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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________

FORM 10-Q

(Mark one)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended: June 26, 2021

 

or

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from __________ to __________

Commission File Number: 000-03905

TRANSCAT, INC.

(Exact name of registrant as specified in its charter)

Ohio

16-0874418

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

 

35 Vantage Point Drive, Rochester, New York 14624

(Address of principal executive offices) (Zip Code)

 

(585) 352-7777

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.50 par value

TRNS

Nasdaq Global Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

 

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of common stock, par value $0.50 per share, of the registrant outstanding as of July 30, 2021 was 7,469,857.


Table of Contents

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3.Quantitative and Qualitative Disclosures about Market Risk 22
Item 4.Controls and Procedures 22
PART II.OTHER INFORMATION  
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6.Exhibits 24

SIGNATURES

25
 


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

First Quarter Ended

June 26,

June 27,

2021

2020

Service Revenue

$

27,557

$

22,967

Distribution Sales

20,233

15,937

Total Revenue

47,790

38,904

 

Cost of Service Revenue

18,805

16,898

Cost of Distribution Sales

15,465

12,597

Total Cost of Revenue

34,270

29,495

 

Gross Profit

13,520

9,409

 

Selling, Marketing and Warehouse Expenses

4,997

4,074

General and Administrative Expenses

4,834

4,371

Total Operating Expenses

9,831

8,445

 

Operating Income

3,689

964

 

Interest and Other Expense, net

195

243

 

Income Before Income Taxes

3,494

721

Benefit from Income Taxes

(194

)

(77

)

 

Net Income

$

3,688

$

798

 

Basic Earnings Per Share

$

0.49

$

0.11

Average Shares Outstanding

7,464

7,394

 

Diluted Earnings Per Share

$

0.49

$

0.11

Average Shares Outstanding

7,593

7,514

See accompanying notes to consolidated financial statements.

1


Table of Contents

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

First Quarter Ended

June 26,

June 27,

2021

2020

Net Income

$

3,688

$

798

 

Other Comprehensive Income:

Currency Translation Adjustment

161

125

Other, net of tax effects of $7 and $13 for the first quarter ended June 26, 2021 and June 27, 2020, respectively

21

38

Total Other Comprehensive Income

182

163

 

Comprehensive Income

$

3,870

$

961

See accompanying notes to consolidated financial statements.

2


Table of Contents

TRANSCAT, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

June 26,

(Audited)

March 27,

2021

2021

ASSETS

Current Assets:

Cash

$

254

$

560

Accounts Receivable, less allowance for doubtful accounts of $615 and $526 as of June 26, 2021 and March 27, 2021, respectively

33,324

33,950

Other Receivables

380

428

Inventory, net

11,642

11,636

Prepaid Expenses and Other Current Assets

3,139

2,354

Total Current Assets

48,739

48,928

Property and Equipment, net

22,172

22,203

Goodwill

43,904

43,272

Intangible Assets, net

6,901

7,513

Right To Use Assets, net

8,467

9,392

Other Assets

956

808

Total Assets

$

131,139

$

132,116

 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

Accounts Payable

$

11,203

$

12,276

Accrued Compensation and Other Liabilities

7,312

10,417

Income Taxes Payable

-

382

Current Portion of Long-Term Debt

2,089

2,067

Total Current Liabilities

20,604

25,142

Long-Term Debt

20,107

17,494

Deferred Income Tax Liabilities

3,223

3,201

Lease Liabilities

7,235

7,958

Other Liabilities

3,263

3,243

Total Liabilities

54,432

57,038

 

Shareholders' Equity:

Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,468,991 and 7,458,251 shares issued and outstanding as of June 26, 2021 and March 27, 2021, respectively

3,734

3,729

Capital in Excess of Par Value

19,632

19,287

Accumulated Other Comprehensive Loss

(269

)

(451

)

Retained Earnings

53,610

52,513

Total Shareholders' Equity

76,707

75,078

Total Liabilities and Shareholders' Equity

$

131,139

$

132,116

See accompanying notes to consolidated financial statements.

3


Table of Contents

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

First Quarter Ended

June 26,

June 27,

2021

2020

Cash Flows from Operating Activities:

Net Income

$

3,688

$

798

Adjustments to Reconcile Net Income to Net Cash

Provided by Operating Activities:

Net Loss (Gain) on Disposal of Property and Equipment

50

(1

)

Deferred Income Taxes

22

24

Depreciation and Amortization

1,990

1,872

Provision for Accounts Receivable and Inventory Reserves

290

561

Stock-Based Compensation Expense

437

312

Changes in Assets and Liabilities:

Accounts Receivable and Other Receivables

805

2,948

Inventory

33

5

Prepaid Expenses and Other Assets

(918

)

(251

)

Accounts Payable

(1,073

)

(2,621

)

Accrued Compensation and Other Liabilities

(2,880

)

494

Income Taxes Payable

(389

)

(99

)

Net Cash Provided by Operating Activities

2,055

4,042

 

Cash Flows from Investing Activities:

Purchases of Property and Equipment

(1,203

)

(1,261

)

Business Acquisitions, net of cash acquired

(931

)

-

Net Cash Used in Investing Activities

(2,134

)

(1,261

)

 

Cash Flows from Financing Activities:

Proceeds from (Repayments of) Revolving Credit Facility, net

3,243

(1,330

)

Repayment of Term Loan

(608

)

(487

)

Issuance of Common Stock

699

383

Repurchase of Common Stock

(3,377

)

(1,287

)

Net Cash Used in Financing Activities

(43

)

(2,721

)

 

Effect of Exchange Rate Changes on Cash

(184

)

(193

)

 

Net Decrease in Cash

(306

)

(133

)

Cash at Beginning of Period

560

499

Cash at End of Period

$

254

$

366

 

Supplemental Disclosure of Cash Flow Activity:

Cash paid during the period for:

Interest

$

187

$

225

Income Taxes, net

$

250

$

61

See accompanying notes to consolidated financial statements.

4


Table of Contents

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In Thousands, Except Par Value Amounts)

(Unaudited)

Capital

Common Stock

In

Accumulated

Issued

Excess

Other

$0.50 Par Value

of Par

Comprehensive

Retained

Shares

Amount

Value

Loss

Earnings

Total

Balance as of March 28, 2020

7,381

$

3,691

$

17,929

$

(1,010

)

$

46,477

$

67,087

Issuance of Common Stock

28

14

369

-

-

383

Repurchase of Common Stock

(48

)

(24

)

(579

)

-

(684

)

(1,287

)

Stock-Based Compensation

50

25

287

-

-

312

Other Comprehensive Income

-

-

-

163

-

163

Net Income

-

-

-

-

798

798

Balance as of June 27, 2020

7,411

$

3,706

$

18,006

$

(847

)

$

46,591

$

67,456

Capital

Common Stock

In

Accumulated

Issued

Excess

Other

$0.50 Par Value

of Par

Comprehensive

Retained

Shares

Amount

Value

Loss

Earnings

Total

Balance as of March 27, 2021

7,458

$

3,729

$

19,287

$

(451

)

$

52,513

$

75,078

Issuance of Common Stock

52

26

673

-

-

699

Repurchase of Common Stock

(62

)

(31

)

(755

)

-

(2,591

)

(3,377

)

Stock-Based Compensation

21

10

427

-

-

437

Other Comprehensive Income

-

-

-

182

-

182

Net Income

-

-

-

-

3,688

3,688

Balance as of June 26, 2021

7,469

$

3,734

$

19,632

$

(269

)

$

53,610

$

76,707

See accompanying notes to consolidated financial statements.

