TRANSCAT INC 10-K

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 27, 2021. 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. 35 Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Transcat, Inc. Rochester, New York 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 27, 2021 and March 28, 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the years ended March 27, 2021 and March 28, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of March 27, 2021, 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 27, 2021 and March 28, 2020, and the results of its operations and its cash flows for the years then ended, 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 27, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Basis for Opinions 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 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 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. 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. 36 Table of Contents Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. BioTek Services, Inc. Purchase Price Allocation Critical Audit Matter Description As discussed in Notes 1 and 9 to the consolidated financial statements, effective December 16, 2020, the Company acquired substantially all of the assets of BioTek Services, Inc. (“BioTek”). The total purchase price paid for the assets of BioTek was approximately $3.5 million. The Company applied the acquisition method of accounting for the acquisition. Under this method, identifiable assets acquired and liabilities assumed are measured at their acquisition-date fair value. The Company used a valuation hierarchy, and utilized an independent third-party valuation specialist to determine the fair values used in this allocation. Intangible assets and goodwill represented an allocation of purchase price to identifiable intangible assets of the acquired business in the amount of $2.0 million and $1.1 million, respectively. The Company’s determination of the fair value used for the allocation of the purchase price is based upon assumptions of the future performance of BioTek and includes work performed by a third-party valuation specialist. Due to the subjectivity involved in estimating the fair values and ultimate allocation of purchase price, we identified the fair value estimates for purchase price allocation of BioTek’s intangible assets as a critical audit matter, which required a higher degree of auditor judgement as well as the use of professionals with specialized skill and knowledge. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the estimation of fair value associated with the purchase price allocation of the BioTek acquisition included the following, among others:   • We obtained an understanding of the process and assumptions used by management to develop the estimate of the purchase price allocation.   • We obtained an understanding of management’s controls relating to the purchase price allocation and tested the operating effectiveness of the controls, as necessary.   • We engaged an internal valuation specialist to test certain assumptions and approaches used.   • We tested cut-off of working capital at the acquisition date for any impact to the fair value assigned to the identifiable tangible and intangible assets acquired or liabilities assumed.   • We tested management’s allocation, including testing of the completeness and accuracy of source information used, mathematical accuracy of management’s calculations, and evaluated reasonableness and consistency of methodology and assumption.   /s/ Freed Maxick CPAs, P.C. We have served as the Company's auditor since 2012. Rochester, New York June 8, 2021 37 Table of Contents   TRANSCAT, INC. CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) For the Fiscal Years Ended March 27, March 28, 2021 2020 Service Revenue $ 101,274 $ 93,003 Distribution Sales 72,061 80,096 Total Revenue 173,335 173,099   Cost of Services Sold 70,579 69,517 Cost of Distribution Sales 56,638 61,104 Total Cost of Revenue 127,217 130,621   Gross Profit 46,118 42,478   Selling, Marketing and Warehouse Expenses 17,743 17,985 General and Administrative Expenses 17,302 13,643 Total Operating Expenses 35,045 31,628   Operating Income 11,073 10,850   Interest and Other Expenses, net 1,091 1,120   Income Before Provision for Income Taxes 9,982 9,730 Provision for Income Taxes 2,191 1,663   Net Income $ 7,791 $ 8,067   Basic Earnings Per Share $ 1.05 $ 1.10 Average Shares Outstanding 7,423 7,331   Diluted Earnings Per Share $ 1.03 $ 1.08 Average Shares Outstanding 7,548 7,487 See accompanying notes to consolidated financial statements. 