Item 1. Business
ITEM 1. BUSINESS
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 26,000 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® (“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 onsite services, mobile calibration services, pickup and delivery and in-house services. As of the end of our fiscal year
ended March 27, 2021 (“fiscal year 2021”), 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 onsite 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 28, 2020 (“fiscal year 2020”) through fiscal year
2021, 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. 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. Information available on our website is not a part of, and is not incorporated into, this Annual Report
on Form 10-K. 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 2021, we continued to commit capital, people and leadership
investments to advance our “Operational Excellence” initiative. This initiative is 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 initiative is a multi-year, ever-evolving program designed
to create an infrastructure that supports 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. Our strategy is 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 onsite and depot service options. Together, this allows us to meet the most
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rigorous quality demands of our most highly regulated customers while simultaneously
being nimble enough to meet their business needs.
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. 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 one acquisition during our
fiscal year 2021 and three business acquisitions during our fiscal year 2020:
·
Effective December 16, 2020, Transcat acquired substantially all of
the assets of BioTek Services, Inc. (“BioTek”), a Virginia based provider of pipette calibration services.
·
Effective February 21, 2020, we acquired substantially all of the
assets of TTE Laboratories, Inc. (“TTE”, now known as pipettes.com), 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.
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 strategic drivers for the acquisitions described above:
Geographic
Expansion
Increased
Capabilities
Leveraged
Infrastructure
Bio
Tek
√
√
Pipettes.com
√
√
IIS
√
√
GRS
√
√
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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:
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
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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 700,000
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. We regularly review outsourced services to identify opportunities
for in-house capability expansion.
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.
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);
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·
periodic onsite 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 onsite 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.
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
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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 OEMs, 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 testing phases with the rollout for the first set of calibration disciplines.
In fiscal year 2022, we expect to make significant investments in capital equipment, technology, and human resources to increase automation
in performing calibration services. We believe automation will deliver the next step change in productivity, improve customer experience
in turnaround time and quality, and increase the flexibility of our workforce. In addition, we have expanded our range of capabilities
by making significant capital and staffing investments in reference-level radio frequency/microwave (“RF/Microwave”) calibration
capabilities. This allowed us to increase business with our prestigious clients in the enterprise computer manufacturing and aerospace
and defense sectors. In fiscal year 2021, we made additional capital investments to expand RF/Microwave capability to the East Coast region
of the United States. Also, 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 services 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
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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.
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 compete with these online-based distributors more effectively, 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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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 (now known as pipettes.com). Pipettes.com focuses on selling pipettes, pipette supplies and related services
to customers. Within our fiscal year 2021, we were able to increase our distribution sales at pipettes.com through enhancements of the
website and leveraging our historical base of customers.
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 2021, 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.
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 2021, our top 10
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vendors accounted for approximately 63% of our aggregate Distribution sales.
In fiscal year 2021, the COVID-19 pandemic impacted the supply of products from our vendors resulting in increased lead times and an increase
in our backlog.
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. In fiscal 2021, vendors reduced these rebate programs to lower their own costs in response to the COVID-19 pandemic. The Company
recorded vendor rebates of $0.7 million and $1.6 million in fiscal years 2021 and 2020, respectively, as a reduction of cost of distribution
sales.
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 Houston, Texas warehouse fulfills orders for used equipment and rental equipment. In fiscal year 2021, we shipped approximately
26,000 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 $6.3 million and $4.3 million as
of March 27, 2021 and March 28, 2020, 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.
Customers may place orders via:
·
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 2021 and 2020, approximately 10% of our total revenue resulted
from sales to customers outside the United States. Of those export sales in fiscal year 2021, approximately 9% were denominated in U.S.
dollars and the remaining 91% 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.
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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.
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, www.transcat.ca and pipettes.com
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 2021 and fiscal year 2020 both consisted of 52 weeks. Fiscal year 2022 which ends on March 26, 2022 (“fiscal year 2022”)
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.
HUMAN CAPITAL MANAGEMENT
As of March 27, 2021, we had 765 employees, of which 685 were employed
in the United States and 80 were employed outside of the United States. None of our employees are covered by collective bargaining agreements
or work councils. Overall, we consider our employee relations to be good. Our culture is important to the overall success of the Company.
Health and Safety The health and safety of our employees is of utmost
importance to us. We conduct regular self-assessments and audits to ensure compliance with our health and safety guidelines and regulatory
requirements. Our
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ultimate goal is to achieve a level of work-related injuries as close to
zero as possible through continuous investment in our safety programs. We provide protective gear (e.g. eye protection, masks and gloves)
as required by applicable standards and as appropriate given employee job duties. Additionally, during the COVID-19 pandemic, we have
invested heavily in safety measures and other initiatives to help ensure the health of our employees.
Hiring Practices We recruit the best people for the job without
regard to gender, ethnicity or other protected traits and it is our policy to comply fully with all domestic, foreign and local laws relating
to discrimination in the workplace.
Diversity and Inclusion Recognizing and respecting our international
presence, we strive to maintain a diverse and inclusive workforce everywhere we operate. Our diversity and inclusion principles are also
reflected in our employee training, in particular with respect to our policies against harassment and bullying and the elimination of
bias in the workplace.
In addition, to support mental health and emotional well-being, all employees
and their dependents worldwide have access to an Employee Assistance Program ("EAP"), at no cost to them. This includes access
to visits with mental health care providers through the EAP.
Compensation and Benefits Our compensation and benefits program
is designed to attract and reward individuals who demonstrate the skills necessary to support our business objectives, assist in the achievement
of our strategic goals and create long-term value for our shareholders.
We provide employees with compensation packages that include base salary
and may also include annual incentive bonuses and/or long-term incentive awards depending upon the employee’s level. We believe
that a compensation program with both short-term and long-term awards provides fair and competitive compensation and aligns employee and
shareholder interests. In addition to cash and equity compensation, we also offer employees benefits such as life and health (medical,
dental and vision) insurance, paid time off, paid parental leave, and a 401(k) plan.
In response to the COVID-19 pandemic, we implemented significant changes
that we determined were in the best interest of our employees as well as the communities in which we operate. This includes having the
vast majority of our corporate employees work from home while also implementing a number of safety measures for employees continuing critical
onsite work. Employees in our Calibration Service Centers were given additional COVID-19 paid time off as well as incremental pay if they
were required to work offsite at a customer location.
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.