"WMI$FM
MH/"]Q-IKS:!#;S1QRP1:2]HD4D:/&JLJD 'Q[X#^(;^*?VSK*\U73_B/I5YJ
MWP;^)?A_1_#_ (A^&OQ,\/:7H&EZ+\0/! The following table presents a summary of certain unaudited quarterly financial data for fiscal years 2020 and 2019: The following table summarizes the restricted stock units vested and shares issued during fiscal years 2020 and 2019 (amounts in thousands): The following table summarizes the non-vested restricted stock units outstanding as of March 28, 2020: The following table summarizes the Company’s options for fiscal years 2020 and 2019: A summary of changes in the Company’s goodwill and intangible assets is as follows: Additions (see Note 9) Amortization Currency Translation Additions (see Note 9) Amortization Currency Translation The average shares outstanding used to compute basic and diluted earnings per share are as follows: NOTE 9 – BUSINESS ACQUISITIONS TTE: Effective, February 21, 2020, Transcat acquired substantially all of the assets of TTE Laboratories, Inc. (“TTE") a Boston, MA-based provider of pipette calibration services and equipment. 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. TTE’s focus on pipettes complements the current offerings Transcat provides to the life science sector. The Company applies the acquisition
method of accounting for business acquisitions. Under the acquisition method, the purchase price of an acquisition is assigned
to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the
date of acquisition. The Company uses a valuation hierarchy, as further described under Fair Value of Financial Instruments in
Note 1 above, and typically utilizes independent third-party valuation specialists to determine the fair values used in this allocation.
Purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition.
75% of the goodwill and intangible assets relating to the TTE acquisition has been allocated to the Service segment with the remaining
25% allocated to the Distribution segment. Intangible assets related to the TTE acquisition are being amortized for financial
reporting purposes on an accelerated basis over the estimated useful life of up to 10 years and are deductible for tax purposes.
Amortization of goodwill related to the TTE acquisition is deductible for tax purposes only. The total purchase price paid for the assets of TTE was approximately $12.2 million. $1.2 million of the purchase price has been put into escrow as a holdback for indemnification claims, if any. The following is a preliminary summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of TTE’s assets and liabilities acquired during the period presented: 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 acquisition of TTE had occurred at the beginning of fiscal year 2020 and fiscal year 2019. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transaction had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods. IIS: Effective July 19, 2019, Transcat acquired Infinite Integral Solutions Inc. (“IIS”). IIS, headquartered in Mississauga, Ontario, Canada, is the owner and developer of the CalTree™ suite of software solutions for the automation of calibration procedures and datasheet generation. Total consideration for the shares of IIS was 1.4 million Canadian dollars, subject in part to the achievement of certain milestones. 1.0 million Canadian dollars was paid during fiscal year 2020 and is included as a business acquisition in the Consolidated Statement of Cash Flows. 1.0 million Canadian dollars has been allocated to software and property and equipment and 0.3 million Canadian has been allocated to goodwill. Due to the immaterial amount of pre-acquisition revenue and expenses, no pro forma table of results has been presented. GRS: Effective April 1, 2019, Transcat acquired substantially all of the assets of Gauge Repair Service (“GRS”), a California-based provider of calibration services. This transaction leveraged the Company’s infrastructure while also increasing the depth and breadth of the Company’s service capabilities. Due to the immaterial amount of the purchase price of the GRS assets, it has been included in the purchases of property and equipment in the Consolidated Statement of Cash Flows. Angel’s: Effective August 31, 2018, Transcat acquired substantially all of the assets of Angel’s Instrumentation, Inc. (“Angel’s”), a Virginia-based provider of calibration services. This transaction expanded the Company’s geographic reach while also increasing the depth and breadth of the Company’s service capabilities. The Company applies the acquisition
method of accounting for business acquisitions. Under the acquisition method, the purchase price of an acquisition is assigned
to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the
date of acquisition. The Company uses a valuation hierarchy, as further described under Fair Value of Financial Instruments in
Note 1 above, and typically utilizes independent third-party valuation specialists to determine the fair values used in this allocation.
Purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition.
All of the goodwill and intangible assets relating to the Angel’s acquisition have been allocated to the Service segment.