38 Table of Contents TRANSCAT, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) For the Fiscal Years Ended March 27, March 28, 2021 2020 Net Income $ 7,791 $ 8,067   Other Comprehensive Income (Loss): Currency Translation Adjustment 662 ( 277 )   Other, net of tax effects of $ 36 and $ 42 for the years ended March 27, 2021 and March 28, 2020, respectively. ( 103 ) ( 122 ) Total Other Comprehensive Income (Loss) 559 ( 399 )   Comprehensive Income $ 8,350 $ 7,668 See accompanying notes to consolidated financial statements. 39 Table of Contents TRANSCAT, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts) March 27, March 28, 2021 2020 ASSETS Current Assets: Cash $ 560 $ 499 Accounts Receivable, less allowance for doubtful accounts of $ 526 and $ 480 as of March 27, 2021 and March 28, 2020, respectively 33,950 30,952 Other Receivables 428 1,132 Inventory, net 11,636 14,180 Prepaid Expenses and Other Current Assets 2,354 1,697 Total Current Assets 48,928 48,460 Property and Equipment, net 22,203 20,833 Goodwill 43,272 41,540 Intangible Assets, net 7,513 7,977 Right to Use Assets, net 9,392 8,593 Other Assets 808 719 Total Assets $ 132,116 $ 128,122   LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable $ 12,276 $ 11,947 Accrued Compensation and Other Current Liabilities 10,417 6,907 Income Taxes Payable 382 86 Current Portion of Long-Term Debt 2,067 1,982 Total Current Liabilities 25,142 20,922 Long-Term Debt 17,494 28,362 Deferred Tax Liabilities, net 3,201 3,025 Lease Liabilities 7,958 6,832 Other Liabilities 3,243 1,894 Total Liabilities 57,038 61,035   Shareholders' Equity: Common Stock, par value $ 0.50 per share, 30,000,000 shares authorized; 7,458,251 and 7,381,180 shares issued and outstanding as of March 27, 2021 and March 28, 2020, respectively 3,729 3,691 Capital in Excess of Par Value 19,287 17,929 Accumulated Other Comprehensive Loss ( 451 ) ( 1,010 ) Retained Earnings 52,513 46,477 Total Shareholders' Equity 75,078 67,087 Total Liabilities and Shareholders' Equity $ 132,116 $ 128,122 See accompanying notes to consolidated financial statements. 40 Table of Contents TRANSCAT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) For the Fiscal Years Ended March 27, March 28, 2021 2020 Cash Flows from Operating Activities: Net Income $ 7,791 $ 8,067 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Loss on Disposal of Property and Equipment 136 460 Deferred Income Taxes 176 575 Depreciation and Amortization 7,580 6,659 Provision for Accounts Receivable and Inventory Reserves 636 371 Stock-Based Compensation Expense 1,513 884 Changes in Assets and Liabilities, net of acquisitions: Accounts Receivable and Other Receivables ( 1,796 ) ( 3,303 ) Inventory 2,724 875 Prepaid Expenses and Other Current Assets ( 725 ) ( 467 ) Accounts Payable 329 ( 2,767 ) Accrued Compensation and Other Current Liabilities 4,943 307 Income Taxes Payable 332 ( 100 ) Net Cash Provided by Operating Activities 23,639 11,561   Cash Flows from Investing Activities: Purchase of Property and Equipment ( 6,617 ) ( 6,579 ) Proceeds from Sale of Property and Equipment 17 184 Business Acquisitions, net of cash acquired ( 3,551 ) ( 12,983 ) Payment of Contingent Consideration and Holdbacks Related to Business Acquisitions - ( 864 ) Net Cash Used in Investing Activities ( 10,151 ) ( 20,242 )   Cash Flows from Financing Activities: (Repayment of) Proceeds from Revolving Credit Facility, net ( 8,801 ) 11,241 Repayments of Term Loan ( 1,982 ) ( 1,899 ) Issuance of Common Stock 1,177 1,727 Repurchase of Common Stock ( 3,049 ) ( 2,822 ) Net Cash (Used In) Provided by Financing Activities ( 12,655 ) 8,247   Effect of Exchange Rate Changes on Cash ( 772 ) 145   Net Increase (Decrease) in Cash 61 ( 289 ) Cash at Beginning of Fiscal Year 499 788 Cash at End of Fiscal Year $ 560 $ 499   Supplemental Disclosures of Cash Flow Activity: Cash paid during the fiscal year for: Interest $ 860 $ 938 Income Taxes $ 1,759 $ 1,371 Supplemental Disclosure of Non-Cash Investing and Financing Activities: Payment of Contingent Consideration and Holdback Amounts Related to Business Acquisition $ - $ 864 See accompanying notes to consolidated financial statements. 41 Table of Contents 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 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 Issuance of Common Stock 57 29 1,148 - - 1,177 Repurchase of Common Stock ( 81 ) ( 41 ) ( 1,253 ) - ( 1,755 ) ( 3,049 ) Stock-Based Compensation 101 50 1,463 - - 1,513 Other Comprehensive Income - - - 559 - 559 Net Income - - - - 7,791 7,791 Balance as of March 27, 2021 7,458 $ 3,729 $ 19,287 $ ( 451 ) $ 52,513 $ 75,078 See accompanying notes to consolidated financial statements. 