TRANSCAT INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page Management's Annual Report on Internal Control over Financial Reporting 42 Report of Independent Registered Public Accounting Firm (PCAOB ID 317 ) 43 Consolidated Statements of Income for the Fiscal Years Ended March 30, 2024, March 25, 2023 and March 26, 2022 46 Consolidated Statements of Comprehensive Income for the Fiscal Years Ended March 30, 2024, March 25, 2023 and March 26, 2022 47 Consolidated Balance Sheets as of March 30, 2024 and March 25, 2023 48 Consolidated Statements of Cash Flows for the Fiscal Years Ended March 30, 2024, March 25, 2023 and March 26, 2022 49 Consolidated Statements of Changes in Shareholders’ Equity for the Fiscal Years Ended March 30, 2024, March 25, 2023 and March 26, 2022 50 Notes to Consolidated Financial Statements 51 41 Table of Contents Management ’ s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. In designing and evaluating our internal control system, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives and that the effectiveness of any system has inherent limitations including, but not limited to, the possibility of human error and the circumvention or overriding of controls and procedures. Management, including the principal executive officer and the principal financial officer, is required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected in a timely manner. An evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our procedures and internal control over financial reporting using the framework and criteria described in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management, including our principal executive officer and our principal financial officer, concluded that our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles as of March 30, 2024. Freed Maxick CPAs, P.C., our independent registered public accounting firm, has audited and reported on the consolidated financial statements of the Company and the Company’s internal control over financial reporting, as stated in their report included in this Annual Report on Form 10-K. 42 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Transcat, Inc. Opinions on the Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Transcat, Inc. and subsidiaries (the Company) as of March 30, 2024 and March 25, 2023, and the related consolidated statements of income, comprehensive income, cash flows and changes in shareholders' equity for each of the three years in the period ended March 30, 2024, 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 30, 2024, 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 30, 2024 and March 25, 2023, and the results of its operations and its cash flows for each of the three years in the period ended March 30, 2024, 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 30, 2024, 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 Management’s 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 audit 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. 43 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. Business Combinations Critical Audit Matter Description As discussed in Notes 1 and 9 to the consolidated financial statements, during the year ended March 30, 2024, the Company completed multiple business combinations for an aggregate purchase of approximately $52.7 million. The Company applied the acquisition method of accounting for the acquisitions. Under this method, identifiable assets acquired, liabilities assumed, and consideration transferred are measured at their acquisition-date fair value. Assumptions used include the weighted-average cost of capital, risk free rate, customer attrition, as well as forecasted revenue and earnings before income tax, interest, depreciation, and amortization (“EBITDA”). Aggregate intangible assets and goodwill represented an allocation of purchase price in the amount of $11.9 and $36.2 million, respectively. The Company’s determination of the fair value of assets acquired is based upon assumptions of the future performance of the acquisitions and other factors. Due to the subjectivity involved we identified the fair value estimate of assets acquired 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 of assets acquired associated with the business combinations included the following, among others: ● We obtained an understanding of the process and assumptions used by management to develop the estimate of the fair value of assets acquired and consideration transferred. ● We obtained an understanding of management’s controls and tested the operating effectiveness of the controls. ● We engaged an internal valuation specialist to test certain assumptions and approaches used. ● We tested management’s estimate of the fair value of assets identified. This included testing the completeness and accuracy of source information used, testing the mathematical accuracy of management’s calculations, and evaluating the reasonableness and consistency of methodology and assumptions used. Nexa Earn-Out Critical Audit Matter Description As discussed in Notes 1, 8 and 9 to the consolidated financial statements as a result of a business combination in a previous year the Company is still obligated under a contingent consideration arrangement where the potential payout is up to $7.1 million. This arrangement is recorded at fair value at each reporting period, which was estimated as zero as of March 25, 2023. During the year ended March 30, 2024 the Company entered into an Amendment to the Share Purchase Agreement. Pursuant to the Amendment, the potential earn-out payments remained the same. The Amendment changed the conditions necessary for the sellers to receive potential earn-out payments as well as the lines of business included in the calculation of EBITDA. Assumptions used to estimate fair value include the discount rate, risk free rate, asset volatility, as well as forecasted EBITDA. As a result of the Amendment, the fair value of the contingent consideration was initially determined to be $2.8 million for which the Company recorded a liability. Later in the year ended March 30, 2024 the Company determined the fair value of the contingent consideration was $0.5 million and recognized a net $2.3 million non-cash gain. The Company’s determination of the fair value of the contingent consideration is based upon assumptions of the future performance of the acquisition and other factors. Due to the subjectivity involved we identified the fair value estimate of the contingent consideration 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. If, as a result of remeasurement, the value of the contingent consideration changes, any charges or income will be included in the Company’s Consolidated Statements of Income. 44 Table of Contents How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the estimation of fair value of the contingent consideration included the following, among others: ● We obtained an understanding of the terms of the Amendment. ● We obtained an understanding of the process and assumptions used by management to develop the estimate. ● We obtained an understanding of the associated controls and tested those controls. ● We engaged an internal valuation specialist to test certain assumptions and approaches used. ● We tested management’s assumptions to determine fair value of the earn-out including projected EBITDA, discount rate, risk-free rate and asset volatility. We also tested the completeness and accuracy of source information used, tested mathematical accuracy of management’s calculations, and evaluated reasonableness and consistency of methodology and assumptions. /s/ Freed Maxick CPAs, P.C. We have served as the Company's auditor since 2012. Rochester, New York May 28, 2024 45 Table of Contents TRANSCAT, INC. CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Amounts) For the Fiscal Years Ended March 30, March 25, March 26, 2024 2023 2022 Service Revenue $ 169,525 $ 144,883 $ 122,005 Distribution Sales 89,956 85,686 82,954 Total Revenue 259,481 230,569 204,959 Cost of Service Revenue 112,272 98,245 83,084 Cost of Distribution Sales 63,403 63,969 63,436 Total Cost of Revenue 175,675 162,214 146,520 Gross Profit 83,806 68,355 58,439 Selling, Marketing and Warehouse Expenses 28,710 24,761 20,649 General and Administrative Expenses 35,315 27,346 23,647 Total Operating Expenses 64,025 52,107 44,296 Operating Income 19,781 16,248 14,143 Interest Expense 1,835 2,417 810 Interest Income ( 808 ) - - Other Expense 315 344 143 Total Interest and Other 1,342 2,761 953 Income Before Provision for Income Taxes 18,439 13,487 13,190 Provision for Income Taxes 4,792 2,799 1,810 Net Income $ 13,647 $ 10,688 $ 11,380 Basic Earnings Per Share $ 1.66 $ 1.42 $ 1.52 Average Shares Outstanding 8,239 7,551 7,496 Diluted Earnings Per Share $ 1.63 $ 1.40 $ 1.50 Average Shares Outstanding 8,352 7,645 7,589 See accompanying notes to consolidated financial statements. 46 Table of Contents TRANSCAT, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) For the Fiscal Years Ended March 30, March 25, March 26, 2024 2023 2022 Net Income $ 13,647 $ 10,688 $ 11,380 Other Comprehensive (Loss) Income: Currency Translation Adjustment 152 ( 918 ) ( 207 ) Other, net of tax effects of $( 26 ), $ 14 and $( 146 ) for the years ended March 30, 2024, March 25, 2023 and March 26, 2022 respectively. 99 ( 49 ) 425 Total Other Comprehensive Income (Loss) 251 ( 967 ) 218 Comprehensive Income $ 13,898 $ 9,721 $ 11,598 See accompanying notes to consolidated financial statements. 47 Table of Contents TRANSCAT, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts) March 30, March 25, 2024 2023 ASSETS Current Assets: Cash and Cash Equivalents $ 19,646 $ 1,531 Marketable Securities 15,533 - Accounts Receivable, less allowance for credit losses of $ 544 and $ 457 as of March 30, 2024 and March 25, 2023, respectively 47,779 44,698 Other Receivables 506 506 Inventory, net 17,418 16,929 Prepaid Expenses and Other Current Assets 4,276 3,935 Total Current Assets 105,158 67,599 Property and Equipment, net 38,944 29,064 Goodwill 105,585 69,360 Intangible Assets, net 19,987 13,799 Right to Use Assets, net 16,823 14,876 Other Assets 1,055 1,051 Total Assets $ 287,552 $ 195,749 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts Payable $ 11,495 $ 15,869 Accrued Compensation and Other Current Liabilities 16,739 10,201 Income Taxes Payable 2,926 - Current Portion of Long-Term Debt 2,339 2,248 Total Current Liabilities 33,499 28,318 Long-Term Debt 1,817 46,869 Deferred Tax Liabilities, net 9,291 6,538 Lease Liabilities 14,873 12,960 Other Liabilities 2,903 1,434 Total Liabilities 62,383 96,119 Shareholders' Equity: Common Stock, par value $ 0.50 per share, 30,000,000 shares authorized; 8,839,299 and 7,562,604 shares issued and outstanding as of March 30, 2024 and March 25, 2023, respectively 4,420 3,781 Capital in Excess of Par Value 141,624 27,886 Accumulated Other Comprehensive Loss ( 949 ) ( 1,200 ) Retained Earnings 80,074 69,163 Total Shareholders' Equity 225,169 99,630 Total Liabilities and Shareholders' Equity $ 287,552 $ 195,749 See accompanying notes to consolidated financial statements. 