Intangible assets related to the Angel’s acquisition are being amortized for financial reporting purposes on an accelerated
basis over the estimated useful life of up to 10 years and are deductible for tax purposes. Amortization of goodwill related to
the Angel’s acquisition is deductible for tax purposes only. The total purchase price paid for the assets of Angel’s was approximately $4.7 million, net of $0.1 million cash acquired. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Angel’s assets and liabilities acquired during the period presented: Certain of the Company’s acquisition agreements, including Angel’s, 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 March 28, 2020, there were no unpaid contingent consideration or holdback amounts reflected in the Consolidated Balance Sheets. $0.9 million of holdback amounts were paid during fiscal year 2020. As of March 30, 2019, $0.4 million of contingent consideration and $0.5 million of other holdback amounts were unpaid and reflected in current liabilities on the Consolidated Balance Sheets. During fiscal year 2019, $0.3 million of contingent consideration or other holdbacks were paid. 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 acquisition of Angel’s had occurred at the beginning of fiscal year 2019. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transaction had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods. NBS: Effective June 12, 2018, Transcat acquired substantially all of the assets of NBS Calibration, Inc. (“NBS”), an Arizona-based provider of calibration services. This transaction aligned with the Company’s acquisition strategy of targeting businesses that expand the Company’s geographic reach and leverage its infrastructure while also increasing the depth and breadth of the Company’s service capabilities. Due to the immaterial amount of the purchase price of the NBS assets, it has been included in the purchases of property and equipment, net, in the consolidated statement of cash flows. During fiscal year 2020, acquisition
costs of $0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.
During fiscal year 2019, acquisition costs of less than $0.1 million were recorded as incurred as general and administrative expenses
in the Consolidated Statements of Income. NOTE 5 – EMPLOYEE BENEFIT PLANS Defined Contribution Plan. All of Transcat’s U.S. based employees are eligible to participate in a defined contribution plan, the Long-Term Savings and Deferred Profit Sharing Plan (the “Plan”), provided they meet certain qualifications. In fiscal years 2020 and 2019, the Company matched 50% of the first 6% of pay that eligible employees contribute to the Plan. In the long-term savings portion of the Plan (the “401K Plan”), plan participants are entitled to a distribution of their vested account balance upon termination of employment or retirement. Plan participants are fully vested in their contributions while Company contributions are fully vested after three years of service. The Company’s matching contributions to the 401K Plan were approximately $0.9 million and $0.8 million in fiscal years 2020 and 2019, respectively. In the deferred profit sharing portion of the Plan, Company contributions are made at the discretion of the board of directors. The Company made no profit sharing contributions in fiscal years 2020 and 2019. Employee Stock Purchase Plan. The Company has an Employee Stock Purchase Plan (the “ESPP”) that allows for eligible employees as defined in the ESPP to purchase common shares of the Company through payroll deductions at a price that is 85% of the closing market price on the second last business day of each calendar month (the “Investment Date”). 