42 Table of Contents 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 27, 2021 (“fiscal year 2021”) and March 28, 2020 (“fiscal year 2020”) 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 average 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 $ 0.6 million at March 27, 2021 and $ 0.5 million at March 28, 2020. 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: 43 Table of Contents 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, identifiable assets acquired and liabilities assumed are measured at their acquisition-date fair value. 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 27, 2021 and March 28, 2020. 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 30, 2019 $ 9,759 $ 24,786 $ 34,545 $ 310 $ 4,923 $ 5,233 Additions 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 Additions 4 1,075 1,079 - 2,030 2,030 Amortization - - - ( 377 ) ( 2,161 ) ( 2,538 ) Currency Translation Adjustment - 653 653 - 44 44 Net Book Value as of March 27, 2021 $ 11,458 $ 31,814 $ 43,272 $ 920 $ 6,593 $ 7,513 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 $ 2.3 million in fiscal year 2022, $ 1.7 million in fiscal year 2023, $ 1.2 million in fiscal year 2024, $ 0.9 million in fiscal year 2025 and $ 0.6 million in fiscal year 2026. 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 44 Table of Contents 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 both March 27, 2021 and March 28, 2020. 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 each of March 27, 2021 and March 28, 2020, investment assets totaled $ 0.4 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 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 2021 and 2020, the Company recorded non-cash stock-based compensation cost in the amount of $ 1.5 million and $ 0.9 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 using the output method-time elapsed as this portrays the transfer of control to the customer. 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 2021 was immaterial. As of March 27, 2021, 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 27, 2021 and March 28, 2020 were immaterial. Payment terms are generally 30 to 45 days. See Note 7 for disaggregated revenue information. 45 Table of Contents 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 $ 0.7 million and $ 1.6 million in fiscal years 2021 and 2020, 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 $ 0.6 million and $ 1.4 million in fiscal years 2021 and 2020, 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 $ 0.9 million and $ 1.2 million in fiscal years 2021 and 2020, respectively. Shipping and Handling Costs: Freight expense and direct shipping costs are included in the cost of revenue. These costs totaled approximately $ 2.5 million and $ 2.6 million in fiscal years 2021 and 2020, 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 $ 0.8 million and $ 0.9 million in fiscal years 2021 and 2020, 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 2021 and 2020. 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 each of fiscal year 2021 and 2020, was recognized as a component of Other Expenses 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 27, 2021, the Company had a foreign exchange contract, which matured in April 2021, outstanding in the notional amount of $ 3.9 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. 46 Table of Contents 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 27, 2021, accumulated other comprehensive loss consisted of cumulative currency translation gains of $ 0.1 million, unrecognized prior service costs, net of tax, of $ 0.5 million and an unrealized gain on other assets, net of tax, of $ 0.1 million. 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. 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 each of fiscal years 2021 and 2020, the net additional common stock equivalents had a $ 0.02 per share effect on the calculation of dilutive earnings per share. The average shares outstanding used to compute basic and diluted earnings per share are as follows: For the Fiscal Years Ended March 27, March 28, 2021 2020 Average Shares Outstanding – Basic 7,423 7,331 Effect of Dilutive Common Stock Equivalents 125 156 Average Shares Outstanding – Diluted 7,548 7,487 Anti-dilutive Common Stock Equivalents - 15 Shareholders’ Equity: During each of fiscal years 2021 and 2020, the Company repurchased and subsequently retired 0.1 million shares of its common stock. There were no stock option redemptions during either fiscal year 2021 or fiscal year 2020. COVID-19 Pandemic: The COVID-19 pandemic has had a negative impact on our fiscal year 2021 and fiscal year 2020 operations and financial results, and the full financial impact of the pandemic cannot be reasonably estimated at this time due to uncertainty as to its severity and duration. The Company took actions to manage its resources conservatively to mitigate the negative impact of the pandemic, including aligning variable costs with demand, froze hiring and wages, with the exception of technology personnel, tightly controlled discretionary spending; reduced the CEO’s salary and Board of Director cash retainer fees by 20% and reduced other executive team members salaries by 10% during the first and second quarter of fiscal year 2021; and amended our revolving credit facility to provide for, among other things, $ 10.0 million in additional borrowing capacity and financial covenant modifications. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted. The CARES Act included a provision that allows the Company to defer the employer portion of social security payroll tax payments that would have been paid between the enactment date and December 31, 2020, with 50% payable by December 31, 2021 and 50% payable by December 31, 2022. During fiscal year 2021, the Company deferred $ 2.0 million of employer social security payroll taxes, of which $ 1.0 million is recorded in accrued compensation and other current liabilities and $ 1.0 million is recorded in other liabilities on the Consolidated Balance Sheets. 47 Table of Contents Recently Issued Accounting Pronouncements: 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, 2022. 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 our 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 27, March 28, 2021 2020 Machinery, Equipment and Software $ 49,782 $ 46,206 Rental Equipment 7,873 7,111 Furniture and Fixtures 2,702 2,668 Leasehold Improvements 4,272 3,051 Total Property and Equipment 64,629 59,036 Less: Accumulated Depreciation and Amortization ( 42,426 ) ( 38,203 ) Total Property and Equipment, net $ 22,203 $ 20,833 Total depreciation and amortization expense relating to property and equipment amounted to $ 5.0 million and $ 4.8 million in fiscal years 2021 and 2020, respectively. NOTE 3 – LONG-TERM DEBT 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 (as amended by Amendment Two, the “Credit Agreement”). Amendment Two extended the term of the revolving credit facility (the “Revolving Credit Facility”) to October 20, 2022 and increased the revolving credit commitment to $ 40 million. Amendment Two modified the definition of the applicable rate used to determine interest charges on outstanding and unused borrowings under the Revolving Credit Facility and it amended the definition of permitted acquisitions to amend borrowings available under the Revolving Credit Facility for acquisitions. In addition, Amendment Two amended the definition of restricted payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain employee tax obligations associated with share-based payment and stock option activity, and modified certain restrictions to the Company’s ability to repurchase its shares and pay dividends. Amendment Two modified the leverage ratio and fixed charge coverage ratio covenants with which the Company is required to comply for the fiscal year ending March 27, 2021. Amendment Two also established a London Interbank Offered Rate (“LIBOR”) floor of 1 % and included a mechanism for adoption of a different benchmark rate when LIBOR is discontinued. During the third quarter of fiscal year 2021, Manufacturers and Traders Trust Company eliminated the prior requirement included in Amendment Two that limited capital expenditures to $ 5.5 million for the fiscal year ending March 27, 2021. During the fourth quarter of fiscal year 2021, Manufacturers and Traders Trust Company eliminated the prior requirement included in Amendment Two that limited restricted payments up to $ 2.5 million to pay certain tax obligations associated with share-based payment and stock option activity for the fiscal year ending March 27, 2021. On December 10, 2018, the Company 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. As of March 27, 2021, $ 10.6 million was outstanding on the 2018 Term Loan, of which $ 2.1 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term 48 Table of Contents debt. The 2018 Term Loan requires total repayments (principal plus interest) of $ 0.2 million per month through December 2025. Principal payments relating to the 2018 Term Loan will be $ 2.1 million in fiscal year 2022, $ 2.2 million in fiscal year 2023, $ 2.2 million in fiscal year 2024, $ 2.3 million in fiscal year 2025 and $ 1.8 million in fiscal year 2026. As of March 27, 2021, $ 40.0 million was available under the Revolving Credit Facility, of which $ 8.9 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. During fiscal year 2021, $ 3.6 million of borrowings was used for business acquisitions. During fiscal year 2020, $ 13.8 