5


Table of Contents

TRANSCAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share and Per Unit Amounts)

(Unaudited)

NOTE 1 – GENERAL

Description of Business: Transcat, Inc. (“Transcat,” “we,” “us,” “our” or the “Company”) is a leading provider of accredited calibration and laboratory instrument services and a value-added distributor of professional grade test, measurement and control instrumentation. The Company is focused on providing services and products to highly regulated industries, particularly the life science industry, which includes pharmaceutical, biotechnology, medical device and other FDA-regulated businesses. Additional industries served include industrial manufacturing; energy and utilities, including oil and gas; chemical manufacturing; FAA-regulated businesses, including aerospace and defense and other industries that require accuracy in their processes, confirmation of the capabilities of their equipment, and for which the risk of failure is very costly.

Basis of Presentation: Transcat’s unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 27, 2021 (“fiscal year 2021”) contained in the Company’s 2021 Annual Report on Form 10-K filed with the SEC.

Revenue Recognition: Distribution sales are recorded when an order’s title and risk of loss transfers to the customer. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. The majority of the Company’s revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue over time using the output method-time elapsed as this portrays the transfer of control to the customer. Revenue is measured as the amount of consideration 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. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data.

Revenue recognized from prior period performance obligations for the first quarter of the fiscal year ending March 26, 2022 (“fiscal year 2022”) was immaterial. As of June 26, 2021, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, 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 June 26, 2021 and March 27, 2021 were immaterial. Payment terms are generally 30 to 45 days. See Note 4 for disaggregated revenue information.

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, and the carrying amounts for cash, accounts receivable, other receivables, accounts payable and accrued compensation and other liabilities approximate fair value due to their short-term nature. Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds and are valued based on Level 1 inputs. At each of June 26, 2021 and March 27, 2021, investment assets totaled $0.4 million and are included as a component of other assets on the Consolidated Balance Sheets.

6


Table of Contents

Stock-Based Compensation: The Company measures the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. The Company records compensation cost related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period of each award. Excess tax benefits for share-based award activity are reflected in the Consolidated Statements of Income as a component of the provision for income taxes. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. The Company did not capitalize any stock-based compensation costs as part of an asset. The Company estimates forfeiture rates based on its historical experience. During the first quarter of fiscal year 2022 and fiscal year 2021, the Company recorded non-cash stock-based compensation expense of $0.4 million and $0.3 million, respectively, in the Consolidated Statements of Income.

Foreign Currency Translation and Transactions: The accounts of Transcat Canada Inc., a wholly-owned subsidiary of the Company, are maintained in the local currency and have been translated to U.S. dollars. Accordingly, the amounts representing assets and liabilities have been translated at the period-end rates of exchange and related revenue and expense accounts have been translated at an average rate of exchange during the period. Gains and losses arising from translation of Transcat Canada Inc.’s financial statements into U.S. dollars are recorded directly to the accumulated other comprehensive loss component of shareholders’ equity.

Transcat records foreign currency gains and losses on Canadian business transactions. The net foreign currency gain was less than $0.1 million in each of the first quarter of fiscal year 2022 and fiscal year 2021. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its earnings will 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 $0.1 million during the first quarter of each of fiscal years 2022 and 2021, was recognized as a component of other expense 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 June 26, 2021, the Company had a foreign exchange contract, which matured in July 2021, outstanding in the notional amount of $4.0 million. The foreign exchange contract was renewed in July 2021 and continues to be in place. The Company does not use hedging arrangements for speculative purposes.

Earnings Per Share: Basic earnings per share of common stock are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of stock options and unvested restricted stock units using the treasury stock method in periods in which they have a dilutive effect. In computing the per share effect of assumed conversion, funds which would have been received from the exercise of options and unvested restricted stock units and the related tax benefits 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 both the first quarter of fiscal year 2022 and fiscal year 2021, the net additional common stock equivalents had no effect on the calculation of diluted earnings per share. The average shares outstanding used to compute basic and diluted earnings per share are as follows (in thousands):

First Quarter Ended

June 26,

June 27,

2021

2020

Average Shares Outstanding – Basic

7,464

7,394

Effect of Dilutive Common Stock Equivalents

129

120

Average Shares Outstanding – Diluted

7,593

7,514

Anti-dilutive Common Stock Equivalents

20

20

Goodwill and Intangible Assets: Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value and whether it is necessary to perform the goodwill impairment process.

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Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. The Company estimates the fair value of its reporting units using the fair market value measurement requirement. Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. A summary of changes in the Company’s goodwill and intangible assets is as follows (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

-

483

483

-

-

-

Amortization

-

-

-

(70

)

(550

)

(620

)

Currency Translation Adjustment

-

149

149

-

8

8

Net Book Value as of June 26, 2021

$

11,458

$

32,446

$

43,904

$

850

$

6,051

$ 6,901

Recently Issued 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. As credit losses from the Company's trade receivables have not historically been significant, the Company anticipates that the adoption of the ASU will not have a material impact on its consolidated financial statements.

NOTE 2 – LONG-TERM DEBT

On July 7, 2021, we entered into the Second Amended and Restated Credit Facility Agreement (the “2021 Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), that amended and restated in its entirety the Company’s Amended and Restated Credit Facility Agreement dated as of October 30, 2017, as amended by Amended and Restated Credit Facility Agreement Amendment 1 dated December 10, 2018 and Amended and Restated Credit Facility Agreement Amendment 2 (“Amendment Two”) dated May 18, 2020 (as amended, the “Prior Credit Agreement”).

The 2021 Credit Agreement increased the revolving credit commitment (the “Revolving Credit Commitment”) from $40.0 million to $80.0 million, with a letter of credit subfacility increased from $2.0 million to $10.0 million, and extended the term of the Revolving Credit Commitment to June 2026. The 2021 Credit Agreement amended the definition of Applicable Margin (formerly Applicable Rate under the Prior Credit Agreement), which is based upon the Company’s then current leverage ratio and is used to determine interest charges on outstanding and unused borrowings under the revolving credit facility; the amendments reduced the Applicable Margins payable at the two highest leverage ratio levels. The 2021 Credit Agreement also amended the definition of Permitted Acquisitions, that is, acquisitions which are permitted under, and may be financed with proceeds of, the revolving credit facility, including increasing the aggregate purchase price for acquisitions consummated in any fiscal year from $1.0 million to $65 million during the current fiscal year and $50 million during any subsequent fiscal year, and adding an aggregate purchase price of $40.0 million for acquisitions consummated at any time during the term of the 2021 Credit Agreement related to businesses with a principal place of business located in the United Kingdom or the European Union.