650,000 shares can be purchased under the ESPP. The difference between the closing market price on the Investment Date and the price paid by employees is recorded as a general and administrative expense in the accompanying Consolidated Statements of Income. The expense related to the ESPP was less than $0.1 million in each of fiscal years 2020 and 2019. Non-Qualified Deferred Compensation Plan. The Company has available a non-qualified deferred compensation plan (the “NQDC Plan”) for directors and officers. Participants are fully vested in their contributions. At its discretion, the Company may elect to match employee contributions, subject to legal limitations in conjunction with the 401K Plan, which fully vest after three years of service. During fiscal years 2020 and 2019, the Company did not match any employee contributions. Participant accounts are adjusted to reflect performance, whether positive or negative, of selected investment options chosen by each participant during the deferral period. In the event of bankruptcy, the assets of the NQDC Plan are available to satisfy the claims of the Company’s general creditors. The liability for compensation deferred under the NQDC Plan was $0.4 million and $0.5 million as of March 28, 2020 and March 30, 2019, respectively, and is included as a component of other liabilities (non-current) on the Consolidated Balance Sheets. Post-retirement Health Care Plans. The Company has a defined benefit post-retirement health care plan which provides long-term care insurance benefits, medical and dental insurance benefits and medical premium reimbursement benefits to eligible retired corporate officers and their eligible spouses (the “Officer Plan”). The change in the post-retirement benefit obligation is as follows: The accumulated post-retirement benefit obligation is included as a component of other liabilities (non-current) in the Consolidated Balance Sheets. The components of net periodic post-retirement benefit cost and other amounts recognized in other comprehensive income are as follows: The prior service cost is amortized over the average remaining life expectancy of active participants in the Officer Plan. The estimated prior service cost that will be amortized from accumulated other comprehensive income into net periodic post-retirement benefit cost during fiscal year 2020 is less than $0.1 million. The post-retirement benefit obligation was computed by an independent third-party actuary. Assumptions used to determine the post-retirement benefit obligation and the net periodic postretirement benefit cost were as follows: Benefit payments are funded by the Company as needed. Payments toward the cost of a retiree’s medical and dental coverage are initially determined as a percentage of a base coverage plan in the year of retirement and are limited to increase at a rate of no more than 50% of the annual increase in medical and dental costs, as defined in the plan document. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows: Increasing the assumed health care cost trend rate by one percentage point would increase the accumulated post-retirement benefit obligation and the annual net periodic post-retirement benefit cost by $0.1 million. A one percentage point decrease in the healthcare cost trend would decrease the accumulated post-retirement benefit obligation and the annual net periodic post-retirement benefit cost by $0.1 million. XTR!_89KF]J*FQ\(6MR6'B!@&A^[4/']AH@VB:)TT-%(?F4S+S
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$ in Thousands12 Months Ended
Current Tax Provision:
Federal
$ 630
$ 701
State
285
349
Foreign
329
259
Current Tax Provision
1,244
1,309
Deferred Tax (Benefit) Provision:
Federal
371
926
State
77
(63)
Foreign
(29)
(82)
Deferred Tax (Benefit) Provision
419
781
Total
$ 1,663
$ 2,090
$ in Thousands12 Months Ended
Retirement Benefits [Abstract]
Post-retirement benefit obligation, at beginning of fiscal year
$ 1,311
$ 1,153
Service cost
77
40
Interest cost
48
44
Benefits paid
(98)
(86)
Actuarial loss
171
160
Post-retirement benefit obligation, at end of fiscal year
1,509
1,311
Fair value of plan assets, at end of fiscal year
Funded status, at end of fiscal year
