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Note 1 - General | 9 Months Ended
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Dec. 28, 2024
Notes to Financial Statements |
Significant Accounting Policies [Text Block] | NOTE 1 – GENERAL Description of Business: Transcat, Inc. (“Transcat,” “we,” “us,” “our” or the “Company”) is a leading provider of accredited calibration services, cost control and optimization services, and distribution and rental of value-added professional grade handheld test, measurement and control instrumentation. The Company is focused on providing services and products to highly regulated industries, particularly the life science industry, which includes pharmaceutical, biotechnology, medical device and other FDA-regulated businesses. Additional industries served include industrial manufacturing; energy and utilities, including oil and gas; chemical manufacturing; FAA-regulated businesses, including aerospace and defense and other industries that require accuracy in their processes, confirmation of the capabilities of their equipment, and for which the risk of failure is very costly. Basis of Presentation: Transcat’s unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 30, 2024 (“fiscal year 2024”) contained in the Company’s Annual Report on Form 10-K for fiscal year 2024 filed with the SEC. Use of Estimates: The preparation of Transcat’s Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States ("GAAP") requires that the Company make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to, allowance for credit losses and returns, inventory reserves, estimated levels of achievement for performance-based restricted stock units, fair value of stock options, depreciable lives of fixed assets, estimated lives of intangible assets, fair value of the goodwill reporting units, and the valuation of assets acquired, liabilities assumed and consideration transferred in business acquisitions. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Consolidated Financial Statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes. Actual results could differ from those estimates. Such changes and refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to the Consolidated Financial Statements. Cash and Cash Equivalents: Cash equivalents consist of highly liquid investments with an original maturity when purchased of three months or less and are stated at cost, which approximates fair value. Marketable Securities: Marketable securities consist of highly liquid investments with an original maturity when purchased of more than three months and are stated at fair value on the Consolidated Balance Sheets. These securities are considered trading securities. Earnings on the marketable securities are included in interest income in the Consolidated Statements of Income. Revenue Recognition: Distribution non-rental revenue is recorded when an order’s title and risk of loss transfers to the customer, which is generally upon shipment. Distribution rental revenue is recognized over time using the time-elapsed output method as this portrays the transfer of control to the customer. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. The majority of the Company’s revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue over time using the time-elapsed output method as this portrays the transfer of control to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for product shipped or services performed. Sales taxes and other taxes billed and collected from customers are excluded from revenue. The Company generally invoices its customers for freight, shipping, and handling charges. Freight billed to customers is included in revenue. Shipping and handling is not included in revenue. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data. Under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, we use judgments that could potentially impact both the timing of our satisfaction of performance obligations. Such judgments include considerations in determining our transaction prices and when our performance obligations are satisfied for our standard product sales that include general payment terms that are between net 30 and 90 days. Revenue recognized from prior period performance obligations for the third quarter of the fiscal year ending March 29, 2025 (“fiscal year 2025”) was immaterial. As of December 28, 2024, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to ASC Topic 606, the Company applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of December 28, 2024 and March 30, 2024 were immaterial. See Note 4 for disaggregated revenue information.