In addition, the 2021 Credit Agreement provides that, assuming no event of default, restricted payments up to $25.0 million (increased from $10.0 million in the Prior Credit Agreement) in the aggregate and $10.0 million (increased from $3.0 million in the First Agreement) in any single fiscal year may be used by us to repurchase our shares and pay dividends. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply. The 2021 Credit Agreement also reduced the London Interbank Offered Rate (“LIBOR”) floor from 1.0% to 0.25% and included a mechanism for adoption of a different benchmark rate in the event LIBOR is discontinued. Pursuant to the 2021 Credit Agreement, the fixed interest rate on our term loan (the “2018 Term Loan”) was reduced from 4.15% to 3.90%.

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The 2021 Credit Agreement superseded in its entirety, the Prior Credit Agreement. Amendment Two to the Prior Credit Agreement had previously extended the term of the revolving credit facility to October 20, 2022 and increased the revolving credit commitment to $40 million.

Amendment Two had modified the definition of the applicable rate used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and it amended the definition of permitted acquisitions to amend borrowings available under the revolving credit facility for acquisitions. In addition, Amendment Two had amended the definition of restricted payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain employee tax obligations associated with share-based payment and stock option activity, and modified certain restrictions to the Company’s ability to repurchase its shares and pay dividends. Amendment Two also had modified the leverage ratio and fixed charge coverage ratio covenants with which the Company was required to comply and limited capital expenditures to $5.5 million for the fiscal year ending March 27, 2021. Amendment Two also had established a LIBOR floor of 1.0% and included a mechanism for adoption of a different benchmark rate in the event LIBOR was discontinued.

We have a term loan, the 2018 Term Loan, in the amount of $15.0 million. As of June 26, 2021, $10.0 million was outstanding on the 2018 Term Loan, of which $2.1 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $0.2 million per month through December 2025.

As of June 26, 2021, $40.0 million was available under the revolving credit facility, of which $12.1 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. During the first quarter of fiscal year 2022, $0.9 million was used for a business acquisition.

The allowable leverage ratio under the Prior Credit Agreement for the second, third and fourth fiscal quarter of fiscal year 2021 and the first quarter of fiscal year 2022 was a maximum multiple of 5.0, 5.5, 7.0 and 4.0, respectively, of total debt outstanding compared to EBITDA and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. After the first quarter of fiscal 2022, pursuant to the July 2021 Facility, the allowable leverage ratio is a maximum multiple of 3.0. The Prior Credit Agreement also had provided that the trailing twelve-month pro forma EBITDA of an acquired business was included in the allowable leverage calculation.

Interest and Other Costs: Interest on outstanding borrowings under the revolving credit facility accrue, at Transcat’s election, at either the variable one-month LIBOR or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods), plus a margin. Interest on outstanding borrowings under the 2018 Term Loan accrue at a fixed rate of 4.15% over the term of the loan during the first quarter of fiscal year 2022 and 3.90% over the term of the loan for subsequent periods. 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 the first quarter of fiscal year 2022 ranged from 1.8% to 2.2%.

Covenants: Pursuant to the Prior Credit Agreement, we were required to comply with a fixed charge ratio covenant and a leverage ratio covenant. M&T waived the requirement for the fixed charge ratio for the first fiscal quarter ending June 26, 2021. We were in compliance with all other loan covenants and requirements during the first quarter of fiscal year 2022. Our leverage ratio, as defined in the Prior Credit Agreement, was 0.96 at June 26, 2021, compared with 0.94 at March 27, 2021. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply.

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 3 – STOCK-BASED COMPENSATION

The Company has a share-based incentive plan (the “2003 Plan”) that provides for, among other awards, grants of restricted stock units and stock options to directors, officers and key employees at the fair market value at the date of grant. At June 26, 2021, 0.9 million shares of common stock were available for future grant under the 2003 Plan.

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The Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete tax benefits related to share-based compensation and stock option activity during the first quarter of fiscal year 2022 and 2021 were $1.1 million and $0.3 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 targets over the eligible period.

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.

The Company achieved 64% of the target level for the performance-based restricted stock units granted in the fiscal year ended March 30, 2019 and as a result, issued 19 shares of common stock to executive officers and certain key employees during the first quarter of fiscal year 2022. The following table summarizes the non-vested restricted stock units outstanding as of June 26, 2021 (in thousands, except per unit data):

 

 

Total

Grant Date

Estimated

Number

Fair

Level of

Date

Measurement

of Units

Value

Achievement at

Granted

Period

Outstanding

Per Unit

June 26, 2021

October 2018

October 2018 – September 2027

8

$

20.81

Time Vested

March 2019

April 2019 – March 2022

21

$

23.50

70% of target level

March 2019

April 2019 – March 2022

21

$

23.50

Time Vested

August 2019

August 2019 – July 2020

1

$

23.00

Time Vested

March 2020

April 2020 – March 2023

2

$

26.25

Time Vested

July 2020

July 2020 – July 2023

38

$

27.08

Time Vested

September 2020

September 2020 – September 2021

12

$

28.52

Time Vested

September 2020

September 2020 – July 2023

4

$

28.54

Time Vested

September 2020

September 2020 – July 2023

5

$

29.76

Time Vested

September 2020

September 2020 – September 2023

3

$

29.76

Time Vested

January 2021

January 2021 – January 2024

2

$

34.62

Time Vested

May 2021

May 2021 – January 2024

1

$

54.21

Time Vested

June 2021

June 2021 – May 2024

13

$

53.17

100% of target level

June 2021

June 2021 – May 2024

13

$

53.17

Time Vested

Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $0.4 million and $0.3 million in the first quarter of fiscal year 2022 and fiscal year 2021, respectively. As of June 26, 2021, unearned compensation, to be recognized over the grants’ respective service periods, totaled $2.7 million.

Stock Options: The Company grants stock options to employees and directors equal to the quoted market price of the Company’s stock at the date of the grant. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Expense for stock options is recognized on a straight-line 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.

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The following table summarizes the Company’s options as of and for the first quarter ended June 26, 2021 (in thousands, except per share data and years):

Weighted

Weighted Average

Average Remaining

Number

Exercise

Contractual

Aggregate

of

Price Per

Term (in

Intrinsic

Shares

Share

years)

Value

Outstanding as of March 27, 2021

125

$

15.47

Granted

25

$

42.57

Exercised

(50

)

$

12.00

Forfeited

5

24.30

Outstanding as of June 26, 2021

95

$

23.96

4

$

3,196

Exercisable as of June 26, 2021

37

$

11.35

1

$

1,659

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 the first quarter of fiscal year 2022 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 June 26, 2021. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

Total expense related to stock options was less than $0.1 million in both the first quarter of fiscal year 2022 and the first quarter of fiscal year 2021. Total unrecognized compensation cost related to non-vested stock options as of June 26, 2021 was $0.4 million, which is expected to be recognized over a period of five years. The aggregate intrinsic value of stock options exercised during the first quarter of fiscal year 2022 and fiscal year 2021 was $2.3 million and $0.3 million, respectively. Cash received from the exercise of options in the first quarter of fiscal year 2022 and fiscal year 2021 was $0.6 million and $0.3 million, respectively. During the first quarter of fiscal year 2022, the Company repurchased the stock options exercised by the Chief Executive Officer for $2.8 million.