(1,509)
(1,311)
Accumulated post-retirement benefit obligation, at end of fiscal year
$ 1,509
$ 1,311
$ in Thousands
Balance at Mar. 31, 2018
$ 3,578
$ 14,965
$ (281)
$ 33,086
$ 51,348
Balance (in Shares) at Mar. 31, 2018
7,155,000
Issuance of Common Stock
$ 7
278
285
Issuance of Common Stock (in Shares)
15,000
Repurchase of Common Stock
$ (4)
(79)
(62)
(145)
Repurchase of Common Stock (in shares)
(8,000)
Stock-Based Compensation
$ 24
1,303
1,327
Stock-Based Compensation (in Shares)
49,000
Other Comprehensive Income (Loss)
(330)
(330)
Net Income
7,145
7,145
Balance at Mar. 30, 2019
$ 3,605
16,467
(611)
40,169
$ 59,630
Balance (in Shares) at Mar. 30, 2019
7,211,000
7,210,882
Issuance of Common Stock
$ 85
1,642
$ 1,727
Issuance of Common Stock (in Shares)
168,000
Repurchase of Common Stock
$ (59)
(1,004)
(1,759)
(2,822)
Repurchase of Common Stock (in shares)
(118,000)
Stock-Based Compensation
$ 60
824
884
Stock-Based Compensation (in Shares)
120,000
Other Comprehensive Income (Loss)
(399)
(399)
Net Income
8,067
8,067
Balance at Mar. 28, 2020
$ 3,691
$ 17,929
$ (1,010)
$ 46,477
$ 67,087
Balance (in Shares) at Mar. 28, 2020
7,381,000
7,381,180
$ in Thousands12 Months Ended
Statement of Comprehensive Income [Abstract]
Other, tax expense (benefit)
$ 42
$ 51
12 Months Ended
Quarterly Financial Information Disclosure [Abstract]
Schedule of Quarterly Data
Basic
Diluted
Total
Gross
Net
Earnings
Earnings
Revenues
Profit
Income
Per Share (a)
Per Share (a)
FY 2020:
Fourth Quarter
$
45,762
$
12,053
$
2,493
$
0.34
$
0.33
Third Quarter
43,179
9,928
1,477
0.20
0.20
Second Quarter
41,763
10,445
2,379
0.32
0.32
First Quarter
42,395
10,052
1,718
0.24
0.23
FY 2019:
Fourth Quarter
$
44,493
$
11,543
$
2,660
$
0.37
$
0.35
Third Quarter
40,868
9,548
1,569
0.22
0.21
Second Quarter
38,879
9,139
1,488
0.21
0.20
First Quarter
36,658
9,113
1,428
0.20
0.19
(a)
Earnings per share calculations for each quarter include the weighted average effect of stock issuances and common stock equivalents for the quarter; therefore, the sum of quarterly earnings per share amounts may not equal full-year earnings per share amounts, which reflect the weighted average effect on an annual basis. Diluted earnings per share calculations for each quarter include the effect of stock options and non-vested restricted stock units, when dilutive to the quarter. In addition, basic earnings per share and diluted earnings per share may not add due to rounding.
12 Months Ended
Share-based Payment Arrangement [Abstract]
Schedule of Share-based Compensation, Restricted Stock and Restricted Stock Units Activity
Grant
Total
Date
Number
Number
Fair
Target
Of
Date
Date
Measurement
of Units
Value
Level
Shares
Shares
Granted
Period
Granted
Per Unit
Achieved
Issued
Issued
April 2015
April 2015 – March 2018
63
$
9.59
50%
32
May 2018
June 2017
June 2017 – May 2018
1
$
12.00
Time Vested
1
June 2018
January 2019
January 2019
1
$
19.04
Time Vested
1
January 2019
April 2018
April 2018 – March 2019
1
$
15.65
Time Vested
1
April 2019
April 2016
April 2016 – March 2019
82
$
10.13
131%
107
May 2019
June 2017
June 2017 – May 2019
1
$
12.00
Time Vested
1
June 2019
October 2018
October 2018 – September 2019
1
$
20.81
Time Vested
1
October 2019
Schedule of Restricted Stock Units Award Activity
Total
Grant Date
Estimated
Number
Fair
Level of
Date
Measurement
of Units
Value
Achievement at
Granted
Period
Granted
Per Unit
March 28, 2020
April 2017
April 2017 – March 2020
62
$
12.90
79% of target level
April 2018
April 2018 – March 2020
1
$
15.65
Time Vested
May 2018
April 2018 – March 2021
23
$
15.30
90% of target level
May 2018
April 2018 – March 2021
24
$
15.30
Time Vested
October 2018
October 2018 – September 2027
9
$
20.81
Time Vested
May 2019
April 2019 – March 2022
24
$
23.50
90% of target level
May 2019
April 2019 – March 2022
24
$
23.50
Time Vested
August 2019
August 2019 – July 2020
1
$
23.00
Time Vested
September 2019
September 2019 – September 2020
18
$
22.77
Time Vested