million of borrowings was used for business acquisitions, including holdback payments. The allowable leverage ratio under the Credit Agreement for the first, second, third and fourth fiscal quarter of fiscal year 2021 and the first quarter of fiscal year 2022 is a maximum multiple of 3.0 , 5.0 , 5.5 , 7.0 and 4.0 , respectively, of total debt outstanding compared to EBITDA and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. After the first quarter of fiscal 2022, the allowable leverage ratio is a maximum multiple of 3.0 . The Credit Agreement provides that the trailing twelve-month pro forma EBITDA of an acquired business is included in the allowable leverage calculation. Interest and Other Costs: Interest on outstanding borrowings under the Revolving Credit Facility accrues, at Transcat’s election, at either the variable one-month LIBOR or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case (subject to a 1% floor), plus a margin. Interest on outstanding borrowings under the 2018 Term Loan accrues at a fixed rate of 4.15 % over the term of the loan. Unused fees accrue based on the average daily amount of unused credit available on the Revolving Credit Facility. Interest rate margins and unused fees are determined on a quarterly basis based upon the Company’s calculated leverage ratio, as defined in the Credit Agreement. The Company’s interest rate for the Revolving Credit Facility for fiscal year 2021 ranged from 1.4 % to 2.7 %. Covenants: The Credit Agreement has certain covenants with which the Company 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 2021 and 2020. Our leverage ratio, as defined in the Credit Agreement, was 0.94 at March 27, 2021, compared with 1.53 at March 28, 2020. Other Terms: The Company has pledged all of its U.S. tangible and intangible personal property, the equity interests of its U.S.-based subsidiaries, and a majority of the common stock of Transcat Canada Inc. as collateral security for the loans made under the Revolving Credit Facility. NOTE 4 – INCOME TAXES While the Tax Cuts and Jobs Act of 2017 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 these provisions in the period in which incurred. During fiscal years 2021 and 2020, the Company recorded net income tax benefits of less than $ 0.1 million each year as a result of these provisions. Foreign subsidiary’s undistributed earnings are considered to be permanently reinvested. Transcat’s income before income taxes on the Consolidated Statements of Income is as follows: FY 2021 FY 2020 United States $ 9,187 $ 8,783 Foreign 795 947 Total $ 9,982 $ 9,730 49 Table of Contents The provision for income taxes for fiscal years 2021 and 2020 is as follows: FY 2021 FY 2020 Current Tax Provision: Federal $ 1,449 $ 630 State 428 285 Foreign 103 329 $ 1,980 $ 1,244 Deferred Tax (Benefit) Provision: Federal $ 96 $ 371 State ( 22 ) 77 Foreign 137 ( 29 ) $ 211 $ 419 Provision for Income Taxes $ 2,191 $ 1,663 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 2021 FY 2020 Federal Income Tax at Statutory Rate $ 2,096 $ 2,044 State Income Taxes, net of federal benefit 282 294 Foreign Taxes and Federal, State and Foreign Tax Credits 9 ( 97 ) Tax Impact of Equity Awards ( 274 ) ( 876 ) Other, net 78 298 Total $ 2,191 $ 1,663   March 27, March 28, 2021 2020 Deferred Tax Assets: Accrued Liabilities $ 354 $ 531 Lease Liabilities 2,439 2,253 Performance-Based Stock Award Grants 439 432 Inventory Reserves 132 105 Non-Qualified Deferred Compensation Plan 104 98 Post-Retirement Health Care Plans 506 385 Stock-Based Compensation 95 70 Deferred Payroll Tax – CARES Act 259 - Capitalized Inventory Costs 118 126 Other 267 265 Total Deferred Tax Assets $ 4,713 $ 4,265   Deferred Tax Liabilities: Goodwill and Intangible Assets $ ( 1,233 ) $ ( 1,162 ) Right of Use Assets ( 2,408 ) ( 2,198 ) Depreciation ( 4,230 ) ( 3,858 ) Other ( 43 ) ( 72 ) Total Deferred Tax Liabilities $ ( 7,914 ) $ ( 7,290 )   Net Deferred Tax Liabilities $ ( 3,201 ) $ ( 3,025 ) 50 Table of Contents 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 2017 and prior, by state tax authorities for fiscal years 2015 and prior, and by Canadian tax authorities for fiscal years 2014 and prior. There are no income tax years currently under examination by Canadian or state income tax authorities. The fiscal year ended March 31, 2018 is currently under examination by the Internal Revenue Service. A reserve of less than $ 0.1 million was recorded during the fiscal year ended March 27, 2021 relating to this examination. During fiscal years 2021 and 2020, there were no uncertain tax positions. No interest or penalties related to uncertain tax positions were recognized in fiscal years 2021 and 2020 or were accrued at March 27, 2021 and March 28, 2020. The Company’s effective tax rate for fiscal years 2021 and 2020 was 21.9 % and 17.1 %, respectively. The 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 2021 and 2020 were $ 0.3 and $ 0.9 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 2022. As such, it expects its effective tax rate in fiscal year 2022 to be between 20.0 % and 22.0 %. 