|  | % of Total Net Sales |
|  | Third Quarter Ended |  |  | Nine Months Ended |
|  | December 28, |  |  | December 23, |  |  | December 28, |  |  | December 23, |
|  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
Point-in-Time |  |  | 86.5 | % |  |  | 88.8 | % |  |  | 86.2 | % |  |  | 89.9 | %
Over Time - Output Method |  |  | 13.5 | % |  |  | 11.2 | % |  |  | 13.8 | % |  |  | 10.1 | %
Total |  |  | 100.0 | % |  |  | 100.0 | % |  |  | 100.0 | % |  |  | 100.0 | %
Fair Value of Financial Instruments: Transcat has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Company to develop its own assumptions. The carrying amount of debt on the Consolidated Balance Sheets approximates fair value due to variable interest rate pricing on a portion of the debt with the balance bearing an interest rate approximating current market rates, and the carrying amounts for cash and cash equivalents, marketable securities, accounts receivable and accounts payable approximate fair value due to their short-term nature. Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds and are valued based on Level 1 inputs. At each of December 28, 2024 and March 30, 2024, investment assets totaled $0.1 million and are included as a component of other assets (non-current) on the Consolidated Balance Sheets. Stock-Based Compensation: The Company measures the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. The Company records compensation cost related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period for awards expected to vest. Excess tax benefits for share-based award activity are reflected in the Consolidated Statements of Income as a component of the provision for income taxes. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. The Company did not capitalize any stock-based compensation costs as part of an asset. The Company estimates forfeiture rates based on its historical experience. During the first nine months of fiscal year 2025 and fiscal year 2024, the Company recorded non-cash stock-based compensation cost of $2.1 million and $3.3 million, respectively, in the Consolidated Statements of Income. Foreign Currency Translation and Transactions: The accounts of Cal OpEx Limited (d/b/a Transcat Ireland), an Irish company, and Transcat Canada Inc., both of which are wholly-owned subsidiaries of the Company, are maintained in their local currencies, the Euro and the Canadian dollar, respectively, and have been translated to U.S. dollars. Accordingly, the amounts representing assets and liabilities have been translated at the period-end rates of exchange and related revenue and expense accounts have been translated at an average rate of exchange during the period. Gains and losses arising from translation of Cal OpEx Limited’s and Transcat Canada Inc.’s financial statements into U.S. dollars are recorded directly to the accumulated other comprehensive loss component of shareholders’ equity. Transcat records foreign currency gains and losses on business transactions denominated in foreign currency. The net foreign currency was a net loss of less than $0.1 million for the first nine months of fiscal year 2025 and anet gain of less than $0.1million for the first nine months of fiscal year 2024. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its future earnings denominated in Canadian dollars would be adversely affected by changes in currency exchange rates. The Company does not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a gain of $0.2 million during each of the first nine months of fiscal years 2025 and 2024, was recognized as a component of Interest and Other (Income) Expenses, net in the Consolidated Statements of Income. The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated in Canadian dollars being hedged. On December 28, 2024, the Company had a foreign exchange contract, which matured in January 2025, outstanding in the notional amount of $2.9 million. This contract was subsequently renewed and remains in place. The Company does not use hedging arrangements for speculative purposes. Earnings Per Share: Basic earnings per share of the Company's common stock, par value $0.50 per share ("common stock"), are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of stock options, unvested restricted stock units using the treasury stock method and contingent consideration classified as equity in periods in which they have a dilutive effect. In computing the per share effect of assumed conversion, proceeds received from the exercise of options and unvested restricted stock units are considered to have been used to purchase shares of common stock at the average market prices during the period, and the resulting net additional shares of common stock are included in the calculation of average shares of common stock outstanding. For the third quarter of each of fiscal year 2025 and 2024, the net additional common stock equivalents had a ($0.01) effect on the calculation of diluted earnings per share. For the first nine months of each of fiscal years 2025 and 2024, the net additional common stock equivalents had a ($0.01) effect on the calculation of diluted earnings per share. The average shares outstanding used to compute basic and diluted earnings per share are as follows (amounts in thousands):
