Transcat(TRNS) - 2022 Q4 - Annual Report

PART I Business Overview Transcat, Inc. is a leading distributor of accredited calibration services, enterprise asset management services, and professional test, measurement, and control instruments, primarily serving highly regulated industries like life sciences. The company operates through its Service and Distribution segments, focusing on expanding capabilities and market reach through organic growth and strategic acquisitions Business Overview Transcat operates through its Service and Distribution segments, providing calibration services, enterprise asset management, and test and measurement instruments to highly regulated industries such as life sciences, aerospace, and energy, with 20-25% of customers utilizing both segments - Transcat operates through two main segments, Service and Distribution, serving approximately 30,000 customers, with 20% to 25% utilizing both segments' services[15] - The Service segment provides calibration, repair, inspection, analytical qualification, preventive maintenance, consulting, and related services, primarily managed through proprietary asset management system CalTrak® and customer portal C3®[16][46][47] - The Distribution segment sells and leases over 150,000 test, measurement, and control instruments from approximately 500 leading brands worldwide, offering value-added services like pre-sale calibration[21] - The company focuses on highly regulated industries, including life sciences (pharmaceutical, biotechnology, medical devices), FAA-regulated aerospace and defense manufacturing, and energy and utilities[14] Company Strategy Transcat's strategy leverages its complementary Service and Distribution segments to enhance productivity and operational efficiency through its 'Operational Excellence' program, aiming for double-digit revenue growth via organic expansion and strategic acquisitions, particularly in the Service segment, while diversifying the Distribution segment - The company's strategy leverages the complementary nature of its Service and Distribution segments to create customer value and build competitive barriers[26] - The 'Operational Excellence' program enhances productivity and operational efficiency through technology, automation, and process improvements, while providing training and career development opportunities for employees[27] - The Service segment's growth strategy aims for double-digit revenue growth through organic expansion (market share capture, outsourcing internal calibration labs) and acquisitions (geographic expansion, increased capabilities, infrastructure utilization)[28][29][30] - The Distribution segment's strategy is to be a leading test and measurement equipment distributor and rental source, offering cross-selling opportunities and differentiating through rentals and used equipment sales to mitigate price competition[31][32] - In FY2022, three acquisitions were completed: Tangent Labs, LLC, Cal OpEx Limited (NEXA), and Upstate Metrology Inc.; in FY2021, BioTek Services, Inc. was acquired, primarily to expand the Service segment's geographic reach and capabilities[34][35] Business Segments Transcat's business segments include Service and Distribution, with the Service segment offering accredited calibration and asset management services centered on quality and proprietary software, while the Distribution segment sells and leases test and measurement instruments, differentiated by value-added services and multi-channel marketing Service Segment The Service segment provides calibration, repair, inspection, consulting, and enterprise asset management services primarily to regulated industries, with all calibration centers ISO/IEC 17025:2017 accredited and utilizing proprietary software like CalTrak® and C3® for comprehensive asset management solutions - The Service segment provides calibration, repair, inspection, analytical qualification, preventive maintenance, consulting, and other related services, as well as enterprise asset management solutions[16][42][44] - All calibration service centers are ISO/IEC 17025:2017 accredited, forming a cornerstone of the company's quality program and providing consistent, uniform service to customers[20][54] - The company performs approximately 800,000 calibrations annually, with about 13% to 15% of services outsourced to third-party vendors for specialized needs[39] - Proprietary asset management software CalTrak® and C3® are validated to U.S. Federal Regulations 21 CFR Part 820.75 and 21 CFR Part 11, providing customers with online access to asset management and calibration records[46][47] Distribution Segment The Distribution segment globally sells and leases professional-grade test, measurement, and control instruments, offering value-added services such as pre-sale calibration, equipment rental, and used equipment sales, striving to be a one-stop solution provider through multi-channel marketing and technical support - The Distribution segment sells and leases over 150,000 test, measurement, and control instruments from approximately 500 leading brands worldwide[21] - Value-added services include pre-sale calibration/certification, equipment rental, used equipment sales, and equipment kitting to meet customer needs and reduce downtime[21][60][62] - Multi-channel marketing and sales are conducted through websites, inside sales teams, print and digital marketing materials, and industry-specific websites such as www.pipettes.com[21](index=21&type=chunk)[64] - In FY2022, the top ten suppliers accounted for approximately 64% of total distribution sales; supply chain disruptions led to increased lead times and a growing backlog of orders[70] Distribution Segment Backlog Status | Metric | March 26, 2022 (million dollars) | March 27, 2021 (million dollars) | | :----------------------- | :----------------------- | :----------------------- | | Total Backlog Orders | 7.7 | 6.3 | | Backlog Orders | 6.4 | 4.9 | Customer Service and Support Transcat provides multi-channel customer support through business development, outbound sales, account management, and inbound sales/customer service teams, continuously monitoring service quality via customer surveys, call monitoring, and daily reports - Customers can place orders via mail, phone (1-800-828-1470), email (sales@transcat.com), online (www.transcat.com), or fax[83] - Customer service quality is monitored through customer surveys, call monitoring, and daily statistical reports[75] Export Sales Information Export sales accounted for approximately 10% of total revenue in FY2022 and FY2021, primarily denominated in Canadian dollars and Euros, exposing the company to international operating risks such as exchange rate fluctuations and trade restrictions - Export sales accounted for approximately 10% of total revenue in FY2022 and FY2021[77] - In FY2022, approximately 81% of export sales were denominated in Canadian dollars, 11% in Euros, and 8% in U.S. dollars[77] - International operations face risks such as trade or foreign exchange restrictions, increased tariffs, exchange rate fluctuations, and political instability[77] Information Systems Transcat utilizes Infor's Application Plus as its enterprise software solution, integrated with SalesForce.com CRM, and employs proprietary CalTrak® and C3® systems for documentation and asset management to support calibration services - The company uses Infor's Application Plus as its enterprise software solution, managing business functions such as customer service, warehouse management, inventory management, financial management, customer relationship management, and business intelligence[78] - SalesForce.com's CRM software is fully integrated with the Infor enterprise software[78] - Proprietary documentation and asset management system CalTrak® manages calibration service center workflows and customer assets, with C3® providing web-based asset management and access to service records for customers[79] Intellectual Property Transcat owns federally registered trademarks including Transcat®, CalTrak®, C3®, and Procision®, along with several internet domain names, all critical intellectual property that the company plans to renew as needed - The company owns federally registered trademarks including Transcat®, CalTrak®, C3®, and Procision®, with CalTrak® also registered in Canada and Puerto Rico[80] - The company owns internet domain names such as www.transcat.com, www.transcat.ca, and pipettes.com[81] - Changes in domain name regulations could prevent the company from maintaining or obtaining comparable domain names, thereby harming the business[81] Seasonality Transcat's business exhibits seasonality, with the third and fourth fiscal quarters typically stronger than the first and second, primarily influenced by the operating cycles of industrial sector customers - Historical data indicates that the company's third and fourth fiscal quarters are typically stronger than the first and second[82] - The Distribution segment performs strongest in the third fiscal quarter, while the Service segment performs strongest in the fourth fiscal quarter[82] Fiscal Year Transcat operates on a 52/53-week fiscal year, ending on the last Saturday in March, with FY2022, FY2021, and FY2023 all comprising 52 weeks - The company operates on a **52/5