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 response to the COVID-19 pandemic, the Company suspended the employer match to the Plan for the first six months of fiscal year 2021. In the second six months of fiscal year 2021, the Company matched 50 % of the first 6 % of pay that eligible employees contribute to the Plan. In fiscal year 2020, 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 $ 0.4 million and $ 0.9 million in fiscal years 2021 and 2020, 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 2021 and 2020. 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 2021 and 2020. 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 2021 and 2020, 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 as of both March 27, 2021 and March 28, 2020, and is included as a component of other liabilities (non-current) on the Consolidated Balance Sheets. 51 Table of Contents 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 2021 FY 2020 Post-retirement benefit obligation, at beginning of fiscal year $ 1,509 $ 1,311 Service cost 84 77 Interest cost 48 48 Benefits paid ( 95 ) ( 98 ) Actuarial loss 285 171 Post-retirement benefit obligation, at end of fiscal year 1,831 1,509 Fair value of plan assets, at end of fiscal year - - Funded status, at end of fiscal year $ ( 1,831 ) $ ( 1,509 )   Accumulated post-retirement benefit obligation, at end of fiscal year $ 1,831 $ 1,509 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 2021 FY 2020 Net periodic post-retirement benefit cost: Service cost $ 84 $ 77 Interest cost 48 48 Amortization of prior service cost 1 1   133 126 Benefit obligations recognized in other comprehensive income: Amortization of prior service cost ( 1 ) ( 1 ) Net gain 233 113   232 112 Total recognized in net periodic benefit cost and other comprehensive income $ 365 $ 238   Amount recognized in accumulated other comprehensive income, at end of fiscal year: Unrecognized prior service cost $ 739 $ 518 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 2021 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 27, March 28, 2021 2020 Weighted average discount rate 3.0 % 3.3 %   Medical care cost trend rate: Trend rate assumed for next year 7.0 % 6.8 % Ultimate trend rate 3.8 % 3.8 % Year that rate reaches ultimate trend rate 2075 2075   Dental care cost trend rate: Trend rate assumed for next year and remaining at that level thereafter 3.0 % 3.5 % 52 Table of Contents 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 2022 $ 179 2023 160 2024 134 2025 125 2026 91 Thereafter $ 1,142 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 $ 0.2 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 $ 0.2 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 27, 2021, 0.9 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 2021 and 2020 were $ 0.3 million and $ 0.9 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 2020 and 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 2021, 80,000 shares granted were time vested. During fiscal year 2020, 47,000 shares granted were time vested and 28,000 shares were subject to performance targets. 53 Table of Contents The following table summarizes the restricted stock units vested and shares issued during fiscal years 2021 and 2020 (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 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 April 2018 April 2018 – March 2019 1 $ 15.65 Time Vested 1 April 2019 April 2017 April 2017 – March 2020 62 $ 12.90 79 % 49 May 2020 July 2020 July 2020 1 $ 27.08 Time Vested 1 July 2020 September 2019 September 2019 – September 2020 18 $ 22.77 Time Vested 18 September 2020 October 2018 October 2018 – September 2020 1 $ 20.81 Time Vested 1 October 2020 January 2021 January 2021 3 $ 34.68 Time Vested 3 January 2021 May 2018 April 2018 – March 2021 29 $ 15.30 Time Vested 29 March 2021 The following table summarizes the non-vested restricted stock units outstanding as of March 27, 2021: Total Grant Date Estimated Number Fair Level of Date Measurement of Units Value Achievement at Granted Period Granted Per Unit March 27, 2021 May 2018 April 2018 – March 2021 29 $ 15.30 60 % of target level October 2018 October 2018 – September 2027 8 $ 20.81 Time Vested May 2019 April 2019 – March 2022 21 $ 23.50 65 % of target level May 2019 April 2019 – March 2022 21 $ 23.50 Time Vested August 2019 August 2019 – July 2020 1 $ 23.00 Time Vested April 2020 April 2020 – March 2023 2 $ 26.25 Time Vested July 2020 July 2020 – July 2023 39 $ 27.08 Time Vested September 2020 September 2020 – July 2023 4 $ 28.54 Time Vested September 2020 September 2020 – July 2023 5 $ 29.76 Time Vested September 2020 September 2020 – September 2023 3 $ 29.76 Time Vested September 2020 September 2020 – September 2021 14 $ 28.52 Time Vested January 2021 January 2021 – January 2024 2 $ 34.62 Time Vested Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $ 1.4 million and $ 0.8 million in fiscal years 2021 and 2020, respectively. Unearned compensation totaled $ 1.8 million as of March 27, 2021. 