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Note 5 - Business Acquisitions | 9 Months Ended
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Dec. 24, 2022
Notes to Financial Statements |
Business Combination Disclosure [Text Block] | NOTE 5 – BUSINESS ACQUISITIONS Complete Calibrations: Effective September 28, 2022, Transcat purchased all of the outstanding capital stock of Galium Limited (d/b/a Complete Calibrations) ("Complete Calibrations"), an Irish company. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. All the goodwill related to the Complete Calibrations acquisition has been allocated to the Service segment. Amortization of goodwill related to the Complete Calibrations acquisition is not deductible for tax purposes. The goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. The total purchase price paid for Complete Calibrations was approximately $1.2 million in cash. In connection with this transaction, the Company also entered into a Technology License Agreement with Calibration Robots Limited, an Irish company and related party to Complete Calibrations, for the use of their proprietary robotics in completing calibrations. The Technology License Agreement includes transactional royalties in the amount of 3 Euros ($3) per calibration performed by technology covered under this license agreement, with a royalty term of up to ten years commencing from the earlier of (i) the date on which cumulative revenue earned from technology covered under this license agreement equals 0.75 million Euros ($0.80 million), and (ii) March 28, 2024. In addition to the transactional royalties, as long as a key employee is employed by the Company, there is an annual royalty fee of 0.1 million Euros ($0.1 million). For purposes of this paragraph, we used a conversion rate of 1.0617 to convert Euro to U.S. dollar as of December 24, 2022. The purchase price allocation is subject to revision based upon our final review of assets acquired, and liabilities assumed. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Complete Calibrations’ assets and liabilities acquired on September 28, 2022 (in thousands):
Goodwill |  | $ | 1,123 |
Plus: | Cash |  |  | 10 |
| Inventory |  |  | 44 |
Total Purchase Price |  | $ | 1,177 |
From the date of acquisition, Complete Calibrations has contributed revenue of $0.1 million and operating income of less than $0.1 million. e2b: Effective September 27, 2022, Transcat acquired substantially all of the assets of e2b Calibration (“e2b”), an Ohio based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. The e2b goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the e2b acquisition has been allocated to the Service segment. Intangible assets related to the e2b acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are deductible for tax purposes. Amortization of goodwill related to the e2b acquisition is deductible for tax purposes. The total purchase price paid for the assets of e2b was approximately $3.1 million in cash. Pursuant to the asset purchase agreement, the Company has $0.9 million of the purchase price in escrow for certain potential post-closing adjustments. The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, working capital adjustments, assets acquired, and liabilities assumed. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of e2b’s assets and liabilities acquired on September 27, 2022 (in thousands):
Goodwill |  | $ | 1,590 |
Intangible Assets – Customer Base & Contracts |  |  | 746 |
Intangible Assets – Covenant Not to Compete |  |  | 396 |
|  |  |  | 2,732 |
Plus: | Accounts Receivable |  |  | 361 |
| Other Current Assets |  |  | 24 |
| Property and Equipment |  |  | 103 |
Less: | Current Liabilities |  |  | (121 | )
Total Purchase Price |  | $ | 3,099 |
From the date of acquisition, e2b has contributed revenue of $0.9 million and operating income of $0.2 million, which includes the negative impact of amortization of the acquired intangible assets. Alliance: Effective May 31, 2022, Transcat acquired substantially all of the assets of Charlton Jeffmont Inc., Raitz Inc. and Toolroom Calibration Inc. d/b/a Alliance Calibration (“Alliance”), an Ohio based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s service capabilities. The Alliance goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the Alliance acquisition has been allocated to the Service segment. Intangible assets related to the Alliance acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are deductible for tax purposes. Amortization of goodwill related to the Alliance acquisition is deductible for tax purposes. The purchase price for Alliance was approximately $4.7 million and was paid with $4.0 million in cash and the issuance of 2,284 shares of our common stock valued at $0.1 million. Pursuant to the asset purchase agreement, the Company held back $0.5 million of the purchase price for certain potential post-closing adjustments, and the purchase price will be subject to reduction by $0.5 million if a key customer relationship is not retained. The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, working capital adjustments, assets acquired, and liabilities assumed. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Alliance’s assets and liabilities acquired on May 31, 2022 (in thousands):