|  | Third Quarter Ended |  |  | Nine Months Ended |
|  | December 28, |  |  | December 23, |  |  | December 28, |  |  | December 23, |
|  | 2024 |  |  | 2023 |  |  | 2024 |  |  | 2023 |
Average Shares Outstanding – Basic |  |  | 9,230 |  |  |  | 8,615 |  |  |  | 9,147 |  |  |  | 8,060 |
Effect of Dilutive Common Stock Equivalents |  |  | 96 |  |  |  | 137 |  |  |  | 96 |  |  |  | 127 |
Average Shares Outstanding – Diluted |  |  | 9,326 |  |  |  | 8,752 |  |  |  | 9,243 |  |  |  | 8,187 |
Anti-dilutive Common Stock Equivalents |  |  | 53 |  |  |  | 37 |  |  |  | 42 |  |  |  | 46 |
Goodwill and Intangible Assets: Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment for each reporting unit on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company is permitted, but not required, to qualitatively assess indicators of a reporting unit’s fair value to determine whether it is necessary to perform the two-step goodwill impairment test. If a quantitative test is deemed necessary, a discounted cash flow analysis is prepared to estimate fair value. Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The allocation of goodwill and intangible assets by segment for the fiscal year 2025 additions are preliminary. A summary of changes in the Company’s goodwill and intangible assets is as follows (amounts in thousands):
|  | Goodwill |  |  | Intangible Assets |
|  | Distribution |  |  | Service |  |  | Total |  |  | Distribution |  |  | Service |  |  | Total |
Net Book Value as of March 30, 2024 |  | $ | 38,216 |  |  | $ | 67,369 |  |  | $ | 105,585 |  |  | $ | 6,993 |  |  | $ | 12,994 |  |  | $ | 19,987 |
Additions |  |  | 21,693 |  |  |  | 49,713 |  |  |  | 71,406 |  |  |  | 5,360 |  |  |  | 37,880 |  |  |  | 43,240 |
Amortization |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2,220 | ) |  |  | (3,297 | ) |  |  | (5,517 | )
Currency Translation Adjustment |  |  | - |  |  |  | (374 | ) |  |  | (374 | ) |  |  | - |  |  |  | (28 | ) |  |  | (28 | )
Net Book Value as of December 28, 2024 |  | $ | 59,909 |  |  | $ | 116,708 |  |  | $ | 176,617 |  |  | $ | 10,133 |  |  | $ | 47,549 |  |  | $ | 57,682 |
Other Liabilities: A summary of other current and non-current liabilities is as follows (amounts in thousands):
|  | (Unaudited) |  |  | (Audited) |
|  | December 28, |  |  | March 30, |
|  | 2024 |  |  | 2024 |
Current Liabilities: |  |  |  |  |  |  |  |
Accrued Payroll and Employee Benefits |  | $ | 5,442 |  |  | $ | 5,508 |
Accrued Incentives |  |  | 1,187 |  |  |  | 4,182 |
Current Portion of Lease Liabilities |  |  | 3,331 |  |  |  | 2,510 |
Accrued Acquisition Holdbacks |  |  | 1,347 |  |  |  | 2,577 |
Accrued Sales Tax |  |  | 607 |  |  |  | 813 |
Accrued Contingent Consideration |  |  | - |  |  |  | 529 |
Income Taxes Payable |  |  | - |  |  |  | 2,926 |
Other Current Liabilities |  |  | 1,171 |  |  |  | 620 |
Accrued Compensation and Other Current Liabilities |  | $ | 13,085 |  |  | $ | 19,665 |
Non-Current Liabilities: |  |  |  |  |  |  |  |
Postretirement Benefit Obligation |  | $ | 1,115 |  |  | $ | 1,134 |
Accrued Acquisition Holdbacks |  |  | 1,647 |  |  |  | 1,647 |
Accrued Contingent Consideration |  |  | 835 |  |  |  | - |
Other Non-Current Liabilities |  |  | 122 |  |  |  | 122 |
Other Liabilities |  | $ | 3,719 |  |  | $ | 2,903 |
Recent Accounting Guidance Not Yet Adopted: In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280). The ASU requires disclosures, on an annual and interim basis, of significant segment expenses and other segment items that are regularly provided to the Chief Operating Decision Maker ("CODM") as well as the title and position of the CODM. ASU 2023-07 is effective for annual periods beginning in fiscal 2025 and interim periods in fiscal year 2026 with early adoption permitted. The adoption of this ASU is expected to impact the Company's financial statement disclosures but have no material impact on the Company's results of operations, cash flows or financial condition. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU expands the income tax disclosure requirements, principally related to the rate reconciliation table and income taxes paid. ASU 2023-09 is effective for annual periods beginning in fiscal 2026, with early adoption permitted. The adoption of the ASU is not expected to have a material impact on the Company’s financial statement disclosures. In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures: Disaggregation of Income Statement Expenses. This guidance requires disclosures about significant expense categories, including but not limited to, inventory purchases, employee compensation, depreciation, amortization, and selling expenses. This amendment is effective for the Company's fiscal year 2028 and interim periods within fiscal year 2029. The Company is currently assessing the impact of this guidance on its financial statement disclosures.

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