NOTE 4 – SEGMENT INFORMATION

Transcat has two reportable segments: Service and Distribution. The Company has no inter-segment sales. The following table presents segment information for the first quarter of fiscal year 2022 and fiscal year 2021 (dollars in thousands):

First Quarter Ended

June 26,

June 27,

2021

2020

Revenue:

Service Revenue

$

27,557

$

22,967

Distribution Sales

20,233

15,937

Total

47,790

38,904

 

Gross Profit:

Service

8,752

6,069

Distribution

4,768

3,340

Total

13,520

9,409

 

Operating Expenses:

Service (1)

5,778

4,940

Distribution (1)

4,053

3,505

Total

9,831

8,445

 

Operating Income:

Service (1)

2,974

1,129

Distribution (1)

715

(165

)

Total

3,689

964

 

Unallocated Amounts:

Interest and Other Expense, net

195

243

Benefit from Income Taxes

(194

)

(77

)

Total

1

166

 

Net Income

$

3,688

$

798

 

 

(1)

Operating expense allocations between segments were based on actual amounts, a percentage of revenues, headcount, and management’s estimates.

 

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NOTE 5 – BUSINESS ACQUISITIONS

Upstate Metrology:Effective April 29, 2021, Transcat acquired substantially all of the assets of Upstate Metrology Inc. (“Upstate Metrology”), a New York based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s service capabilities.

100% of the goodwill related to the Upstate Metrology acquisition has been allocated to the Service segment. Amortization of goodwill related to the Upstate Metrology acquisition is deductible for tax purposes.

The total purchase price paid for the assets of Upstate Metrology was approximately $0.9 million. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Upstate Metrology’s assets and liabilities acquired during the period presented (in thousands):

Goodwill

$

483

 

Plus:

Current Assets

189

 

Non-Current Assets

270

 

Less:

Current Liabilities

(11

)

Total Purchase Price

$

931

 

BioTek: Effective December 16, 2020, Transcat acquired substantially all of the assets of BioTek Services, Inc. (“BioTek”), a Virginia based provider of pipette calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s service capabilities. BioTek’s focus on pipettes complements the current offerings Transcat provides to the life science sector.

100% of the goodwill and intangible assets relating to the BioTek acquisition has been allocated to the Service segment. Intangible assets related to the BioTek acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to 10 years and are deductible for tax purposes. Amortization of goodwill related to the BioTek acquisition is deductible for tax purposes.

The total purchase price paid for the assets of BioTek was approximately $3.5 million. $0.4 million of the purchase price has been put into escrow as a holdback for indemnification claims, if any. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of BioTek’s assets and liabilities acquired during the period presented (in thousands):

Goodwill

$

1,063

 

Intangible Assets – Customer Base & Contracts

1,930

Intangible Assets – Covenant Not to Compete

100

3,093

Plus:

Current Assets

406

 

Non-Current Assets

8

 

Total Purchase Price

$

3,507

 

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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 Upstate Metrology and BioTek had occurred at the beginning of fiscal year 2021. 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)

Quarter Ended

(in thousands except per share information)

June 26,

2021

June 27,

2020

Total Revenue

$

47,889

$

39,622

Net Income

$

3,659

$

816

Basic Earnings Per Share

$

0.49

$

0.11

Diluted Earnings Per Share

$

0.48

$

0.11

Certain of the Company’s acquisition agreements include provisions for contingent consideration and other holdback amounts. The Company accrues for contingent consideration and holdback provisions based on their estimated fair value at the date of acquisition. As of June 26, 2021, there was no contingent consideration or other holdback amounts unpaid and reflected in current liabilities on the Consolidated Balance Sheets. During the first quarter of fiscal year 2022 and fiscal year 2021, no contingent consideration or other holdback amounts were paid.

During the first quarter of fiscal years 2022 and 2021, acquisition costs of less than $0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, estimates, beliefs, assumptions and predictions of future events and are identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “projects,” “seek,” “strategy,” “target,” “intends,” “could,” “may,” “will,” “would,” and other similar words. Forward-looking statements are not statements of historical fact and thus are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or those expressed in such forward-looking statements. You should evaluate forward-looking statements in light of important risk factors and uncertainties that may affect our operating and financial results and our ability to achieve our financial objectives. These factors include, but are not limited to, the impact of and our response to the COVID-19 pandemic, the highly competitive nature of the industries in which we compete and in the nature of our two business segments, cybersecurity risks, the risk of significant disruptions in our information technology systems, our inability to recruit, train and retain quality employees, skilled technicians and senior management, fluctuations in our operating results, competition in the rental market, the volatility of our stock price, our ability to adapt our technology, reliance on our enterprise resource planning system, technology updates, risks related to our acquisition strategy and the integration of the businesses we acquire, volatility in our customers’ industries, changes in vendor rebate programs, our vendors’ abilities to provide desired inventory, the risks related to current and future indebtedness, the relatively low trading volume of our common stock, foreign currency rate fluctuations and the impact of general economic conditions on our business. These risk factors and uncertainties are more fully described by us under the heading “Risk Factors” in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 27, 2021. You should not place undue reliance on our forward-looking statements, which speak only as of the date they are made. Except as required by law, we

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undertake no obligation to update or publicly announce any revisions to any of the forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

There have been no material changes to our critical accounting policies and estimates from the information provided in our Annual Report on Form 10-K for the fiscal year ended March 27, 2021.

 

RESULTS OF OPERATIONS

 

During our first quarter of fiscal year 2022, we had consolidated revenue of $47.8 million. This represented an increase of $8.9 million or 22.8% versus the first quarter of fiscal year 2021. This increase was due to the economic rebound and the lower customer demand in the prior year first quarter due to the COVID-19 pandemic, especially in the Distribution segment.

 

Our first quarter of fiscal year 2022 gross profit was $13.5 million. This was an increase of $4.1 million or 43.7% versus the first quarter of fiscal year 2021. In addition, consolidated gross margin was 28.3%, an increase of 410 basis points, versus the first quarter of fiscal year 2021. This increase was the result of operating leverage on our fixed costs and continued productivity improvements in the Service segment, and a favorable mix of products sold in the Distribution segment.

 

Total operating expenses were $9.8 million in the first quarter of fiscal year 2022, an increase of $1.4 million when compared to the prior year first quarter. Included in operating expenses during the first quarter of fiscal year 2022 were incremental operating expenses related to the acquisition of Upstate Metrology, investments in technology and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were 20.6% in the first quarter of fiscal year 2022, down 110 basis points from 21.7% in the first quarter of fiscal year 2021. Operating income increased by $2.7 million and operating margin increased by 520 basis points in the first quarter of fiscal year 2022.

 

Net income was $3.7 million for the first quarter of fiscal year 2022, up from $0.8 million in the first quarter of fiscal year 2021 primarily due to higher operating income and a higher benefit from income taxes.