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. 54 Table of Contents We calculate the value of the stock options granted using the Black-Scholes model. We calculate expected volatility for stock options by taking an average of historical volatility over the expected term. The computation of expected term was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield in effect at the time of grant. We assume no expected dividends. During fiscal year 2021, the Company’s Board of Directors granted an option for 5,000 shares of common stock to a Company employee that vests over three years and an option for 15,000 shares of common stock to an employee that immediately vested. 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. The expense related to all stock option awards was $ 0.1 million in each of fiscal years 2021 and 2020. The following table summarizes the Company’s options for fiscal years 2021 and 2020: Weighted Weighted Average Average Number Exercise Remaining Aggregate Of Price Per Contractual Intrinsic Shares Share Term (in Years) Value Outstanding as of March 30, 2019 291 $ 11.16 Granted 15 25.06 Exercised ( 156 ) 9.16 Outstanding as of March 28, 2020 150 14.63 Granted 20 27.48 Exercised ( 45 ) 18.01 Outstanding as of March 27, 2021 125 15.47 3 $ 4,713 Exercisable as of March 27, 2021 87 $ 11.72 1 $ 3,553 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 2021 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 27, 2021. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock. Total unrecognized compensation cost related to non-vested stock options as of March 27, 2021 was $ 0.1 million, which is expected to be recognized over a period of three years. The aggregate intrinsic value of stock options exercised in fiscal years 2021 and 2020 was $ 1.6 million and $ 2.5 million, respectively. Cash received from the exercise of options in fiscal years 2021 and 2020 was $ 0.8 million and $ 1.4 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 2021 and 2020: 55 Table of Contents FY 2021 FY 2020 Revenue: Service $ 101,274 $ 93,003 Distribution 72,061 80,096 Total 173,335 173,099   Gross Profit: Service 30,695 23,486 Distribution 15,423 18,992 Total 46,118 42,478   Operating Expenses: Service (1) 20,254 17,814 Distribution (1) 14,791 13,814 Total 35,045 31,628   Operating Income: Service 10,441 5,672 Distribution 632 5,178 Total 11,073 10,850   Unallocated Amounts: Interest and Other Expense, net 1,091 1,120 Provision for Income Taxes 2,191 1,663 Total 3,282 2,783   Net Income $ 7,791 $ 8,067   Total Assets: Service $ 71,090 $ 67,023 Distribution 44,759 47,952 Unallocated 16,267 13,147 Total $ 132,116 $ 128,122   Depreciation and Amortization (2): Service $ 5,597 $ 4,930 Distribution 1,983 1,729 Total $ 7,580 $ 6,659   Capital Expenditures: Service $ 4,236 $ 3,974 Distribution 2,381 2,605 Total $ 6,617 $ 6,579   Geographic Data: Revenues to Unaffiliated Customers (3): United States (4) $ 159,270 $ 157,744 Canada 13,040 13,827 Other International 1,024 1,528 Total $ 173,335 $ 173,099   Property and Equipment: United States (4) $ 19,897 $ 18,672 Canada 2,306 2,161 Total $ 22,203 $ 20,833 56 Table of Contents (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. As of March 27, 2021, the remaining lease terms on our operating leases range from approximately one year to less than ten years . Renewal options not yet exercised and termination options are not reasonably certain of exercise by the Company. There is no transfer of title or option to purchase the leased assets upon expiration. The weighted average discount rate for both of the years ended March 27, 2021 and March 28, 2020 was 4.15 %. The components of lease expense for the current and prior-year comparative periods were as follows: FY 2021 FY 2020 Operating lease cost 3,206 3,295 Variable lease cost 577 444 Total lease cost 3,783 3,739 Supplemental cash flow information related to leases was as follows: FY 2021 FY 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow from operating leases 2,153 1,961 Right to Use Assets