48 Table of Contents TRANSCAT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) For the Fiscal Years Ended March 30, March 25, March 26, 2024 2023 2022 Cash Flows from Operating Activities: Net Income $ 13,647 $ 10,688 $ 11,380 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Net Loss on Disposal of Property and Equipment 53 88 88 Deferred Income Taxes ( 1,597 ) ( 186 ) 559 Depreciation and Amortization 13,544 10,955 9,567 Provision for Accounts Receivable and Inventory Reserves 406 74 34 Stock-Based Compensation Expense 4,512 3,377 2,329 Changes in Assets and Liabilities, net of acquisitions: Accounts Receivable and Other Receivables ( 1,259 ) ( 5,226 ) ( 3,392 ) Inventory 2,318 ( 3,377 ) ( 122 ) Prepaid Expenses and Other Current Assets ( 299 ) 1,119 ( 2,960 ) Accounts Payable ( 5,005 ) 1,600 1,901 Accrued Compensation and Other Current Liabilities 3,397 ( 2,161 ) ( 1,113 ) Income Taxes Payable 2,899 - ( 653 ) Net Cash Provided by Operating Activities 32,616 16,951 17,618 Cash Flows from Investing Activities: Purchase of Property and Equipment ( 13,280 ) ( 9,414 ) ( 10,152 ) Proceeds from Sale of Property and Equipment - 10 109 Business Acquisitions, net of cash acquired ( 12,859 ) ( 9,109 ) ( 29,808 ) Purchases of Marketable Securities ( 15,533 ) - - Net Cash Used in Investing Activities ( 41,672 ) ( 18,513 ) ( 39,851 ) Cash Flows from Financing Activities: (Repayment of) Proceeds from Revolving Credit Facility, net ( 42,713 ) 2,786 31,005 Repayments of Term Loan ( 2,248 ) ( 2,121 ) ( 2,114 ) Issuance of Common Stock, net of direct costs 77,266 658 1,486 Repurchase of Common Stock ( 4,906 ) ( 447 ) ( 6,683 ) Net Cash Provided by Financing Activities 27,399 876 23,694 Effect of Exchange Rate Changes on Cash ( 228 ) 821 ( 625 ) Net Increase in Cash and Cash Equivalents 18,115 135 836 Cash and Cash Equivalents at Beginning of Fiscal Year 1,531 1,396 560 Cash and Cash Equivalents at End of Fiscal Year $ 19,646 $ 1,531 $ 1,396 Supplemental Disclosures of Cash Flow Activity: Cash paid during the fiscal year for: Interest $ 1,240 $ 2,263 $ 780 Income Taxes, net $ 3,099 $ 1,116 $ 3,900 Supplemental Disclosure of Non-Cash Investing and Financing Activities: Common stock issued for acquisitions $ 34,769 $ 145 $ 2,368 Assets Acquired and Liabilities Assumed in Business Combinations: Contingent consideration related to NEXA acquisition $ - $ - $ 153 Accrued holdback consideration related to acquisitions $ 4,859 $ 590 $ - Balance Sheet Reclassification of Property and Equipment, net to Inventory $ 1,056 $ 752 $ 1,013 See accompanying notes to consolidated financial statements. 49 Table of Contents TRANSCAT, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS ’ EQUITY (In Thousands) Capital Common Stock In Accumulated Issued Excess Other $0.50 Par Value of Par Comprehensive Retained Shares Amount Value Income (Loss) Earnings Total Balance as of March 27, 2021 7,458 $ 3,729 $ 19,287 $ ( 451 ) $ 52,513 $ 75,078 Proceeds from Issuance of Common Stock 127 64 3,790 - - 3,854 Repurchase of Common Stock ( 111 ) ( 56 ) ( 1,478 ) - ( 5,149 ) ( 6,683 ) Stock-Based Compensation 55 28 2,301 - - 2,329 Other Comprehensive Income - - - 218 - 218 Net Income - - - - 11,380 11,380 Balance as of March 26, 2022 7,529 3,765 23,900 ( 233 ) 58,744 86,176 Proceeds from Issuance of Common Stock 14 6 797 - - 803 Repurchase of Common Stock ( 7 ) ( 3 ) ( 175 ) - ( 269 ) ( 447 ) Stock-Based Compensation 26 13 3,364 - - 3,377 Other Comprehensive Loss - - - ( 967 ) - ( 967 ) Net Income - - - - 10,688 10,688 Balance as of March 25, 2023 7,562 3,781 27,886 ( 1,200 ) 69,163 99,630 Proceeds from Issuance of Common Stock 1,267 634 116,724 - - 117,358 Direct costs of Stock Offering - - ( 5,323 ) - - ( 5,323 ) Repurchase of Common Stock ( 50 ) ( 25 ) ( 2,145 ) - ( 2,736 ) ( 4,906 ) Stock-Based Compensation 60 30 4,482 - - 4,512 Other Comprehensive Income - - - 251 - 251 Net Income - - - - 13,647 13,647 Balance as of March 30, 2024 8,839 $ 4,420 $ 141,624 $ ( 949 ) $ 80,074 $ 225,169 See accompanying notes to consolidated financial statements. 50 Table of Contents TRANSCAT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – GENERAL Description of Business: Transcat, Inc. (“Transcat,” “we,” “us,” “our” or the “Company”) is a leading provider of accredited calibration services, cost control and optimization services, and distribution and rental of value-added professional grade handheld test, measurement, and control instrumentation. The Company is focused on providing services and products to highly regulated industries, particularly the life science industry, which includes pharmaceutical, biotechnology, medical device and other FDA-regulated businesses. Additional industries served include industrial manufacturing; energy and utilities, including oil and gas; chemical manufacturing; FAA-regulated businesses, including aerospace and defense and other industries that require accuracy in their processes, confirmation of the capabilities of their equipment, and for which the risk of failure is very costly. Principles of Consolidation: The consolidated financial statements of Transcat include the accounts of Transcat and the Company’s wholly-owned subsidiaries, Transcat Canada, Inc., WTT Real Estate Acquisition, LLC, Cal OpEx Limited (d/b/a Transcat Ireland), Cal OpEx Inc. (d/b/a NEXA EAM), SteriQual LLC, Tangent Labs LLC, TIC-MS, LLC and Axiom Test Equipment, LLC. All interco mpany 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 credit losses and returns, inventory reserves, estimated levels of achievement for performance-based restricted stock units, fair value of stock options, depreciable lives of fixed assets, estimated lives of major catalogs and intangible assets, fair value of the goodwill reporting units, and the valuation of assets acquired, liabilities assumed and consideration transferred in business acquisitions. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Consolidated Financial Statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes. Actual results could differ from those estimates. Such changes and refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to the Consolidated Financial Statements. 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 year ended March 30, 2024 ("fiscal year 2024 ") consisted of 53 weeks and fiscal year 2023 which ended on March 25, 2023 consisted of 52 weeks. Cash and Cash Equivalents: Cash equivalents consist of highly liquid investments with an original maturity when purchased of three months or less and are stated at cost, which approximates fair value. Marketable Securities: Marketable securities consist of highly liquid investments with an original maturity when purchased of more than three months and are stated at fair value on the Consolidated Balance Sheets. These securities are considered trading securities. Earnings on the marketable securities are included in interest income in the Consolidated Statements of Income. Accounts Receivable: Accounts receivable represent amounts due from customers in the ordinary course of business. These amounts are recorded net of the allowance for credit losses and returns in the Consolidated Balance Sheets. The allowance for credit losses 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 credit losses. The accounts receivable balance, less the allowance, as of March 26, 2022, was $ 39.7 million. 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 totalin g $ 0.3 mil lion at both March 30, 2024 and March 25, 2023 . 51 Table of Contents Property and Equipment, Depreciation and Amortization: Property and equipment are stated at cost. Depreciation and amortization are computed under the straight-line method over the following estimated useful lives: Years Machinery, Equipment and Software 2 – 15 Rental Equipment 5 – 8 Furniture and Fixtures 3 – 10 Leasehold Improvements 2 – 12 Property and equipment determined to have no value are written off at their then remaining net book value. The Company capitalizes certain costs, including internal payroll 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, liabilities assumed and consideration transferred 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. 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 for each reporting unit on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company is permitted, but not required, to qualitatively assess indicators of a reporting unit’s fair value to determine whether it is necessary to perform the two -step goodwill impairment test. If a quantitative test is deemed necessary, a discounted cash flow analysis is prepared to estimate fair value. The Company determined that no impairment was indicated as of March 30, 2024 and March 25, 2023 . Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. A summary of changes in the Company’s goodwill and intangible assets is as follows (amounts in thousands): Goodwill Intangible Assets Distribution Service Total Distribution Service Total Net Book Value as of March 27, 2021 $ 11,458 $ 31,814 $ 43,272 $ 920 $ 6,593 $ 7,513 Additions - 21,749 21,749 - 11,060 11,060 Amortization - - - ( 273 ) ( 3,611 ) ( 3,884 ) Currency Translation Adjustment - 53 53 - 3 3 Net Book Value as of March 26, 2022 11,458 53,616 65,074 647 14,045 14,692 Additions - 5,094 5,094 - 3,576 3,576 Measurement Period Adjustments - ( 203 ) ( 203 ) - - - Amortization - - - ( 199 ) ( 4,255 ) ( 4,454 ) Currency Translation Adjustment - ( 605 ) ( 605 ) - ( 15 ) ( 15 ) Net Book Value as of March 25, 2023 11,458 57,902 69,360 448 13,351 13,799 Additions 26,758 9,393 36,151 7,900 3,983 11,883 Amortization - - - ( 1,355 ) ( 4,342 ) ( 5,697 ) Currency Translation Adjustment - 74 74 - 2 2 Net Book Value as of March 30, 2024 $ 38,216 $ 67,369 $ 105,585 $ 6,993 $ 12,994 $ 19,987 52 Table of Contents The intangible assets are being amortized on an accelerated basis over their estimated useful lives of up to 15 years. Amortization expense relating to in tangible assets is expected to be $ 5.4 million in fiscal year 2025, $ 4.2 million in fiscal year 2026, $ 2.6 million in fiscal year 2027, $ 2.0 million in fiscal year 2028 and $ 0.9 million in fiscal year 2029. Catalog Costs: Transcat capitalizes the cost of each master catalog mailed and amortizes the cost over the respective catalog’s estimated productive life. The Company reviews response results from catalog mailings on a continuous basis, and if warranted, modifies the period over which costs are recognized. The Company amortizes the cost of each master catalog over an eighteen -month period and amortizes the cost of each catalog supplement over a three -month period. There were no unamortized catalog costs at March 30, 2024. Total unamortized catalog costs, included as a component of prepaid expenses and other current assets on the Consolidated Balance Shee ts, were $ 0.1 million at March 25, 2023 . 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 and cash equivalents, marketable securities, accounts receivable and accounts payable approximate fair value due to their short-term nature. Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds and are valued based on Level 1 inputs. At March 30, 2024 and March 25, 2023 , investment assets totaled $ 0.1 million and $ 0.2 mil lion, respectively and are included as a component of other assets (non-current) on the Consolidated Balance Sheets. Stock-Based Compensation: The Company measures the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. The Company records compensation cost related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period for awards expected to vest. Excess tax benefits for share-based award activity are reflected in the Consolidated Statements of Income as a component of the provision for income taxes. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. The Company did not capitalize any stock-based compensation costs as part of an asset. The Company estimates forfeiture rates based on its historical experience. During fiscal years 2024 , 2023 and 2022 , the Company recorded non-cash stock-based compensation cost in the am ount of $ 4.5 million, $ 3.4 million and $ 2.3 million, respectively, in the Consolidated Statements of Income. Revenue Recognition: Distribution non-rental sales are recorded when an order’s title and risk of loss transfers to the customer, which is generally upon shipment. Distribution rental sales are recognized over time using the time-elapsed output method as this portrays the transfer of control to the customer. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. The majority of the Company’s revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue over time using the time-elapsed output method as this portrays the transfer of control to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for product shipped or services performed. Sales taxes and other taxes billed and collected from customers are excluded from revenue. The Company generally invoices its customers for freight, shipping, and handling charges. Freight billed to customers is included in revenue. Shipping and handling is not included in revenue. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data. 53 Table of Contents Under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers, we use judgments that could potentially impact both the timing of our satisfaction of performance obligations and our determination of transaction prices used in determining revenue recognized. Such judgments include considerations in determining our transaction prices and when our performance obligations are satisfied for our standard product sales that include general payment terms that are between net 30 and 90 days. Revenue recognized from prior period performance obligations for fiscal year 2024 was immaterial. As of March 30, 2024 , the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to ASC Topic 606, the Company applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of March 30, 2024 and March 25, 2023 were immaterial. See Note 7 for disaggregated revenue information. The following table presents a summary of the Company's net sales by revenue recognition method as a percentage of total net sales: % of Total Net Sales 2024 2023 2022 Point-in-Time 89.7 % 91.0 % 91.1 % Over Time - Output Method 10.3 % 9.0 % 8.9 % Total 100.0 % 100.0 % 100.0 % 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 $ 0.6 million, $0 .6 million and $ 1.0 million in fiscal years 2024 , 2023 and 2022 , respectively, as a reduction of cost of distribution sales. Cooperative Advertising Income: The Company participates in co-op advertising programs with certain of its vendors. The Company records cash consideration received from these vendors for advertising as a reduction of cost of distribution sales. The Company recorded consideration in the amount of $ 1.1 millio n, $ 1.0 million and $ 0.8 million in fiscal years 2024 , 2023 and 2022 , 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 approxim ately $ 1.6 million, $ 1.2 m illion and $ 1.1 million in fiscal years 2024 , 2023 and 2022 , respectively. Shipping and Handling Costs: Freight expense and direct shipping costs are included in the cost of revenue. These costs totaled approximatel y $ 3.1 milli on, $ 2.9 million and $ 2.7 million in fiscal years 2024 , 2023 and 2022 , 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 $ 0.5 million, $0 .7 million and $ 0.8 million in fiscal years 2024 , 2023 and 2022 , respectively. Foreign Currency Translation and Transactions: The accounts of Cal OpEx Limited (d/b/a Transcat Ireland), an Irish company, and Transcat Canada Inc., both of which are wholly-owned subsidiaries of the Company, are maintained in their local currencies, the Euro and the Canadian dollar, respectively, and have been translated to U.S. dollars. Accordingly, the amounts representing assets and liabilities have been translated at the period-end rates of exchange and related revenue and expense accounts have been translated at an average rate of exchange during the period. Gains and losses arising from translation of Cal OpEx Limited’s and Transcat Canada Inc.’s financial statements into U.S. dollars are recorded directly to the accumulated other comprehensive loss component of shareholders’ equity. 54 Table of Contents Transcat records foreign currency gains and losses on business transactions denominated in foreign currency. The net foreign currency loss was $ 0.1 million in fiscal year 2024 , a loss of $ 0.7 million in fiscal year 2023 and a gain of $ 0.1 million in fiscal year 2022 . The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its future earnings denominated in Canadian dollars would be adversely affected by changes in currency exchange rates. The Company does not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a loss of less tha n $ 0.1 million, a gain of $ 0.4 million and a loss of less than $ 0.1 million in fiscal year 2024 , 2023 and 2022 , respectively, was recognized as a component of Interest and Other Expenses, net in the Consolidated Statements of Income. The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated in Canadian dollars being hedged. On March 30, 2024 , the Company had a foreign exchange contract, which matured in April 2024, outstanding in the notional amount of $ 1.8 millio n. This contract was subsequently renewed and remains in place. The Company does not use hedging arrangements for speculative purposes. Other Comprehensive Income (Loss): Other comprehensive income (loss) is composed of currency translation adjustments, unrecognized prior service costs from post retirement plan, net of tax, and unrealized gains or losses on other assets, net of tax. 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. 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 Statements of Income. At March 30, 2024 , accumulated other comprehensive loss consisted of cumulative currency translation losses of $ 0.9 million, unrecognized prior service costs, net of tax, of less than $ 0.1 million and an unrealized gain on other assets, net of tax, of less than $ 0.1 million. At March 25, 2023 , accumulated other comprehensive loss consisted of cumulati ve currency translation losses of $ 1.1 million, unrecognized prior service costs, net of tax, of $ 0.1 million and an unrealized gain on other assets, net of tax, of less than $ 0.1 million. Earnings Per Share: Basic earnings per share of the Company's common stock, par value $ 0.50 per share ("common stock"), are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of stock options 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 the fiscal year 2024 , the net additional common stock equivalents had a $( 0.03 ) per s hare effect on the calculation of dilutive earnings per share. For each of fiscal years 2023 and 2022 , the net additional common stock equivalents had a $( 0.02 ) per s hare 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 (amounts in thousands): Fiscal Year Ended March 30, March 25, March 26, 2024 2023 2022 Average Shares Outstanding – Basic 8,239 7,551 7,496 Effect of Dilutive Common Stock Equivalents 113 94 93 Average Shares Outstanding – Diluted 8,352 7,645 7,589 Anti-dilutive Common Stock Equivalents 50 160 111 55 Table of Contents Other Liabilities: A summary of other current and non-current liabilities is as follows (amounts in thousands): March 30, March 25, 2024 2023 Current Liabilities: Accrued Payroll and Employee Benefits $ 5,508 $ 3,243 Accrued Incentives 4,182 2,507 Current Portion of Lease Liabilities 2,510 2,333 Accrued Acquisition Holdbacks 2,577 252 Accrued Sales Tax 813 736 Accrued Contingent Consideration 529 - Other Current Liabilities 620 1,130 Accrued Compensation and Other Current Liabilities $ 16,739 $ 10,201 Non-Current Liabilities: Postretirement Benefit Obligation $ 1,134 $ 1,266 Accrued Acquisition Holdbacks 1,647 - Other Non-Current Liabilities 122 168 Other Liabilities $ 2,903 $ 1,434 Recently Adopted Accounting Pronouncements: In June 2016, the Financial Accounting Standard Board (“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. Allowance for credit losses for accounts receivable is the most significant item for the Company under this ASU. The Company adopted ASU 2016 - 13 effective on March 26, 2023. The adoption of this standard did not have a material impact on our consolidated financial statements. Recent Accounting Guidance Not Yet Adopted: In December 2023, the FASB issued ASU 2023 - 09, Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures. The ASU expands the income tax disclosure requirements, principally related to the rate reconciliation table and income taxes paid. ASU 2023 - 09 is effective for annual periods beginning in fiscal 2025, with early adoption permitted. The adoption of the ASU is not expected to have a material impact on the Company’s financial statement disclosures. 