 

The following table presents, for the first quarter of fiscal year 2022 and fiscal year 2021, the components of our Consolidated Statements of Income:

 

    (Unaudited)
First Quarter Ended
  June 26,   June 27,
    2021   2020
As a Percentage of Total Revenue:          
Service Revenue   57.7 %   59.0 %
Distribution Sales 42.3 %   41.0 %
Total Revenue 100.0 %   100.0 %
           
Gross Profit Percentage:          
Service Gross Profit 31.8 %   26.4 %
Distribution Gross Profit 23.6 %   21.0 %
Total Gross Profit 28.3 %   24.2 %
           
Selling, Marketing and Warehouse Expenses 10.5 %   10.5 %
General and Administrative Expenses 10.1 %   11.2 %
Total Operating Expenses 20.6 %   21.7 %
           
Operating Income 7.7 %   2.5 %
           
Interest and Other Expense, net 0.4 %   0.6 %
           
Income Before Income Taxes 7.3 %   1.9 %
Benefit from Income Taxes (0.4 %)   (0.2 %)
           
Net Income 7.7 %   2.1 %

 

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FIRST QUARTER ENDED JUNE 26, 2021 COMPARED TO FIRST QUARTER ENDED JUNE 27, 2020
(dollars in thousands):

 

Revenue:

    First Quarter Ended   Change
    June 26,   June 27,        
    2021   2020   $   %
Revenue:                
  Service   $ 27,557     $ 22,967     $ 4,590     20.0%
  Distribution     20,233       15,937       4,296     27.0%
  Total   $ 47,790     $ 38,904     $ 8,886     22.8%

 

Total revenue increased $8.9 million, or 22.8%, in our fiscal year 2022 first quarter compared to the prior fiscal year first quarter.

 

Service revenue, which accounted for 57.7% and 59.0% of our total revenue in the first quarter of fiscal years 2022 and 2021, respectively, increased 20.0% from the first quarter of fiscal year 2021 to the first quarter of fiscal year 2022. This year-over-year increase included $0.6 million in revenue from acquisitions and organic revenue growth of 16.6% and was driven by improvement in end market conditions, continued market share gains and an easier comparison versus the first quarter of fiscal year 2021 which was the quarter most significantly impacted by the COVID-19 pandemic.

 

Our fiscal years 2022 and 2021 Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows:

 

  FY 2022     FY 2021
  Q1     Q4 Q3 Q2 Q1
Service Revenue Growth 20.0%     15.8% 12.2% 4.5% 2.5%

 

The growth in Service segment revenue during the first quarter of fiscal year 2022 versus the first quarter of fiscal year 2021 reflected both organic growth and acquisitions, and the growth in the first quarter of fiscal year 2021 versus the first quarter of fiscal year 2020 was also both organic and from acquisitions.

 

Within any fiscal year, while we add new customers, we also have customers from the prior fiscal year whose service orders may not repeat for any number of factors. Among those factors are variations in the timing of periodic calibrations and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of Service segment orders can vary on a quarter-to-quarter basis, we believe trailing twelve-month information provides a better indication of the progress of this segment. The following table presents the trailing twelve-month Service segment revenue for each quarter in fiscal years 2021 and 2020 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period:

 

  FY 2022     FY 2021
  Q1     Q4 Q3 Q2 Q1
Trailing Twelve-Month:              
  Service Revenue $105,864     $101,274 $97,225 $94,624 $93,572
  Service Revenue Growth 13.1%     8.9% 5.4% 4.3% 7.4%

 

Our strategy has been to focus our investments in the core electrical, temperature, pressure, physical/dimensional and radio frequency/microwave calibration disciplines. We expect to subcontract approximately 13% to 15% of our Service revenue to third-party vendors for calibration beyond our chosen scope of capabilities. We continually evaluate our outsourcing needs and make capital investments, as deemed necessary, to add more in-house capabilities and reduce the need for third-party vendors. Capability expansion through business acquisitions is another way that we seek to reduce the need for outsourcing. The following table presents the source of our Service

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revenue and the percentage of Service revenue derived from each source for each quarter during fiscal years 2022 and 2021:

 

    FY 2022     FY 2021
    Q1     Q4 Q3 Q2 Q1
Percent of Service Revenue:              
  In-House 83.1%     83.6% 83.1% 83.7% 82.9%
  Outsourced 15.4%     14.9% 15.3% 14.7% 15.6%
  Freight Billed to Customers 1.5%     1.5% 1.6% 1.6% 1.5%
    100.0%     100.0% 100.0% 100.0% 100.0%

 

Our Distribution sales accounted for 42.3% of our total revenue in the first quarter of fiscal year 2022 and 41.0% of our total revenue in the first quarter of fiscal year 2021. During the first quarter of fiscal year 2022, Distribution segment sales showed an increase of 27.0% to $20.2 million. This increase was due to increased orders in the first quarter of fiscal year 2022 and an easier comparison to the first quarter of fiscal year 2021, which was the quarter most significantly impacted by the COVID-19 pandemic. In addition, rental revenue increased by 61.3% to $1.6 million.

 

Our fiscal years 2022 and 2021 Distribution sales growth (decline), in relation to prior fiscal year quarter comparisons, was as follows:

 

  FY 2022     FY 2021
  Q1     Q4 Q3 Q2 Q1
   Distribution Sales Growth (Decline)   27.0%     (4.6%) (8.6%) (6.6%) (20.3%)

 

The change in the first quarter of fiscal year 2022 versus the first quarter of fiscal year 2021 for the Distribution segment reflected just organic growth and the change in the first quarter of fiscal year 2021 versus the first quarter of fiscal year 2020 for the Distribution segment reflected both organic growth and acquisitions.

 

Distribution sales orders include orders for instruments that we routinely stock in our inventory, customized products, and other products ordered less frequently, which we do not stock. Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in our service centers prior to shipment, orders required by the customer to be shipped complete or at a future date, and other orders awaiting final credit or management review prior to shipment. Our total pending product shipments at the end of the first quarter of fiscal year 2022 were $8.2 million, an increase of $4.3 million versus the end of the first quarter of fiscal year 2021 and an increase of $1.9 million since March 27, 2021. The year-over-year increase in pending product shipments and backorders was a result of the COVID-19 pandemic and its disruption to the supply of products as well as increased orders for the wind power generation market. The following table presents our total pending product shipments and the percentage of total pending product shipments that were backorders at the end of each quarter of fiscal years 2022 and 2021:

 

  FY 2022     FY 2021
  Q1     Q4 Q3 Q2 Q1
Total Pending Product Shipments $8,173     $6,287 $5,533 $4,251 $3,890
% of Pending Product              
 Shipments that were Backorders 78.4%     77.6% 79.3% 76.6% 75.8%

 

 

Gross Profit:

      First Quarter Ended   Change
      June 26,   June 27,        
      2021   2020   $   %
Gross Profit:                          
  Service   $ 8,752     $ 6,069     $ 2,683     44.2%
  Distribution     4,768       3,340       1,428     42.8%
  Total   $ 13,520     $ 9,409     $ 4,111     43.7%

 

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Total gross profit for the first quarter of fiscal year 2022 was $13.5 million, an increase of $4.1 million or 43.7% versus the first quarter of fiscal year 2021. Total gross margin was 28.3% in the first quarter of fiscal year 2022, up from 24.2% in the first quarter of fiscal year 2021, a 410 basis point increase.