obtained in exchange for lease liabilities 2,945 2,940 Total rental expense was approximately $ 3.8 million and $ 3.7 million in fiscal years 2021 and 2020, respectively. The minimum future annual rental payments under the non-cancelable leases at March 27, 2021 are as follows (in millions): Fiscal Year 2022 $ 2.9 2023 2.3 2024 1.9 2025 1.4 2026 0.8 Thereafter 3.2 Total minimum lease payments $ 12.5 Less: Imputed interest 2.9 Present value of remaining lease payments $ 9.6 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. Principal payments relating to the 2018 Term Loan will be $ 2.1 million in fiscal year 2022, $ 2.2 million in fiscal year 2023, $ 2.2 million in fiscal year 2024, $ 2.3 million in fiscal year 2025 and $ 1.8 million in fiscal year 2026. 57 Table of Contents NOTE 9 – BUSINESS ACQUISITIONS BioTek: Effective December 16, 2020, Transcat acquired substantially all of the assets of BioTek Services, Inc. (“BioTek”), a Virginia based provider of pipette 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. BioTek’s focus on pipettes complements the current offerings Transcat provides to the life science sector. 100% of the goodwill and intangible assets relating to the BioTek acquisition has been allocated to the Service segment. Intangible assets related to the BioTek 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 BioTek acquisition is deductible for tax purposes. The total purchase price paid for the assets of BioTek was approximately $3.5 million. $ 0.4 million of the purchase price has been put into escrow as a holdback 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 BioTek’s assets and liabilities acquired during the period presented: FY 2021 Goodwill $ 1,063 Intangible Assets – Customer Base & Contracts 1,930 Intangible Assets – Covenant Not to Compete 100 3,093 Plus:       Current Assets 406 Non-Current Assets 8 Total Purchase Price $ 3,507 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. We will refer to TTE as “pipettes.com”. 75% of the goodwill and intangible assets relating to the pipettes.com acquisition has been allocated to the Service segment with the remaining 25% allocated to the Distribution segment. Intangible assets related to the pipettes.com 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 pipettes.com acquisition is deductible for tax purposes. The total purchase price paid for the assets of pipettes.com 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 summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of pipettes.com assets and liabilities acquired during the period presented. FY 2021 Goodwill $ 6,795 Intangible Assets – Customer Base & Contracts 4,410 Intangible Assets – Covenant Not to Compete 120 11,325 Plus:       Current Assets 884 Non-Current Assets 261 Less:       Current Liabilities ( 239 ) 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 acquisitions of pipettes.com and BioTek had occurred at the beginning of fiscal year 2020. 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. 58 Table of Contents (Unaudited) Fiscal Years Ended March 27, March 28, 2021 2020 Total Revenue $ 174,883 $ 182,459 Net Income $ 8,051 $ 9,017 Basic Earnings Per Share $ 1.08 $ 1.23 Diluted Earnings Per Share $ 1.07 $ 1.20 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 was 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. Certain of the Company’s acquisition agreements include provisions for contingent consideration and other holdback amounts. The Company accrues for contingent consideration and holdback provisions based on their estimated fair value at the date of acquisition. As of March 27, 2021, there was no other holdback amounts unpaid and reflected in current liabilities on the Consolidated Balance Sheets. During fiscal year 2021, acquisition costs of $ 0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income. NOTE 10 – QUARTERLY DATA (Unaudited) The following table presents a summary of certain unaudited quarterly financial data for fiscal years 2021 and 2020: Basic Diluted Total Gross Net Earnings Earnings Revenues Profit Income Per Share (a) Per Share (a) FY 2021: Fourth Quarter $ 48,762 $ 13,970 $ 3,208 $ 0.43 $ 0.42 Third Quarter 44,062 11,245 1,761 0.24 0.23 Second Quarter 41,607 11,494 2,024 0.27 0.27 First Quarter 38,904 9,409 798 0.11 0.11   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   (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. 59 Table of Contents NOTE 11 SUBSEQUENT EVENT 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 expand the depth and breadth of the Company’s service capabilities. The total purchase price paid for the assets of Upstate Metrology was approximately $ 0.9 million. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.