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. 56 Table of Contents NOTE 2 – PROPERTY AND EQUIPMENT Property and equipment consists of (amounts in thousands): March 30, March 25, 2024 2023 Machinery, Equipment and Software $ 64,971 $ 59,689 Rental Equipment 19,773 10,000 Furniture and Fixtures 3,076 2,933 Leasehold Improvements 9,467 8,191 Total Property and Equipment 97,287 80,813 Less: Accumulated Depreciation and Amortization ( 58,343 ) ( 51,749 ) Total Property and Equipment, net $ 38,944 $ 29,064 Total depreciation and amortization expense relating to property and equipment amounted to $ 7.8 mill ion, $ 6.5 million and $ 5.7 million in fiscal years 2024 , 2023 and 2022 , respectively. NOTE 3 – LONG-TERM DEBT On July 7, 2021, the Company entered into the Second Amended and Restated Credit Facility Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), that amended and restated in its entirety the Company’s prior credit agreement with M&T. The Credit Agreement provides for a revolving credit commitment (the “revolving credit facility”) of $ 80.0 million through June 2026, with a letter of credit subfacility of $ 10.0 million. The Company's 2018 term loan, with an original principal amount of $ 15.0 million (the "2018 Term Loan"), is also provided for under the Credit Agreement. The Credit Agreement allows the Company to use up to $ 50.0 million under the revolving credit facility for acquisitions in any single fiscal year. The Credit Agreement restricts the Company's ability to complete acquisitions of businesses with a principal place of business located in the United Kingdom or the European Union to an aggregate purchase price of $ 40.0 million during the term of the Credit Agreement, if the acquisition is financed directly or indirectly with the revolving credit facility. Under the Credit Agreement, the Company may make restricted payments up to $ 25.0 million in the aggregate over the term of the Credit Agreement and $ 10.0 million in any single fiscal year to repurchase shares and pay dividends. As of March 30, 2024 , $ 80.0 million was available for borrowing under the revolving credit facility. As of March 30, 2024 there were no amounts out standing under the revolving credit facility. During fiscal year 2024 , $ 12.9 million from the revolving credit facility was used for three business acquisitions. As of March 30, 2024 , $ 4.2 million was outstanding on the 2018 Term Loan, of which $ 2.3 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $ 0.2 million per month through December 2025. Interest and Other Costs: Effective July 1, 2023, interest on outstanding borrowings under the revolving credit facility accrue, at Transcat’s election, at either the variable Daily Simple SOFR or a fixed rate for a designated period at the SOFR corresponding to such period (subject to a 0.25 % floor), in each case, plus a margin. 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. The Company’s interest rate for the revolving credit facility for fiscal year 2024 ranged from 6.4 % to 7.1 %. Interest on outstanding borrowings under the 2018 Term Loan accrue at a fixed rate of 3.90 % over the term of the loan. Covenants: The Credit Agreement has certain covenants with which the Company must comply, including a fixed charge ratio covenant, which prohibits the Company's fixed charge ratio from being less than 1.15 to 1.00, and a leverage ratio covenant, which prohibits the Company's leverage ratio from exceeding 3.00 to 1.00. The Company was in compliance with all loan covenants and requirements during fiscal years 2024 and 2023 . The Company's leverage ratio, as defined in the Credit Agreemen t, was 0.10 at March 30, 2024 , compared with 1.60 at March 25, 2023 . 57 Table of Contents 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 Transcat’s income before income taxes on the Consolidated Statements of Income is as follows (amounts in thousands): FY 2024 FY 2023 FY 2022 United States $ 15,064 $ 9,879 $ 10,417 Foreign 3,375 3,608 2,773 Total $ 18,439 $ 13,487 $ 13,190 The provision for income taxes for fiscal years 2024 , 2023 and 2022 is as follows: FY 2024 FY 2023 FY 2022 Current Tax Provision: Federal $ 4,099 $ 1,938 $ 414 State 1,067 652 240 Foreign 1,185 395 752 $ 6,351 $ 2,985 $ 1,406 Deferred Tax (Benefit) Provision: Federal $ ( 809 ) $ ( 334 ) $ 456 State ( 316 ) ( 258 ) ( 10 ) Foreign ( 434 ) 406 ( 42 ) $ ( 1,559 ) $ ( 186 ) $ 404 Provision for Income Taxes $ 4,792 $ 2,799 $ 1,810 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 (amounts in thousands): FY 2024 (ETR) FY 2023 FY 2022 Federal Income Tax at Statutory Rate $ 3,872 21.0 % $ 2,832 $ 2,770 State Income Taxes, net of federal benefit 593 3.2 % 311 172 Federal, State and Foreign Tax Credits ( 87 ) - 0.5 % ( 99 ) ( 182 ) Foreign Rate Differential 41 0.2 % 43 55 Tax Impact of Equity Awards ( 634 ) - 3.4 % ( 416 ) ( 1,395 ) 162(m) Limitation 805 4.4 % - - Non-Deductible Acquisition Costs 71 0.4 % 6 206 GILTI and 78 Gross Up 112 0.6 % 83 161 Other, net 19 0.1 % 39 23 Total $ 4,792 26.0 % $ 2,799 $ 1,810 58 Table of Contents March 30, March 25, 2024 2023 Deferred Tax Assets: Accrued Liabilities $ 399 $ 362 Lease Liabilities 3,623 1,916 Performance-Based Stock Award Grants 1,094 720 Inventory Reserves 68 70 Non-Qualified Deferred Compensation Plan 12 62 Post-Retirement Health Care Plans 303 323 Stock-Based Compensation 897 570 Capitalized Inventory Costs 185 214 Other 270 314 Total Deferred Tax Assets $ 6,851 $ 4,551 Deferred Tax Liabilities: Goodwill and Intangible Assets $ ( 5,945 ) $ ( 3,504 ) Right of Use Assets ( 3,636 ) ( 1,957 ) Depreciation ( 6,498 ) ( 5,462 ) Other ( 63 ) ( 166 ) Total Deferred Tax Liabilities $ ( 16,142 ) $ ( 11,089 ) Net Deferred Tax Liabilities $ ( 9,291 ) $ ( 6,538 ) The Company files income tax returns with the U.S. government and various states as well as foreign governments. Open fiscal years subject to U.S. Government federal examination are 2021 through 2023. Open fiscal years subject to state examination are 2019 through 2023. The Company also files in Canada and Ireland. Open fiscal years subject to examination for Canada are 2020 through 2023; open fiscal years subject to examination for Ireland are 2020 to 2023. There are no income tax years currently under examination by the Internal Revenue Service, states, Canadian and Irish tax authorities. The Company's foreign subsidiary undistributed earnings are considered to be permanently reinvested. The Company’s policy regarding interest and/or penalties related to income tax matters is to recognize such items as a component of the income tax provision. The Company recognized no interest expense or penalties associated with uncertain tax benefits accrued for fiscal years 2024 , 2023 and 2022 . In accordance with applicable accounting guidance, the amount of unrecognized tax liability from uncertain positions was $ 0 at year-end fiscal year 2024 , 2023 and 2022 . The Company assesses its deferred tax assets annually for expected utilization. If deemed necessary, valuation allowances are established to reduce the deferred tax assets to their net realizable value to the extent it is more likely than not that some portion or all of the deferred tax assets will not be realized based on the character of the carryforward item, the associated taxing jurisdiction, the relevant history for the particular item, the applicable expiration dates, and identified actions under the control of the Company in realizing such assets. The Company assesses the available positive and negative evidence surrounding the recoverability of the deferred tax assets and applies its judgment in estimating the amount of valuation allowance necessary. The Company has determined that a valuation allowance of $ 0 is appropriate for fiscal years 2024 , 2023 and 2022 . NOTE 5 – EMPLOYEE BENEFIT PLANS Defined Contribution Plan. All of Transcat’s U.S. based employees are eligible to participate in a defined contribution plan, the Long-Term Savings and Deferred Profit Sharing Plan (the “Plan”), provided they meet certain qualifications. In fiscal years 2024 , 2023 and 2022 , the Company matched 50 % of the first 6 % of pay that eligible employees contribute to the Plan. 59 Table of Contents 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 approximat ely $ 1.5 million, $ 1.2 million and $ 1.1 million in fiscal years 2024 , 2023 and 2022 , respectively. In the deferred profit sharing portion of the Plan, Company contributions are made at the discretion of the Company’s Board of Directors. The Company made no profit sharing contributions in fiscal years 2024 , 2023 and 2022 . 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 th an $ 0.1 million i n each of fiscal years 2024 , 2023 and 2022 . 