Goodwill | $ | 1,783 |
Intangible Assets – Customer Base & Contracts |  | 2,320 |
Intangible Assets – Covenant Not to Compete |  | 114 |
|  |  | 4,217 |
Plus: | Accounts Receivable |  | 343 |
| Property and Equipment |  | 170 |
Less: | Current Liabilities |  | (27 | )
Total Purchase Price | $ | 4,703 |
From the date of acquisition, Alliance has contributed revenue of $1.3 million and operating income of $0.1 million, which includes the negative impact of amortization of the acquired intangible assets. Tangent: Effective December 31, 2021, Transcat purchased all the outstanding membership units of Tangent Labs, LLC (“Tangent”). Tangent provides in-house and on-site calibrations of precision measurement and control instrumentation to customers in the life science, aerospace and other regulated industries, and has lab locations in Indianapolis, Indiana and Huntsville, Alabama. This transaction aligned with a key component of the Company’s strategy of acquiring local capabilities in attractive geographies. The Tangent goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the Tangent acquisition has been allocated to the Service segment. Intangible assets related to the Tangent acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are deductible for tax purposes. Amortization of goodwill related to the Tangent acquisition is not deductible for tax purposes. The purchase price for Tangent was approximately $8.9 million, all paid in cash, and is subject to certain customary holdback provisions and a portion of which was placed in escrow to secure the sellers’ obligations in the event that a key employee terminates employment with Tangent on or before the first anniversary of the closing of the transaction. $7.9 million was paid in cash and $1.0 million of the purchase price has been put into escrow for indemnification claims, if any. During the second quarter of fiscal year 2023, the key employee terminated their employment with the Company. As a result, the Company took $0.2 million out of the escrow account and it was recorded as a gain in the Company's Consolidated Statement of Income. During the second quarter of fiscal year 2023, a measurement period adjustment was recorded to recognize the fair value of Property and Equipment acquired, with a corresponding reduction to Goodwill. There was no remeasurement period adjustment in the third quarter of fiscal year 2023. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Tangent’s assets and liabilities acquired on December 31, 2021 (in thousands):
Goodwill |  | $ | 5,385 |
Intangible Assets – Customer Base & Contracts |  |  | 4,150 |
Intangible Assets – Covenant Not to Compete |  |  | 220 |
|  |  |  | 9,755 |
Plus: | Cash |  |  | 26 |
| Accounts Receivable |  |  | 187 |
| Other Current Assets |  |  | 16 |
| Property and Equipment |  |  | 203 |
Less: | Current Liabilities |  |  | (68 | )
| Deferred Tax Liability |  |  | (1,195 | )
Total Purchase Price |  | $ | 8,924 |
During the first nine months of fiscal year 2023, Tangent contributed revenue of $1.7 million and operating loss of less than $0.1 million, which includes the negative impact of amortization of the acquired intangible assets. NEXA: Effective August 31, 2021, Transcat purchased all of the outstanding capital stock of Cal OpEx Limited (d/b/a NEXA Enterprise Asset Management), an Irish company, which owns all of the issued and outstanding capital stock of its U.S.-based subsidiary, Cal OpEx Inc., a Delaware corporation (collectively, “NEXA”). NEXA provides calibration optimization and other technical solutions to improve asset and reliability management programs to pharmaceutical, biotechnology, and medical device companies worldwide. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. The NEXA goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All of the goodwill and intangible assets relating to the NEXA acquisition has been allocated to the Service segment. Intangible assets related to the NEXA acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to five years and are deductible for tax purposes. Amortization of goodwill related to the NEXA acquisition is not deductible for tax purposes. The purchase price for NEXA was approximately $26.2 million and was paid with $23.9 million in cash and the issuance of 34,943 shares of our common stock valued at $2.4 million. Additionally, there are potential earn-out payments of up to $7.5 million over the four-year period following the closing of the transaction based upon NEXA achieving certain annual revenue and EBITDA goals. If achieved, the earn-out payments will also be made in shares of common stock unless certain criteria is met for cash payment. As of August 31, 2021 the estimated fair value for the contingent earn-out payments, classified as Level 3 in the fair value hierarchy, was $0.2 million and included in the purchase price