 

Service gross profit in the first quarter of fiscal year 2022 increased $2.7 million, or 44.2%, from the first quarter of fiscal year 2021. Service gross margin was 31.8% in the first quarter of fiscal year 2022, a 540 basis point increase versus the first quarter of fiscal year 2021. This increase in gross margin was primarily due to operating leverage on our fixed cost base and continued strong technician productivity.

 

The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:

 

  FY 2022     FY 2021
  Q1     Q4 Q3 Q2 Q1
Service Gross Margin    31.8%     33.9% 27.9% 32.2% 26.4%

 

Our Distribution gross margin includes net sales less the direct cost of inventory sold and the direct costs of equipment rental revenues, primarily depreciation expense for the fixed assets in our rental equipment pool, as well as the impact of rebates and cooperative advertising income we receive from vendors, freight billed to customers, freight expenses and direct shipping costs. In general, our Distribution gross margin can vary based upon the mix of products sold, price discounting, and the timing of periodic vendor rebates offered and cooperative advertising programs from suppliers.

 

The following table reflects the quarterly historical trend of our Distribution gross margin as a percent of Distribution sales:

 

  FY 2022     FY 2021
  Q1     Q4 Q3 Q2 Q1
Distribution Gross Margin 23.6%     21.0% 22.5% 21.1% 21.0%

 

Distribution segment gross margin was 23.6% in the first quarter of fiscal year 2022 versus 21.0% in the first quarter of fiscal year 2021, a 260 basis point increase. The increase in segment gross margin was primarily due to a favorable mix of higher margin products sold and rented.

 

Operating Expenses:

 

      First Quarter Ended   Change
      June 26,   June 27,        
      2021   2020   $   %
Operating Expenses:                            
Selling, Marketing and Warehouse   $ 4,997     $ 4,074     $ 923     22.7%
General and Administrative     4,834       4,371       463     10.6%
Total   $ 9,831     $ 8,445     $ 1,386     16.4%

 

Total operating expenses were $9.8 million in the first quarter of fiscal year 2022 versus $8.4 million during the first quarter of fiscal year 2021. The year-over-year increase in selling, marketing and warehouse expenses is due to higher performance-based sales incentives and direct marketing costs. The increase in general and administrative expenses includes incremental expenses related to acquired companies, increased payroll costs from new employees and continued investments in technology.

 

As a percentage of total revenue, operating expenses were 20.6% in the first quarter of fiscal year 2022 and 21.7% in the first quarter of fiscal year 2021, a decrease of 110 basis points.

 

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Income Taxes:

 

    First Quarter Ended   Change
    June 26,   June 27,        
    2021   2020   $   %
Benefit from Income Taxes   $ (194 )   $ (77 )   $ (117 )   (151.9%)

 

Our effective tax rates for the first quarter of fiscal years 2022 and 2021 were (5.6%) and (10.7%), respectively. The increase in the tax benefit is due to the increased amount of discrete tax benefit from share-based compensation activity. Our quarterly provision for income taxes is affected by discrete items that may occur in any given year but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the first quarter of fiscal years 2022 and 2021 was $1.1 million and $0.3 million, respectively. We continue to evaluate our tax provision on a quarterly basis and adjust, as deemed necessary, our effective tax rate given changes in facts and circumstances expected for the entire fiscal year. We expect our total fiscal year 2022 effective tax rate to be approximately 16% to 18%.

 

Net Income:

 

    First Quarter Ended   Change
    June 26,   June 27,          
    2021   2020   $   %
Net Income   $ 3,688     $ 798     $ 2,890     362.2%

 

Net income for the first quarter of fiscal year 2022 increased $2.9 million from the first quarter of fiscal year 2021 primarily due to the increased operating income and a higher benefit from income taxes.

 

Adjusted EBITDA:

 

In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, non-cash stock compensation expense, non-cash loss on sale of building, and restructuring expense), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, stock-based compensation expense and other items, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.

 

Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

 

    First Quarter Ended
    June 26,   June 27,
    2021   2020
Net Income   $ 3,688     $ 798  
+ Interest Expense     189       224  
+ Other Expense / (Income)     6       19  
+ Tax Provision     (194)     (77)
Operating Income   $ 3,689     $ 964  
+ Depreciation & Amortization     1,990       1,871  
+ Restructuring Expense     -       360  
+ Other (Expense) / Income     (6)     (19)
+ Noncash Stock Compensation     437       312  
Adjusted EBITDA   $ 6,110     $ 3,488  

 

Total Adjusted EBITDA for the first quarter of fiscal year 2022 was $6.1 million, an increase of $2.6 million or 75.2% versus the first quarter of fiscal year 2021. As a percentage of revenue, Adjusted EBITDA increased to

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12.8% for the first quarter of fiscal year 2022 from 9.0% for the first quarter of fiscal year 2021. The increase in Adjusted EBITDA during the first quarter of fiscal year 2022 was primarily driven by the increase in net income.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We expect that foreseeable liquidity and capital resource requirements will be met through anticipated cash flows from operations and borrowings from our revolving credit facility. We believe that these sources of financing will be adequate to meet our future requirements.

 

On July 7, 2021, we entered into the Second Amended and Restated Credit Facility Agreement (the “2021 Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), that amended and restated in its entirety the Company’s Amended and Restated Credit Facility Agreement dated as of October 30, 2017, as amended by Amended and Restated Credit Facility Agreement Amendment 1 dated December 10, 2018 and Amended and Restated Credit Facility Agreement Amendment 2 (“Amendment Two”) dated May 18, 2020 (as amended, the “Prior Credit Agreement”).

 

The 2021 Credit Agreement increased the revolving credit commitment (the “Revolving Credit Commitment”) from $40.0 million to $80.0 million, with a letter of credit subfacility increased from $2.0 million to $10.0 million, and extended the term of the Revolving Credit Commitment to June 2026. The 2021 Credit Agreement amended the definition of Applicable Margin (formerly Applicable Rate under the Prior Credit Agreement), which is based upon the Company’s then current leverage ratio and is used to determine interest charges on outstanding and unused borrowings under the revolving credit facility; the amendments reduced the Applicable Margins payable at the two highest leverage ratio levels. The 2021 Credit Agreement also amended the definition of Permitted Acquisitions, that is, acquisitions which are permitted under, and may be financed with proceeds of, the revolving credit facility, including increasing the aggregate purchase price for acquisitions consummated in any fiscal year from $1.0 million to $65 million during the current fiscal year and $50 million during any subsequent fiscal year, and adding an aggregate purchase price of $40.0 million for acquisitions consummated at any time during the term of the 2021 Credit Agreement related to businesses with a principal place of business located in the United Kingdom or the European Union.