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 2024 , 2023 and 2022 , 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 $ 0.1 mill ion as of March 30, 2024 and $ 0.2 million as of March 25, 2023 , and is included as a component of other liabilities (non-current) on the Consolidated Balance Sheets. Post-retirement Health Care Plans. The Company has a defined benefit post-retirement health care plan which provides long-term care insurance benefits, medical and dental insurance benefits and medical premium reimbursement benefits to eligible retired corporate officers and their eligible spouses (the “Officer Plan”). The change in the post-retirement benefit obligation is as follows (amounts in thousands): FY 2024 FY 2023 FY 2022 Post-retirement benefit obligation, at beginning of fiscal year $ 1,266 $ 1,326 $ 1,831 Service cost 14 17 96 Interest cost 60 45 52 Plan Amendments - 193 - Benefits paid ( 121 ) ( 136 ) ( 125 ) Actuarial (gain) loss ( 85 ) ( 179 ) ( 528 ) Post-retirement benefit obligation, at end of fiscal year 1,134 1,266 1,326 Fair value of plan assets, at end of fiscal year - - - Funded status, at end of fiscal year $ ( 1,134 ) $ ( 1,266 ) $ ( 1,326 ) Accumulated post-retirement benefit obligation, at end of fiscal year $ 1,134 $ 1,266 $ 1,326 60 Table of Contents 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 (amounts in thousands): FY 2024 FY 2023 FY 2022 Net periodic post-retirement benefit cost: Service cost $ 14 $ 17 $ 96 Interest cost 60 45 52 Amortization of prior service cost 15 1 1 89 63 149 Benefit obligations recognized in other comprehensive income (loss): Amortization of prior service cost ( 15 ) ( 1 ) ( 1 ) Prior service cost - 193 - Net actuarial gain ( 85 ) ( 185 ) ( 583 ) ( 100 ) 7 ( 584 ) Total recognized in net periodic benefit cost and other comprehensive income (loss) $ ( 11 ) $ 70 $ ( 435 ) Amount recognized in accumulated other comprehensive income (loss), at end of fiscal year: Unrecognized prior service cost $ 63 $ 163 $ 156 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 2025 is les s 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 30, March 25, 2024 2023 Weighted average discount rate 5.2 % 4.9 % Medical care cost trend rate: Trend rate assumed for next year 7.8 % 7.8 % Ultimate trend rate 4.0 % 4.0 % 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 3.5 % 3.5 % 61 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 (amounts in thousands): Fiscal Year Amount 2025 $ 103 2026 72 2027 83 2028 98 2029 113 Thereafter $ 665 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 c ost by $ 0.1 million. A one percentage point decrease in the healthcare cost trend would decrease the accumulated post-retirement benefit obligation and the annual net periodic post-retirement benefit co st by $ 0.1 mill ion. NOTE 6 – STOCK-BASED COMPENSATION In September 2021, the Transcat, Inc. 2021 Stock Incentive Plan (the “2021 Plan”) was approved by shareholders and became effective. The 2021 Plan replaced the Transcat, Inc. 2003 Incentive Plan (the “2003 Plan”). Shares available for grant under the 2021 Plan include any shares remaining available for issuance under the 2003 Plan and any shares that are subject to outstanding awards under the 2003 Plan that are subsequently canceled, expired, forfeited, or otherwise not issued or are settled in cash. The 2021 Plan 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 30, 2024 , 0.6 mi llion shares of common stock were available for future grant under the 2021 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 and stock option activity in fiscal years 2024 , 2023 and 2022 w ere $ 0.7 million , $ 0.4 million and $ 1.4 million, respectively. Restricted Stock Units: The Company grants time-based and performance-based restricted stock units as a component of executive and key employee compensation. Expense for restricted stock unit 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 unit 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 or cumulative Adjusted EBITDA targets over the eligible period. On the date of each annual meeting of shareholders, the Company’s non-employee directors receive an annual grant of restricted stock units valued at $ 50,000 that vest after one year. Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the unit that coincides with the actual outcome of the performance conditions. On an interim basis, 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 2024 , 38 ,000 s hares of time-vested restricted stock units were granted and 10,000 shares of performance-based restricted stock units were granted. During fiscal year 2023 , 19,000 shares of time-vested restricted stock units were granted and 11,000 shares of performance-based restricted stock units were granted. During fiscal year 2022 , 30,000 shares of time-vested restricted stock units were granted and 15,000 shares of performance-based stock units were granted. 62 Table of Contents The following table summarizes the restricted stock units vested and shares issued during fiscal years 2024 , 2023 and 2022 (amounts in thousands, except per unit data): Total Grant 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 2020 1 $ 15.65 Time Vested 1 April 2020 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 April 2018 April 2018 – March 2021 1 $ 15.65 Time Vested 1 April 2021 May 2018 April 2018 – March 2021 29 $ 15.30 64 % 19 May 2021 September 2020 September 2020 – September 2021 14 $ 28.52 Time Vested 14 September 2021 October 2018 October 2018 – September 2021 1 $ 20.81 Time Vested 1 October 2021 April 2019 April 2019 – March 2022 20 $ 23.50 Time Vested 20 March 2022 April 2019 April 2019 – March 2022 20 $ 23.50 82 % 16 May 2022 July 2022 July 2022 1 $ 59.33 Time Vested 1 July 2022 September 2021 September 2021 – September 2022 7 $ 66.09 Time Vested 7 September 2022 September 2022 September 2022 1 $ 73.30 Time Vested 1 September 2022 October 2018 October 2018 – September 2022 1 $ 20.81 Time Vested 1 October 2022 April 2020 April 2020 - March 2023 2 $ 26.25 Time Vested 2 April 2023 July 2020 July 2020 - July 2023 26 $ 27.08 Time Vested 26 July 2023 September 2020 September 2020 - July 2023 4 $ 28.54 Time Vested 4 July 2023 September 2020 September 2020 - July 2023 5 $ 29.76 Time Vested 5 July 2023 September 2022 September 2022 - September 2023 5 $ 73.80 Time Vested 5 September 2023 September 2020 September 2020 - September 2023 3 $ 29.76 Time Vested 3 September 2023 October 2018 October 2018 – September 2023 1 $ 20.81 Time Vested 1 October 2023 June 2021 June 2021 - March 2024 11 $ 53.17 Time Vested 11 March 2024 63 Table of Contents The following table summarizes the non-vested restricted stock units outstanding as of March 30, 2024 (amounts in thousands, except per unit data): Total Grant Date Estimated Number Fair Level of Date Measurement of Units Value Achievement at Granted Period Granted Per Unit March 30, 2024 October 2018 October 2018 – September 2027 5 $ 20.81 Time Vested May 2021 May 2021 – May 2024 1 $ 54.21 Time Vested June 2021 June 2021 – March 2024 10 $ 53.17 136% of target level September 2021 September 2021 – September 2024 4 $ 67.76 Time Vested January 2022 January 2022 – March 2024 1 $ 90.92 136% of target level January 2022 January 2022 – January 2025 1 $ 90.41 Time Vested March 2022 March 2022 – March 2025 1 $ 76.31 Time Vested May 2022 May 2022 - March 2025 11 $ 63.17 55% of target level May 2022 May 2022 - March 2025 12 $ 63.17 Time Vested August 2022 August 2022 - August 2025 1 $ 78.04 Time Vested September 2022 September 2022 – September 2023 5 $ 73.80 Time Vested December 2022 December 2022 - December 2025 1 $ 81.26 Time Vested December 2022 December 2022 - December 2025 1 $ 67.48 Time Vested May 2023 May 2023 – March 2026 10 $ 89.70 150% of target level May 2023 May 2023 – March 2026 11 $ 89.70 Time Vested May 2023 May 2023 – May 2026 19 $ 89.70 Time Vested August 2023 August 2023 – August 2024 6 $ 90.56 Time Vested September 2023 September 2023 – September 2024 4 $ 109.55 Time Vested Total expense relating to restricted stock units, based on grant date fair value and the achievem ent criteria, was $ 3.2 million, $ 2.0 million and $ 1.6 million in fiscal years 2024 , 2023 and 2022 , respectively. As of March 30, 2024 , unearned compensation, to be recognized over the grants’ respective service periods, totaled $ 3.5 million based on estimated achievement levels as of March 30, 2024. If the maximum performance levels were achieved, the unearned compensation could be a maximum of $ 3.7 million . Stock Options: The Company grants stock options to employees and directors with an exercise price 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. We calculate the fair value of the stock options granted using the Black-Scholes model. The following weighted-average assumptions were used to value options granted during fiscal years 2024 , 2023 and 2022 : FY 2024 FY 2023 FY 2022 Risk-Free Interest Rate 4.08 % 2.65 % 1.01 % Volatility Factor 37.27 % 37.62 % 30.22 % Expected Term (in Years) 6.34 4.58 6.25 Annual Dividend Rate 0.00 % 0.00 % 0.00 % 64 Table of Contents 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 safe harbor rules, 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. Under FASB ASC Topic 718, “Compensation – Stock Compensation”, the Company has elected to account for forfeitures as they occur. During fiscal year 2024 , the Company granted options for 7,000 shares of common stock in the aggregate to Company employees that vest over three years, an option for 10,000 shares of common stock to a Company employee that vests over five years and options for 30,000 shares of common stock ( 10,000 each) to three Company directors that vest over five years. During fiscal year 2023 , the Company granted options for 46,000 shares of common stock in the aggregate to Company employees that vest over three years and an option for 10,000 shares of common stock to a Company director that vests over five years. During fiscal year 2022 , the Company granted an option for 10,000 shares of common stock each to two Company directors ( 20,000 shares in the aggregate) that vest over five years, an option for 2,000 shares of common stock each to five employees ( 10,000 shares in the aggregate) that vests over three years, and an option for 90,000 shares of common stock in the aggregate to employees during an acquisition that vests over five years and an option for 6,000 shares of common stock to a Company employee that vests over three years. The expense related to all stock option awards w as $ 1.3 mi llion in fiscal year 2024 , $ 1.4 million in fiscal year 2023 and $ 0.7 million in fiscal year 2022 . The following table summarizes the Company’s options for fiscal years 2024 , 2023 and 2022 (amounts in thousands, except per option data): Weighted Weighted Average Average Remaining Number Exercise Contractual Aggregate Of Price Per Term Intrinsic Options Option (in Years) Value Outstanding as of March 27, 2021 125 $ 15.47 Granted 131 61.29 Exercised ( 85 ) 12.00 Forfeited ( 6 ) 24.10 Outstanding as of March 26, 2022 165 53.27 Granted 56 62.46 Exercised ( 4 ) 6.19 Forfeited - - Outstanding as of March 25, 2023 217 56.25 Granted 47 94.39 Exercised ( 25 ) 58.44 Forfeited ( 5 ) 68.13 Outstanding as of March 30, 2024 234 63.43 5 $ 11,095 Exercisable as of March 30, 2024 61 $ 32.96 5 $ 4,276 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 2024 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 30, 2024 . The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock. Total unrecognized compensation cost related to non-vested stock options as of March 30, 2024 was $ 2.4 million, which is expected to be recognized over a period of three years. The aggregate intrinsic value of stock options exercised in fiscal years 2024 , 2023 and 2022 was $ 1.3 million, $ 0.3 million and $ 5.3 million, respectively. Cash received from the exercise of options in fiscal years 2024 , 2023 and 2022 was $ 1.5 million, $ 0.1 milli on and $ 1.0 million, respectively. 