Schedule of Stock Options Activity
Weighted
Weighted
Average
Average
Number
Exercise
Remaining
Aggregate
Of
Price Per
Contractual
Intrinsic
Shares
Share
Term (in Years)
Value
Outstanding as of March 31, 2018
272
$
10.27
Granted
25
19.95
Exercised
(2
)
9.66
Forfeited
(4
)
6.75
Outstanding as of March 30, 2019
291
11.16
Granted
15
25.06
Exercised
(156
)
9.16
Forfeited
-
-
Outstanding as of March 28, 2020
150
14.63
4
$
1,619
Exercisable as of March 28, 2020
115
$
12.20
3
$
1,514
12 Months Ended
Accounting Policies [Abstract]
Schedule of Estimated Useful Lives
Years
Machinery, Equipment and Software
2 – 15
Rental Equipment
5 – 8
Furniture and Fixtures
3 – 10
Leasehold Improvements
2 – 10
Schedule of Goodwill and Intangible Assets
Goodwill
Intangible Assets
Distribution
Service
Total
Distribution
Service
Total
Net Book Value as of March 31, 2018
$
9,759
$
22,981
$
32,740
$
487
$
5,018
$
5,505
-
2,012
2,012
-
1,650
1,650
-
-
-
(177
)
(1,713
)
(1,890
)
Adjustment
-
(207
)
(207
)
-
(32
)
(32
)
Net Book Value as of March 30, 2019
9,759
24,786
34,545
310
4,923
5,233
1,695
5,580
7,275
1,133
3,397
4,530
-
-
-
(146
)
(1,619
)
(1,765
)
Adjustment
-
(280
)
(280
)
-
(21
)
(21
)
Net Book Value as of March 28, 2020
$
11,454
$
30,086
$
41,540
$
1,297
$
6,680
$
7,977
Schedule of Weighted Average Number of Shares
For the Fiscal Years Ended
March 28,
March 30,
2020
2019
Average Shares Outstanding – Basic
7,331
7,196
Effect of Dilutive Common Stock Equivalents
156
319
Average Shares Outstanding – Diluted
7,487
7,515
Anti-dilutive Common Stock Equivalents
15
20
12 Months Ended
Business Combinations [Abstract]
BUSINESS ACQUISITIONS
FY 2020
Goodwill
$
6,779
Intangible Assets – Customer Base & Contracts
4,410
Intangible Assets – Covenant Not to Compete
120
11,309
Plus:
Current Assets
939
Non-Current Assets
261
Less:
Current Liabilities
(278
)
Total Purchase Price
$
12,231
(Unaudited)
Fiscal Years Ended
March 28,
March 30,
2020
2019
Total Revenue
$
180,053
$
168,008
Net Income
$
8,560
$
7,670
Basic Earnings Per Share
$
1.17
$
1.07
Diluted Earnings Per Share
$
1.14
$
1.02
FY 2019
Goodwill
$
1,902
Intangible Assets – Customer Base & Contracts
1,470
Intangible Assets – Covenant Not to Compete
130
3,502
Plus:
Current Assets
786
Non-Current Assets
473
Less:
Current Liabilities
(24
)
Total Purchase Price
$
4,737
(Unaudited)
Fiscal Years
Ended
March 30,
2019
Total Revenue
$
163,039
Net Income
$
7,725
Basic Earnings Per Share
$
1.07
Diluted Earnings Per Share
$
1.03
12 Months Ended
Retirement Benefits [Abstract]
EMPLOYEE BENEFIT PLANS
FY 2020
FY 2019
Post-retirement benefit obligation, at beginning of fiscal year
$
1,311
$
1,153
Service cost
77
40
Interest cost
48
44
Benefits paid
(98
)
(86
)
Actuarial loss
171
160
Post-retirement benefit obligation, at end of fiscal year
1,509
1,311
Fair value of plan assets, at end of fiscal year
-
-
Funded status, at end of fiscal year
$
(1,509
)
$
(1,311
)
Accumulated post-retirement benefit obligation, at end of fiscal year
$
1,509
$
1,311
FY 2020
FY 2019
Net periodic post-retirement benefit cost:
Service cost
$
77
$
40
Interest cost
48
44
Amortization of prior service cost
1
1
126
85
Benefit obligations recognized in other comprehensive income:
Amortization of prior service cost
(1
)
(1
)
Net gain
113
171
112
170
Total recognized in net periodic benefit cost and other comprehensive income
$
238
$
255
Amount recognized in accumulated other comprehensive income, at end of fiscal year:
Unrecognized prior service cost
$
518
$
405
March 28,
March 30,
2020
2019
Weighted average discount rate
3.3%
3.8%
Medical care cost trend rate:
Trend rate assumed for next year
6.8%
8.5%
Ultimate trend rate
3.8%
6.0%
Year that rate reaches ultimate trend rate
2075
2025
Dental care cost trend rate:
Trend rate assumed for next year and remaining at that level thereafter
3.5%
5.0%
Fiscal
Year
Amount
2021
$
136
2022
145
2023
129
2024
108
2025
99
Thereafter
$
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