 

In addition, the 2021 Credit Agreement provides that, assuming no event of default, restricted payments up to $25.0 million (increased from $10.0 million in the Prior Credit Agreement) in the aggregate and $10.0 million (increased from $3.0 million in the Prior Credit Agreement) in any single fiscal year may be used by us to repurchase our shares and pay dividends. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply. The 2021 Credit Agreement also reduced the LIBOR floor from 1.0% to 0.25% and included a mechanism for adoption of a different benchmark rate in the event LIBOR is discontinued. Pursuant to the 2021 Credit Agreement, the fixed interest rate on our term loan (the “2018 Term Loan”) was reduced from 4.15% to 3.90%.

 

The 2021 Credit Agreement superseded in its entirety, the Prior Credit Agreement. Amendment Two to the Prior Credit Agreement had previously extended the term of the revolving credit facility to October 20, 2022 and increased the revolving credit commitment to $40 million.

 

Amendment Two also had modified the definition of the applicable rate used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and it amended the definition of permitted acquisitions to amend borrowings available under the revolving credit facility for acquisitions. In addition, Amendment Two had amended the definition of restricted payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain employee tax obligations associated with share-based payment and stock option activity, and modified certain restrictions to the Company’s ability to repurchase its shares and pay dividends. Amendment Two also had modified the leverage ratio and fixed charge coverage ratio covenants with which the Company was required to comply and limited capital expenditures to $5.5 million for the fiscal year ending March 27, 2021. Amendment Two also had established a LIBOR floor of 1.0% and included a mechanism for adoption of a different benchmark rate in the event LIBOR was discontinued.

 

We have a term loan, the 2018 Term Loan, in the amount of $15.0 million. As of June 26, 2021, $10.0 million was outstanding on the 2018 Term Loan, of which $2.1 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $0.2 million per month through December 2025.

 

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As of June 26, 2021, $40.0 million was available under the revolving credit facility, of which $12.1 million was outstanding and included in long-term debt on the Consolidated Balance Sheets.

 

During the first quarter of fiscal year 2021, we used $0.9 million for a business acquisition.

 

The allowable leverage ratio under the Prior Credit Agreement for the second, third and fourth fiscal quarter of fiscal year 2021 and the first quarter of fiscal year 2022 was a maximum multiple of 5.0, 5.5, 7.0 and 4.0, respectively, of total debt outstanding compared to EBITDA and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. After the first quarter of fiscal 2022, pursuant to the July 2021 Facility, the allowable leverage ratio is a maximum multiple of 3.0. The Prior Credit Agreement also had provided that the trailing twelve-month pro forma EBITDA of an acquired business was included in the allowable leverage calculation.

 

Pursuant to the Prior Credit Agreement, we were required to comply with a fixed charge ratio covenant and a leverage ratio covenant. M&T waived the requirement for the fixed charge ratio for the first fiscal quarter ending June 26, 2021. We were in compliance with all other loan covenants and requirements during the first quarter of fiscal year 2022. Our leverage ratio, as defined in the Prior Credit Agreement, was 0.96 at June 26, 2021, compared with 0.94 at March 27, 2021. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply.

 

 

Interest on the revolving credit facility continues to accrue, at our election, at either the variable one-month LIBOR (subject to a 1% floor during the first quarter of fiscal year 2022) or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case, plus a margin. Interest on outstanding borrowings of the 2018 Term Loan accrues at a fixed rate of 4.15% over the term of the loan during the first quarter of fiscal year 2022 with principal and interest payments made monthly. Unused fees accrued based on the average daily amount of unused credit available under the Prior Credit Agreement. Interest rate margins and unused fees were determined on a quarterly basis based upon our calculated leverage ratio.

 

Cash Flows: The following table is a summary of our Consolidated Statements of Cash Flows (dollars in thousands):

 

    First Quarter Ended
    June 26,   June 27,
    2021   2020
Cash Provided by (Used in):                
Operating Activities   $ 2,055     $ 4,042  
Investing Activities   $ (2,134 )   $ (1,261 )
Financing Activities   $ (43 )   $ (2,721 )

 

Operating Activities: Net cash provided by operations was $2.1 million during the first quarter of fiscal year 2022 compared to $4.0 million of net cash provided by operating activities during the first quarter of fiscal year 2021. The year-over-year decrease in cash provided by operations was primarily the result of changes in net working capital (defined as current assets less current liabilities). The significant working capital fluctuations were as follows:

 

·         Receivables: Accounts receivable decreased by a net amount of $0.6 million during the first quarter of fiscal year 2022 inclusive of $0.2 million of accounts receivable acquired as part of the Upstate Metrology acquisition completed during the period. During the first quarter of fiscal year 2021, accounts receivable decreased by a net amount of $3.1 million. The year-over-year variation reflects changes in the timing of collections. The following table illustrates our “days sales outstanding” as of June 26, 2021 and June 27, 2020 (dollars in thousands):

 

    June 26,   June 27,
    2021   2020
Net Sales, for the last two fiscal months   $ 33,502   $ 27,464
Accounts Receivable, net   $ 33,324   $ 27,849
Days Sales Outstanding     60     61

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· Inventory: Our inventory strategy includes making appropriate large quantity, high dollar purchases with key manufacturers for various reasons, including maximizing on-hand availability of key products, expanding the number of SKU’s stocked in anticipation of customer demand, reducing backorders for products with long lead times and optimizing vendor volume discounts. As a result, inventory levels may vary from quarter-to-quarter based on the timing of these large orders in relation to our quarter end. Our inventory balance remained flat during both the first quarter of fiscal year 2022 and fiscal year 2021.

 

· Accounts Payable: Changes in accounts payable may or may not correlate with changes in inventory balances at any given quarter end due to the timing of vendor payments for inventory, as well as the timing of payments for outsourced Service vendors and capital expenditures. Accounts payable decreased $1.1 million during the first quarter of fiscal year 2022. Accounts payable decreased $2.6 million during the first quarter of fiscal year 2021. The decreases are largely due to the timing of inventory and other payments in the respective periods.

 

· Accrued Compensation and Other Liabilities: Accrued compensation and other liabilities include, among other things, amounts to be paid to employees for non-equity performance-based compensation. At the end of any particular period, the amounts accrued for such compensation may vary due to many factors including, but not limited to, changes in expected performance levels, the performance measurement period, and timing of payments to employees. During the first quarter of fiscal year 2022, accrued compensation and other liabilities decreased by $3.1 million. During the first quarter of fiscal year 2021, accrued compensation and other liabilities decreased by $0.3 million. The change in fiscal year 2022 was largely due to the one-time annual payments of incentive based compensation accruals.

 

· Income Taxes Payable: In any given period, net working capital may be affected by the timing and amount of income tax payments. During the first quarter of fiscal year 2022 and fiscal year 2021, income taxes payable decreased by $0.3 million and $0.1 million, respectively. The year-over-year difference is due to timing of income tax payments.

 

Investing Activities: During the first quarter of fiscal year 2022, we invested $1.2 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and the Company’s rental business.

 

During the first quarter of fiscal year 2021, we invested $1.3 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and the Company’s rental business.