65 Table of Contents NOTE 7 – SEGMENT AND GEOGRAPHIC DATA The basis for determining our operating segments is the manner in which financial information is used in monitoring our operations. Transcat has two reportable segments: Service and Distribution. Through our Service segment, we offer calibration, repair, inspection, analytical qualifications, preventative maintenance, consulting and other related services. Through our Distribution segment, we sell and rent national and proprietary brand instruments to customers globally. The Company has no inter-segment sales. We believe that reporting performance at the operating income level is the best indicator of segment performance. The following table presents segment and geographic data for fiscal years 2024 , 2023 and 2022 (dollars in thousands): FY 2024 FY 2023 FY 2022 Revenue: Service $ 169,525 $ 144,883 $ 122,005 Distribution 89,956 85,686 82,954 Total 259,481 230,569 204,959 Gross Profit: Service 57,253 46,638 38,921 Distribution 26,553 21,717 19,518 Total 83,806 68,355 58,439 Operating Expenses: Service (1) 42,210 35,216 28,107 Distribution (1) 21,815 16,891 16,189 Total 64,025 52,107 44,296 Operating Income: Service 15,043 11,422 10,814 Distribution 4,738 4,826 3,329 Total 19,781 16,248 14,143 Unallocated Amounts: Interest and Other Expense, net 1,342 2,761 953 Provision for Income Taxes 4,792 2,799 1,810 Total 6,134 5,560 2,763 Net Income $ 13,647 $ 10,688 $ 11,380 Total Assets: Service $ 134,415 $ 118,568 $ 109,472 Distribution 96,602 52,340 46,107 Unallocated 56,535 24,841 22,183 Total $ 287,552 $ 195,749 $ 177,762 Continued on next page 66 Table of Contents FY 2024 FY 2023 FY 2022 Depreciation and Amortization (2) : Service $ 9,193 $ 8,800 $ 7,543 Distribution 4,284 2,155 2,024 Total $ 13,477 $ 10,955 $ 9,567 Capital Expenditures: Service $ 6,141 $ 5,569 $ 7,885 Distribution 7,139 3,845 2,267 Total $ 13,280 $ 9,414 $ 10,152 Geographic Data: Revenues to Unaffiliated Customers (3) : United States (4) $ 235,117 $ 207,143 $ 187,165 Canada 16,666 16,468 14,623 Other International 7,698 6,958 3,171 Total $ 259,481 $ 230,569 $ 204,959 Property and Equipment: United States (4) $ 33,507 $ 24,721 $ 22,042 Canada 5,415 4,326 4,397 Other International 22 17 - Total $ 38,944 $ 29,064 $ 26,439 ( 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. 67 Table of Contents NOTE 8 – COMMITMENTS Leases: The Company determines if an arrangement is a lease at inception. Our lease agreements generally contain lease and non-lease components. Historically, non-lease components such as utilities have been immaterial. Payments under our lease arrangements are primarily fixed. Lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in our leases is not readily determinable. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Transcat leases facilities, equipment, and vehicles under various non-cancelable operating leases. As of March 30, 2024 , the remaining lease terms on our operating leases range from approximately one year to fifteen years, and include any renewal and/or termination options that are reasonably certain to be exercised by the Company. There is no transfer of title or option to purchase the leased assets upon expiration. The weighted average discount rate for fiscal years 2024 , 2023 and 2022 was 4.1 %, 3.9 % and 4.2 %, respectively. The weighted average remaining lease term is approximately eleven years. Short-term leases are leases having a term of 12 months or less. The Company recognizes short-term leases on an as incurred basis and does not record a related lease asset or liability for such leases. Short-term lease expense was immaterial in fiscal years 2024 , 2023 and 2022 . The components of lease expense for the current and prior-year comparative periods were as follows (dollars in thousands): FY 2024 FY 2023 FY 2022 Operating lease cost $ 5,948 $ 4,730 $ 3,687 Variable lease cost 666 608 619 Total lease cost $ 6,614 $ 5,338 $ 4,306 Supplemental cash flow information related to leases was as follows: FY 2024 FY 2023 FY 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow from operating leases $ 2,954 $ 2,469 $ 2,207 Right to Use Assets obtained in exchange for lease liabilities $ 4,965 $ 4,519 $ 3,874 Total rental expense was approximatel y $ 6.6 millio n, $ 5.3 million and $ 4.3 million in fiscal years 2024 , 2023 and 2022 , respectively. The minimum future annual rental payments under the non-cancelable leases at March 30, 2024 are as follows (in millions): Fiscal Year Amount 2025 4.6 2026 3.9 2027 3.6 2028 2.9 2029 2.0 Thereafter 8.5 Total minimum lease payments 25.5 Less: Imputed interest 8.1 Present value of remaining lease payments 17.4 Term Loan: Effective December 2018, the Company has term loan repayments (principal plus interest) of $ 0.2 million per month through December 2025. Principal payments relating to the 2018 Term Loan will be $ 2.3 million in fiscal year 2025 and $ 1.8 million in fiscal year 2026. 68 Table of Contents Contingent Consideration: In connection with the acquisition of NEXA, there were potential earn-out payments of up to $ 7.5 million over the four -year period following the closing of the transaction based upon NEXA achieving certain annual revenue and EBITDA goals. As of March 25, 2023, the estimated fair value for the earn-out payments was zero. During fiscal year 2024, the Company entered into an Amendment to the Share Purchase Agreement (the “First Amendment”). Pursuant to the First Amendment, the potential earn-out payments would have been up to $ 7.1 million for the Earn-Out years of calendar year 2023, 2024 and 2025 based upon NEXA achieving certain EBITDA goals. If achieved, the earn-out payments would be made in shares of common stock unless certain criteria is met for cash payment. Subsequent to fiscal year 2024, the Company entered into an Amendment to the Share Purchase Agreement (the “Second Amendment”). Pursuant to the Second Amendment, the Company agreed to pay approximately $ 0.5 million for the Earn-Out year of calendar year 2023 and removed the entitlement for any future earn-out payments. As of March 30, 2024, the estimated fair value of the 2023 earn-out payment was approximately $ 0.5 million. As of March 30, 2024, the estimated fair value of the 2024 and 2025 earn-out payments was zero. See Note 9. NOTE 9 – BUSINESS ACQUISITIONS Axiom : Effective August 8, 2023, Transcat purchased all of the outstanding capital stock of Axiom Test Equipment, Inc. (“Axiom”), a privately-held California rental provider of electronic test equipment to customers across the United States. 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 Distribution capabilities. The Axiom goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the Axiom acquisition has been allocated to the Distribution segment. Intangible assets related to the Axiom acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to twelve years and are not deductible for tax purposes. Amortization of goodwill related to the Axiom acquisition is not deductible for tax purposes. The total purchase price for Axiom was approximately $ 38.7 million and was paid with $ 10.0 million in cash and the issuance of our common stock valued at $ 28.6 million. Pursuant to the asset purchase agreement, the Company held back approximately $ 3.9 million of the purchase price for certain potential post-closing adjustments. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Axiom's assets and liabilities acquired on August 8, 2023 ( in thousands): Goodwill $ 26,758 Intangible Assets – Customer Base & Contracts 7,900 34,658 Plus: Cash 161 Accounts Receivable 925 Inventory 1,796 Other Current Assets 40 Property and Equipment 4,965 Less: Current Liabilities ( 579 ) Deferred Tax Liability ( 3,242 ) Total Purchase Price $ 38,724 From the date of acquisition throu gh the end of fiscal year 2024, Axi om has contributed revenue o f $ 7.2 million and operating income of $ 0.7 million, which in cludes the negative impact of amortization of the acquired intangible assets. 69 Table of Contents SteriQual : Effective July 12, 2023, Transcat purchased all of the outstanding capital stock of SteriQual, Inc. (“SteriQual”), a Florida based provider of expert consulting services to pharmaceutical, biopharmaceutical, medical device and diagnostic equipment manufacturers. 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 SteriQual goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the SteriQual acquisition has been allocated to the Service segment. Intangible assets related to the SteriQual acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are not deductible for tax purposes. Amortization of goodwill related to the SteriQual acquisition is not deductible for tax purposes. The total purchase price for SteriQual was approximately $ 4.3 million and was paid by the issuance of our common stock. Pursuant to the asset purchase agreement, the Company held back approximately $ 0.9 million of the purchase price for certain potential post-closing adjustments. Pursuant to the asset purchase agreement, the purchase price is subject to reduction by $ 0.5 million if certain revenue targets are not met through July 12, 2024. This contingent consideration is remeasured quarterly. If, as a result of remeasurement, the value of the contingent consideration changes, any charges or income will be included in the Company’s Consolidated Statements of Income. The purchase price was reduced to $ 3.8 million as of December 23, 2023 as the Company recorded a receivable in the amount of $ 0.5 million related to the revenue target contingent consideration. This receivable was recognized based on the facts and circumstances at the date of acquisition and is recognized as a component of goodwill and not recorded in the Consolidated Statement of Income. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of SteriQual's assets and liabilities acquired on July 12, 2023 ( in thousands): Goodwill $ 2,175 Intangible Assets – Customer Base & Contracts 1,062 Intangible Assets – Covenant Not to Compete 392 Intangible Assets – Sales Backlog 95 3,724 Plus: Accounts Receivable 666 Less: Current Liabilities ( 211 ) Deferred Tax Liability ( 395 ) Total Purchase Price $ 3,784 From the date of acquisitio n through the end of fiscal year 2024, SteriQual has contributed revenue of $ 2.6 million and operating income of $ 0.3 million, which in cludes the negative impact of amortization of the acquired intangible assets. TIC-MS : Effective March 27, 2023, Transcat purchased all of the outstanding capital stock of TIC-MS, Inc. (“TIC-MS”), a Missouri 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 TIC-MS goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the TIC-MS acquisition has been allocated to the Service segment. Intangible assets related to the TIC-MS acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are not deductible for tax purposes. Amortization of goodwill related to the TIC-MS acquisition is not deductible for tax purposes. 70 Table of Contents The total purchase price for TIC-MS was approximately $ 9.7 million and was paid with $ 2.9 million in cash, including $0. 5 million placed in escrow for contingent consideration, certain post-closing adjustments and indemnification claims, if any, and the issuance of 77,387 shares of our common stock valued at $ 6.9 million. Pursuant to the asset purchase agreement, the purchase price was be subject to reduction by up to $ 0.5 million if a key customer relationship was not retained through March 27, 2024. As of March 30, 2024, we continued to retain this key customer relationship. As a result, there has not been a receiv able recognized relating to the $ 0.5 million contingent consideration. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of TIC-MS's assets and liabilities acquired on March 27, 2023 ( in thousands): Goodwill $ 7,218 Intangible Assets – Customer Base & Contracts 2,303 Intangible Assets – Covenant Not to Compete 132 9,653 Plus: Accounts Receivable 502 Property and Equipment 356 Less: Current Liabilities ( 124 ) Deferred Tax Liability ( 712 ) Total Purchase Price $ 9,675 From the date of acquisition through the end of fiscal year 2024, TIC-MS has contributed revenue of $ 3.2 million and operating income of $ 1.3 million, which includes the negative impact of amortization of the acquired intangible assets. Elite : Effective February 2, 2023, Transcat acquired substantially all of the assets of Elite Calibration LLC (“Elite”), a California based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that can leverage the Company’s already existing operating infrastructure. All the goodwill related to the Elite acquisition has been allocated to the Service segment. Amortization of goodwill related to the Elite acquisition is deductible for tax purposes. The goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. The total purchase price for the assets of Elite was approximately $ 0.9 million, of which $ 0.8 million was paid in cash. Pursuant to the asset purchase agreement, the Company held back $ 0.1 million of the purchase price for certain potential post-closing adjustments. As of March 30, 2024, no amounts have been paid. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Elite’s assets and liabilities acquired on February 2, 2023 ( in thousands): Goodwill $ 820 Plus: Accounts Receivable 62 Total Purchase Price $ 882 Since this operation was integrated immediately into our existing operations, its separate contributed revenue and operating income is undeterminable. 71 Table of Contents Complete Calibrations : Effective September 28, 2022, Transcat purchased all of the outstanding capital stock of Galium Limited (d/b/a Complete Calibrations) ("Complete Calibrations"), an Irish company. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. All the goodwill related to the Complete Calibrations acquisition has been allocated to the Service segment. Amortization of goodwill related to the Complete Calibrations acquisition is not deductible for tax purposes. The goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. The total purchase price paid for Complete Calibrations was approximately $ 1.2 million in cash. In connection with this transaction, the Company also entered into a Technology License Agreement with Calibration Robots Limited, an Irish company and related party to Complete Calibrations, for the use of their proprietary robotics in completing calibrations. The Technology License Agreement includes transactional royalties in the amount of 3 Euros ($ 3.19 ) per calibration performed by technology covered under this license agreement, with a royalty term of up to ten years commencing from the earlier of (i) the date on which cumulative revenue earned from technology covered under this license agreement equals 0.75 million Euros ($ 0.80 million), and (ii) March 28, 2024. In addition to the transactional royalties, as long as a key employee is employed by the Company, there is an annual royalty fee of 0.1 million Euros ($ 0.11 million). For purposes of this paragraph, we used a conversion rate of 1.0851 to c onvert Euro to U.S. dollar as of March 30, 2024 . As of March 30, 2024 , the key employee is still employed by the Company. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Complete Calibrations’ assets and liabilities acquired on September 28, 2022 ( in thousands): Goodwill $ 1,123 Plus: Cash 10 Inventory 44 Total Purchase Price $ 1,177 During fiscal year 2024, Complete Calibrations has contributed revenue of $ 0.4 million and operating loss of less than $ 0.1 million. e2b : Effective September 27, 2022, Transcat acquired substantially all of the assets of e2b Calibration ( “e2b” ), an Ohio based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. The e2b goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the e2b acquisition has been allocated to the Service segment. Intangible assets related to the e2b acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are deductible for tax purposes. Amortization of goodwill related to the e2b acquisition is deductible for tax purposes. The total purchase price paid for the assets of e2b was approximately $ 3.1 million in cash. Pursuant to the asset purchase agreement, the Company held back $ 0.9 million of the purchase price in escrow for certain potential post-closing adjustments. During the third quarter of fiscal year 2023, $ 0.6 million of the escrow was released to the sellers. During the third quarter of fiscal year 2024, $ 0.3 million was released to the sellers. As of March 30, 2024 , there is no money remaining in escrow. 72 Table of Contents The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of e2b’s assets and liabilities acquired on September 27, 2022 ( in thousands): Goodwill $ 1,367 Intangible Assets – Customer Base & Contracts 746 Intangible Assets – Covenant Not to Compete 396 2,509 Plus: Accounts Receivable 361 Other Current Assets 24 Property and Equipment 326 Less: Current Liabilities ( 121 ) Total Purchase Price $ 3,099 During fiscal year 2024, e2b has contributed revenue of $ 3.1 million and operating income of $ 0.4 million, which includes the negative impact of amortization of the acquired intangible assets. Alliance : Effective May 31, 2022, Transcat acquired substantially all of the assets of Charlton Jeffmont Inc., Raitz Inc. and Toolroom Calibration Inc. d/b/a Alliance Calibration (“Alliance”), an Ohio based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. The Alliance goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the Alliance acquisition has been allocated to the Service segment. Intangible assets related to the Alliance acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are deductible for tax purposes. Amortization of goodwill related to the Alliance acquisition is deductible for tax purposes. The purchase price for Alliance was approximately $ 4.7 million and was paid with $ 4.0 million in cash and the issuance of 2,284 shares of our common stock valued at $ 0.1 million. Pursuant to the asset purchase agreement, the Company held back $ 0.5 million of the purchase price for certain potential post-closing adjustments, and the purchase price would have been subject to reduction by $ 0.5 million if a key customer relationship was not retained. During the first quarter of fiscal year 2024, $ 0.5 million of the holdback was released to the sellers. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Alliance’s assets and liabilities acquired on May 31, 2022 ( in thousands): Goodwill $ 1,783 Intangible Assets – Customer Base & Contracts 2,320 Intangible Assets – Covenant Not to Compete 114 4,217 Plus: Accounts Receivable 343 Property and Equipment 170 Less: Current Liabilities ( 27 ) Total Purchase Price $ 4,703 During fiscal year 2024, Alliance has contributed revenue of $ 2.4 million and operating income of $ 0.7 million, whic h includes the negative impact of amortization of the acquired intangible assets. 73 Table of Contents NEXA : Effective August 31, 2021, Transcat purchased all of the outstanding capital stock of Cal OpEx Limited (d/b/a NEXA Enterprise Asset Management), an Irish company, which owns all of the issued and outstanding capital stock of its U.S.