allocation below. This amount was calculated using a Geometric Brownian motion distribution that was then used in a Monte Carlo simulation model. Assumptions used in the Monte Carlo simulation model included: 1) weighted-average cost of capital of 6.60%, 2) risk-free interest rate of 0.58%, 3) asset volatility of 20.00%, and 4) forecasted revenue and EBITDA. This contingent consideration is remeasured quarterly. If, as a result of remeasurement, the value of the contingent consideration changes, any charges or income will be included in the Company's Consolidated Statements of Income. During the second quarter of fiscal year 2023, the Company reduced the contingent consideration down to zero. As a result of remeasurement, the change was included in the Company’s Consolidated Statements of Income. There were no remeasurement adjustments during the third quarter of fiscal year 2023. $0.1 million of the purchase price has been put into escrow for indemnification claims, if any. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of NEXA’s assets and liabilities acquired on August 31, 2021 (in thousands):
Goodwill |  | $ | 15,679 |
Intangible Assets – Customer Base & Contracts |  |  | 5,600 |
Intangible Assets – Backlog |  |  | 490 |
Intangible Assets – Covenant Not to Compete |  |  | 600 |
|  |  |  | 22,369 |
Plus: | Cash |  |  | 3,732 |
| Accounts Receivable |  |  | 2,434 |
| Non-Current Assets |  |  | 38 |
Less: | Current Liabilities |  |  | (572 | )
| Deferred Tax Liability |  |  | (1,769 | )
Total Purchase Price |  | $ | 26,232 |
During the first nine months of fiscal year 2023, NEXA contributed revenue of $9.8 million and operating income of $0.2 million, which includes the negative impact of amortization of the acquired intangible assets. Upstate Metrology: Effective April 29, 2021, Transcat acquired substantially all of the assets of Upstate Metrology Inc. (“Upstate Metrology”), a New York based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that can leverage the Company’s already existing operating infrastructure. All the goodwill related to the Upstate Metrology acquisition has been allocated to the Service segment. Amortization of goodwill related to the Upstate Metrology acquisition is deductible for tax purposes. The goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. The total purchase price for the assets of Upstate Metrology was approximately $0.9 million. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Upstate Metrology’s assets and liabilities acquired on April 29, 2021 (in thousands):
Goodwill |  | $ | 483 |
Plus: | Current Assets |  |  | 189 |
| Non-Current Assets |  |  | 270 |
Less: | Current Liabilities |  |  | (11 | )
Total Purchase Price |  | $ | 931 |
Since this operation was integrated immediately into our existing operation, Upstate Metrology’s separate operating income in undeterminable. The results of acquired businesses are included in Transcat’s consolidated operating results as of the dates the businesses were acquired. The following unaudited pro forma information presents the Company’s results of operations as if the acquisitions of Complete Calibrations, e2b, Alliance, Tangent, NEXA and Upstate Metrology had occurred at the beginning of fiscal year 2022. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transactions had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods.
|  | (Unaudited) |  |  | (Unaudited) |
|  | Third Quarter Ended |  |  | Nine Months Ended |
(in thousands except per share information) |  | December 24, 2022 |  |  | December 25, 2021 |  |  | December 24, 2022 |  |  | December 25, 2021 |
Total Revenue |  | $ | 57,402 |  |  | $ | 52,760 |  |  | $ | 170,648 |  |  | $ | 158,848 |
Net Income |  | $ | 1,601 |  |  | $ | 1,648 |  |  | $ | 7,245 |  |  | $ | 9,749 |
Basic Earnings Per Share |  | $ | 0.21 |  |  | $ | 0.22 |  |  | $ | 0.96 |  |  | $ | 1.30 |
Diluted Earnings Per Share |  | $ | 0.21 |  |  | $ | 0.22 |  |  | $ | 0.95 |  |  | $ | 1.28 |
Certain of the Company’s acquisition agreements include provisions for contingent consideration and other holdback amounts. The Company accrues for contingent consideration and holdback provisions based on their estimated fair value at the date of acquisition. There is uncertainty of the fair value measurement from the use of significant unobservable inputs if those inputs reasonably could have been different at the reporting date. Changes in those significant unobservable inputs to a different amount might result in a significantly higher or lower fair value. As of December 24, 2022, $0.5 million of other holdback amounts unpaid are reflected in current liabilities on the Consolidated Balance Sheets. During the first nine months of fiscal year 2023 and fiscal year 2022, no contingent consideration or other holdback amounts were paid. During the first nine months of fiscal year 2023, acquisition costs of $0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income. During the first nine months of fiscal year 2022, acquisition costs were $0.9 million.

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