 

Financing Activities: During the first quarter of fiscal year 2022, $3.2 million was borrowed from our revolving line of credit and $0.7 million in cash was generated from the issuance of common stock. In addition, we used $0.6 million for scheduled repayments of our term loan and $3.4 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in the quarter which are shown as a repurchase of shares of our common stock.

 

During the first quarter of fiscal year 2021, $0.4 million in cash was generated from the issuance of common stock. In addition, we used $1.3 million to reduce the balance on our revolving line of credit, $0.5 million for scheduled repayments of our term loan and $1.3 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in the quarter which are shown as a repurchase of shares of our common stock.

 

 

OUTLOOK

 

The results of the first quarter of fiscal year 2022 were strong and we are pleased with the continued strong performance of our Service segment and improving trends in our Distribution segment. We have a strong balance sheet, sustainable Service segment gross margins and an active M&A pipeline. We are confident that the strength of our unique value proposition and our new customer pipeline positions us well for continued strong organic growth.

 

For the second quarter of fiscal year 2022, we expect Service organic growth to be similar to what we achieved in the first quarter of fiscal year 2022. We expect more modest improvement in Service gross margin than we have experienced over the last several quarters, largely due to a more difficult technician productivity comparison versus

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the second quarter of fiscal year 2021. Distribution sales are expected to achieve high teens growth in the second quarter of fiscal year 2022 on improved order trends and a prior-year comparison that includes lower levels of demand due to the COVID-19 pandemic.

 

We revised our fiscal year 2022 income tax rate to range between 16% and 18% from the previous estimated range of 20% to 22%. This estimate includes Federal, various state, and Canadian income taxes and reflects the discrete tax benefit associated with share-based payment awards and stock option activity.

 

We anticipate total capital expenditures to be approximately $7.5 million to $8.5 million in fiscal year 2022, with the majority of the capital expenditures planned for technology and growth-oriented opportunities within both of our operating segments.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

INTEREST RATES

 

Our exposure to changes in interest rates results from our borrowing activities. In the event interest rates were to move by 1%, our yearly interest expense would increase or decrease by approximately $0.1 million assuming our average borrowing levels remained constant. As of June 26, 2021, $40.0 million was available under our revolving credit facility, of which $12.1 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. As described above under “Liquidity and Capital Resources,” we also have a $15.0 million (original principal) term loan. The 2018 Term Loan is considered a fixed interest rate loan. As of June 26, 2021, $10.0 million was outstanding on the 2018 Term Loan and was included in long-term debt and current portion of long-term debt on the Consolidated Balance Sheets. The 2018 Term Loan requires total (principal and interest) repayments of $0.2 million per month.

 

At our option, we borrow from our revolving credit facility at the variable one-month LIBOR or at a fixed rate for a designated period at the LIBOR (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods) corresponding to such period, in each case, plus a margin. Our interest rate margin is determined on a quarterly basis based upon our calculated leverage ratio. Our interest rate during the first quarter of fiscal year 2022 for our revolving credit facility ranged from 1.8% to 2.2%. Interest on outstanding borrowings of the 2018 Term Loan accrued at a fixed rate of 4.15% over the term of the loan during the first quarter of fiscal year 2022 and 3.90% over the term of the loan for subsequent periods. On June 26, 2021, we had no hedging arrangements in place for our revolving credit facility to limit our exposure to upward movements in interest rates.

 

 

FOREIGN CURRENCY

 

Approximately 90% of our total revenues for each of the first quarters of fiscal year 2022 and 2021 were denominated in U.S. dollars, with the remainder denominated in Canadian dollars. A 10% change in the value of the Canadian dollar to the U.S. dollar would impact our revenue by approximately 1%. We monitor the relationship between the U.S. and Canadian currencies on a monthly basis and adjust sales prices for products and services sold in Canadian dollars as we believe to be appropriate.

 

We continually utilize short-term foreign exchange forward contracts to reduce the risk that future earnings would be adversely affected by changes in currency exchange rates. We do not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a loss of $0.1 million during the first quarter of each of the fiscal years 2022 and 2021, was recognized as a component of other expense 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 June 26, 2021, we had a foreign exchange contract, which matured in July 2021, outstanding in the notional amount of $4.0 million. The foreign exchange contract was renewed in July 2021 and continues to be in place. We do not use hedging arrangements for speculative purposes.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Our principal executive officer and our principal financial officer evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are designed to ensure that information

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required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of such date.

 

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this quarterly report (our first fiscal quarter of fiscal year 2022) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

    (a)   (b)   (c)   (d)
Period   Total
Number of
Shares
Purchased
 

Average

Price Paid
per Share

  Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1)
  Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet Be
Purchased Under the Plans
or Programs (1)
                 
03/28/21 - 04/24/21   279(2)   $49.08(2)   -   -
                 
04/25/21 - 05/22/21   61,912(2)   $54.35(2)   -   -
                 
05/23/21 - 06/26/21   -   -   -   -
                 
Total   62,191   $54.33   -   -

 

(1) We have a Share Repurchase Plan (the “Plan”), announced on October 31, 2011, which allows us to repurchase shares of our common stock from certain of our executive officers, directors and key employees, subject to certain conditions and limitations. The purchase price is determined by the weighted average closing price per share of our common stock on The NASDAQ Global Market over the twenty (20) trading days following our acceptance of the repurchase request and may not be more than 15% higher than the closing price on the last day of the twenty (20) trading day period. We may purchase shares of our common stock pursuant to the Plan on a continuous basis, but we may not expend more than $1.0 million in any fiscal year to repurchase the shares. Our board of directors may terminate the Plan at any time. No shares were repurchased under the Plan during the first quarter of fiscal year 2022.
(2) Shares of common stock withheld pursuant to the Transcat, Inc. 2003 Incentive Plan, as Amended and Restated, to cover employee tax-withholding obligations upon vesting of restricted stock unit awards that vested and stock option exercises in the first quarter of fiscal year 2022. Amounts in column (b) reflect the weighted average price for shares withheld in satisfaction of these tax-withholding obligations.

 

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ITEM 6. EXHIBITS

 

 

 

INDEX TO EXHIBITS

 

     
10.1   Second Amended and Restated Credit Facility Agreement, dated as of July 7, 2021, by and between Transcat, Inc. and Manufacturers and Traders Trust Company, incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 12, 2021
     
(31) Rule 13a-14(a)/15d-14(a) Certifications
     
  31.1* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
  31.2* Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
(32) Section 1350 Certifications
     
  32.1* Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
(101) Interactive Data File
     
     101.INS* XBRL Instance Document
     
     101.SCH* XBRL Taxonomy Extension Schema Document
     
     101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
     
     101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
   
     101.LAB* XBRL Taxonomy Extension Label Linkbase Document
   
     101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
   
(104) Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 *       Exhibit filed with this report.

 

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SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

TRANSCAT, INC.

   
   
   
Date:  August 3, 2021 /s/ Lee D. Rudow
  Lee D. Rudow
 

President and Chief Executive Officer

(Principal Executive Officer)

   
   
Date:  August 3, 2021 /s/ Mark A. Doheny
  Mark A. Doheny
 

Vice President of Finance and Chief Financial Officer

(Principal Financial Officer)

 

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