-based subsidiary, Cal OpEx Inc., a Delaware corporation (collectively, “NEXA”). On September 11, 2023, the Company entered into the first amendment (the “First Amendment”) to a Share Purchase Agreement dated August 31, 2021 ( the “Purchase Agreement”) with John Cummins and Ross Lane (the “Sellers”) associated with the Company’s purchase of all of the outstanding capital stock of NEXA. As described below, the First Amendment changed the conditions necessary for the Sellers to receive potential earn-out payments, changes the lines of business included in the calculation of earnings before income taxes, depreciation and amortization (“EBITDA”), and changes the outside due date of any potential earn-out payments. On May 20, 2024, the Company entered into the second amendment to the Purchase Agreement (the “Second Amendment”). As described below, the Second Amendment removed the entitlement for future earn-out payments. Pursuant to the Purchase Agreement, the Sellers were entitled to potential earn-out payments in an aggregate amount of up to $ 7.5 million for the calendar years ending December 31, 2022, 2023, 2024, and 2025 (each, an “Earn-Out Year”) if NEXA’s consolidated gross revenue, as defined in the Purchase Agreement, equaled or exceeded 70% of the target revenue specified in the Purchase Agreement and NEXA’s consolidated EBITDA percentage, as defined in the Purchase Agreement, equaled or exceeded 25% for a given earn-out year. The potential earn-out payment of up to $ 0.4 million for the 2022 Earn-Out Year was not earned under the Purchase Agreement. Pursuant to the First Amendment, the Sellers were entitled to potential earn-out payments in an aggregate amount of up to $ 7.1 million for the remaining Earn-Out Years ( 2023, 2024 and 2025 ) if NEXA’s consolidated EBITDA, as defined in the Amendment, equaled or exceeded 70% of the target EBITDA specified in the Amendment for a given earn-out year. Pursuant to the First Amendment, the definition of EBITDA was revised to include EBITDA from the Commissioning, Qualification and Validation business ("CQV") and incremental EBITDA from the SteriQual, Inc. business. The maximum earn-out payment would have been received if NEXA’s consolidated EBITDA equaled or exceeded 150% of the target EBITDA specified in the First Amendment. The earn-out payments, if any, would be paid in shares of common stock, calculated using the volume-weighted average closing price of the common stock for 30 consecutive trading days ending on the trading day that is two days prior to the date the earn-out payment is to be paid (“VWAP”). If the VWAP is less than $ 45.07 per share, then the Company may pay the earn-out payment in cash in lieu of shares of common stock. As of March 25, 2023, the estimated fair value for the total earn-out obligations under the original Purchase Agreement, classified as Level 3 in the fair value hierarchy, was zero. After entering into the First Amendment during the third quarter of fiscal year 2024, the Company revalued the earn-out obligations. As of September 23, 2023, the estimated fair value for the total earn-out obligations under the First Amendment, classified as Level 3 in the fair value hierarchy, was approximately $ 2.8 million. This amount was calculated using a Geometric Brownian motion distribution that was then used in a Monte Carlo simulation model. Assumptions used in the Monte Carlo simulation model included: 1 ) discount rate of 9.00 %, 2 ) risk-free interest rate of 5.00 %, 3 ) asset volatility of 25.00 %, and 4 ) forecasted revenue and EBITDA. The Company recognized a non-cash expense of $ 2.8 million, which was recorded in general and administrative expenses in its Consolidated Statement of Income for the quarter ended September 23, 2023. As of December 23, 2023, the estimated fair value of the total earn-out obligations under the First Amendment was approximately $ 2.9 million. The change in accrual is due to the actual results of the 2023 calendar Earn-Out Year and the accretion of the 2024 and 2025 Earn-Out Years. As a result, the Company recognized a non-cash expense of $ 0.1 million, which was recorded in general and administrative expenses in its Consolidated Statement of Income for the quarter ended December 23, 2023. After reviewing the fiscal year 2025 budget and revised revenue and EBITDA forecasts for the remainder of calendar 2025, during the fourth quarter of fiscal year 2024, the Company revalued the earn-out obligations. As of March 30, 2024, the estimated fair value for the total earn-out obligations under the First Amendment, classified as Level 3 in the fair value hierarchy, was zero. This amount was calculated using a Geometric Brownian motion distribution that was then used in a Monte Carlo simulation model. Assumptions used in the Monte Carlo simulation model included: 1 ) discount rate of 12.00 %, 2 ) risk-free interest rate of 4.70 %, 3 ) asset volatility of 22.50 %, and 4 ) forecasted revenue and EBITDA. The Company recognized a non-cash gain of approximately $ 2.4 million, which was recorded in general and administrative expenses in its Consolidated Statement of Income for the quarter ended March 30, 2024. As of March 30, 2024, the 2023 calendar Earn-Out Year was $ 0.5 million. This will be paid during the first quarter of fiscal year 2025. Contingent consideration is remeasured quarterly. If, as a result of remeasurement, the value of the contingent consideration changes, any charges or income will be included in the Company’s Consolidated Statements of Income. Due to the uncertainty with utilizing these significant unobservable inputs for this Level 3 fair value measurement, materially higher or lower fair value measurements may be recognized at subsequent remeasurement periods. 74 Table of Contents Pursuant to the Second Amendment, the Company agreed to pay approximately $ 0.5 million for the 2023 Earn-Out Year and removed the entitlement for any future earn-out payments. 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 Axiom, SteriQual, TIC-MS, Elite, Complete Calibrations, e2b and Alliance had occurred at the beginning of fiscal year 2022 . The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transactions had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods. (Unaudited) Fiscal Year Ended March 30, March 25, March 26, (in thousands except per share information) 2024 2023 2022 Total Revenue $ 263,554 $ 252,835 $ 225,281 Net Income $ 14,254 $ 11,568 $ 12,242 Basic Earnings Per Share $ 1.73 $ 1.53 $ 1.63 Diluted Earnings Per Share $ 1.71 $ 1.51 $ 1.61 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 and at subsequent remeasurement periods, as applicable. As of March 30, 2024 , $ 0.5 million of contingent consideration and $ 2.6 million of other holdback amounts were unpaid and are reflected in current liabilities on the Consolidated Balance Sheets and $ 1.6 mill ion of other holdback amounts unpaid are reflected in other liabilities on the Consolidated Balance Sheets. During fiscal year 2024 , $ 0.8 mi llion of holdback amounts were paid. During fiscal years 2023 and 2022 , no contingent consideration or other holdback amounts were paid. During fiscal years 2024 , 2023 and 2022 , acquisition cos ts of $ 1.2 million, $ 0.2 million and $ 0.9 million, respectively, were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income. NOTE 10 – SHAREHOLDERS' EQUITY On September 21, 2023, the Company entered into an underwriting agreement with Oppenheimer & Co. Inc., as representative of several underwriters, for the sale of common stock in an underwritten public offering at a public offering price of $ 95.00 per share (the “Offering”). The Offering closed on September 25, 2023 and the Company sold an aggregate of 847,371 shares in the Offering, which included 110,526 shares issued upon the exercise by the underwriters of their over-allotment option, for total gross proceeds of $ 80.5 million. Net proceeds received after direct costs in the Offering were $ 75.2 million. A portion of the net proceeds from this Offering were used to pay off the revolving credit facility in full. During fiscal years 2024 , 2023 and 2022 , the Company repurchased and subsequently retired less tha n 0.1 mill ion shares, less than 0.1 million shares and 0.1 million shares, respectively, of its common stock. The Company allows its employees the option of satisfying the employee tax withholding obligations with either cash or a net share repurchase. The repurchase of shares was for the net awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity, tot aling $ 4.9 million i n fiscal year 2024 , $ 0.4 million in fiscal year 2023 and $ 6.7 million in fiscal year 2022 . There were no stock option redemptions during fiscal year 2024 , fiscal year 2023 or fiscal year 2022 . 75 Table of Contents NOTE 11 – SUBSEQUENT EVENT Effective April 15, 2024, the Company acquired Becnel Rental Tools, LLC, a privately-held Louisiana limited liability company (“Becnel”), pursuant to an Agreement and Plan of Merger (the “Agreement”), by and among the Company, Becnel and the other parties thereto. Becnel is an ISO 9001:2015 certified provider of rental tools and services primarily utilized in the decommissioning and maintenance of oil wells. 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 rental capabilities. Pursuant to the Agreement, the Company acquired Becnel for approximately $ 50.8 million, consisting of a combination of (i) $ 17.5 million in cash and (ii) approximately $ 33.3 million of common stock, or 301,707 shares of common stock. Of the acquisition consideration, approximately $ 1.5 million in cash and approximately $ 1.0 million in shares of common stock, or 9,283 shares, are subject to certain customary holdback provisions. The purchase price allocation has not been finalized, due to the timing of the acquisition and the filing date of this Annual Report on Form 10 -K. Therefore, the allocation of the purchase price to the assets acquired and liabilities assumed, including values to be recognized for goodwill and other intangible assets, will be disclosed in the Quarterly Report on Form 10 -Q for the fiscal quarter ending June 29, 2024. The pro forma results of operations from the Becnel acquisition will be disclosed in the Quarterly Report on Form 10 -Q for the fiscal quarter ending June 29, 2024. The goodwill related to Becnel is not expected to be deductible for income tax purposes. The goodwill and intangible assets relating to the Becnel acquisition will be allocated to the Distribution segment. On May 20, 2024, the Company entered into the Second Amendment to the Purchase Agreement relating to the purchase of all of the outstanding capital stock of NEXA to amend the earn-out terms under the Purchase Agreement. See Note 9 for further information on the Second Amendment. 76 Table of Contents Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.