TRANSCAT INC - Quarter Report: 2007 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended: September 29, 2007
or
o | 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 (State or other jurisdiction of incorporation or organization) |
16-0874418 (I.R.S. Employer Identification No.) |
35 Vantage Point Drive, Rochester, New York 14624
(Address of principal executive offices) (Zip Code)
(Address of principal executive offices) (Zip Code)
(585) 352-7777
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of Common Stock, par value $0.50 per share, of the
registrant outstanding as of October 31, 2007 was 7,152,346.
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousands, Except Per Share Amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited) | (Unaudited) | |||||||||||||||
Second Quarter Ended | Six Months Ended | |||||||||||||||
September 29, | September 23, | September 29, | September 23, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Product Sales |
$ | 11,219 | $ | 9,880 | $ | 22,146 | $ | 20,417 | ||||||||
Service Sales |
5,406 | 4,980 | 10,669 | 9,963 | ||||||||||||
Net Sales |
16,625 | 14,860 | 32,815 | 30,380 | ||||||||||||
Cost of Products Sold |
8,087 | 7,415 | 15,952 | 15,244 | ||||||||||||
Cost of Services Sold |
4,276 | 3,897 | 8,362 | 7,728 | ||||||||||||
Total Cost of Products
and Services Sold |
12,363 | 11,312 | 24,314 | 22,972 | ||||||||||||
Gross Profit |
4,262 | 3,548 | 8,501 | 7,408 | ||||||||||||
Selling, Marketing and Warehouse Expenses |
1,919 | 1,807 | 4,127 | 3,942 | ||||||||||||
Administrative Expenses |
1,749 | 1,222 | 3,331 | 2,610 | ||||||||||||
Total Operating Expenses |
3,668 | 3,029 | 7,458 | 6,552 | ||||||||||||
Operating Income |
594 | 519 | 1,043 | 856 | ||||||||||||
Interest Expense |
29 | 90 | 63 | 184 | ||||||||||||
Other Expense, net |
209 | 46 | 290 | 120 | ||||||||||||
Total Other Expense |
238 | 136 | 353 | 304 | ||||||||||||
Income Before Income Taxes |
356 | 383 | 690 | 552 | ||||||||||||
Provision for Income Taxes |
162 | 137 | 258 | 189 | ||||||||||||
Net Income |
194 | 246 | 432 | 363 | ||||||||||||
Other Comprehensive Income |
265 | 13 | 457 | 94 | ||||||||||||
Comprehensive Income |
$ | 459 | $ | 259 | $ | 889 | $ | 457 | ||||||||
Basic Earnings Per Share |
$ | 0.03 | $ | 0.04 | $ | 0.06 | $ | 0.05 | ||||||||
Average Shares Outstanding |
7,127 | 6,902 | 7,099 | 6,864 | ||||||||||||
Diluted Earnings Per Share |
$ | 0.03 | $ | 0.03 | $ | 0.06 | $ | 0.05 | ||||||||
Average Shares Outstanding |
7,577 | 7,425 | 7,474 | 7,377 |
See accompanying notes to consolidated financial statements.
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TRANSCAT, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
(Unaudited) | ||||||||
September 29, | March 31, | |||||||
2007 | 2007 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash |
$ | 188 | $ | 357 | ||||
Accounts Receivable, less allowance for doubtful accounts of $62 and
$47 as of September 29, 2007 and March 31, 2007, respectively |
7,874 | 8,846 | ||||||
Other Receivables |
858 | 352 | ||||||
Inventory, net |
3,662 | 4,336 | ||||||
Prepaid Expenses and Other Current Assets |
1,108 | 762 | ||||||
Deferred Tax Asset |
955 | 851 | ||||||
Total Current Assets |
14,645 | 15,504 | ||||||
Property and Equipment, net |
3,275 | 2,814 | ||||||
Goodwill |
2,967 | 2,967 | ||||||
Deferred Tax Asset |
769 | 791 | ||||||
Other Assets |
352 | 346 | ||||||
Total Assets |
$ | 22,008 | $ | 22,422 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts Payable |
$ | 5,411 | $ | 5,307 | ||||
Accrued Compensation and Other Liabilities |
1,931 | 2,578 | ||||||
Income Taxes Payable |
216 | 42 | ||||||
Total Current Liabilities |
7,558 | 7,927 | ||||||
Long-Term Debt |
1,333 | 2,900 | ||||||
Other Liabilities |
411 | 366 | ||||||
Total Liabilities |
9,302 | 11,193 | ||||||
Shareholders Equity: |
||||||||
Common Stock, par value $0.50 per share, 30,000,000 shares authorized;
7,413,262 and 7,286,119 shares issued as of September 29, 2007 and
March 31, 2007, respectively; 7,137,480 and 7,010,337 shares
outstanding as of September 29, 2007 and March 31, 2007,
respectively |
3,707 | 3,643 | ||||||
Capital in Excess of Par Value |
5,792 | 5,268 | ||||||
Warrants |
329 | 329 | ||||||
Accumulated Other Comprehensive Income |
500 | 43 | ||||||
Retained Earnings |
3,366 | 2,934 | ||||||
Less: Treasury Stock, at cost, 275,782 shares as of
September 29, 2007 and March 31, 2007 |
(988 | ) | (988 | ) | ||||
Total Shareholders Equity |
12,706 | 11,229 | ||||||
Total Liabilities and Shareholders Equity |
$ | 22,008 | $ | 22,422 | ||||
See accompanying notes to consolidated financial statements.
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TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited) | ||||||||
Six Months Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net Income |
$ | 432 | $ | 363 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities: |
||||||||
Deferred Income Taxes |
(85 | ) | 148 | |||||
Depreciation and Amortization |
788 | 769 | ||||||
Provision for Accounts Receivable and Inventory Reserves |
(63 | ) | 43 | |||||
Stock-Based Compensation Expense |
428 | 328 | ||||||
Changes in Assets and Liabilities: |
||||||||
Accounts Receivable and Other Receivables |
892 | 515 | ||||||
Inventory |
749 | (46 | ) | |||||
Prepaid Expenses and Other Assets |
(602 | ) | (280 | ) | ||||
Accounts Payable |
104 | (408 | ) | |||||
Accrued Compensation and Other Liabilities |
(595 | ) | (924 | ) | ||||
Income Taxes Payable |
174 | (41 | ) | |||||
Net Cash Provided by Operating Activities |
2,222 | 467 | ||||||
Cash Flows from Investing Activities: |
||||||||
Purchase of Property and Equipment |
(999 | ) | (454 | ) | ||||
Net Cash Used in Investing Activities |
(999 | ) | (454 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Chase Revolving Line of Credit, net |
(1,567 | ) | | |||||
GMAC Revolving Line of Credit, net |
| 223 | ||||||
Payments on Other Debt Obligations |
| (368 | ) | |||||
Issuance of Common Stock |
160 | 110 | ||||||
Net Cash Used in Financing Activities |
(1,407 | ) | (35 | ) | ||||
Effect of Exchange Rate Changes on Cash |
15 | 4 | ||||||
Net Decrease in Cash |
(169 | ) | (18 | ) | ||||
Cash at Beginning of Period |
357 | 115 | ||||||
Cash at End of Period |
$ | 188 | $ | 97 | ||||
Supplemental Disclosures of Cash Flow Activity: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 69 | $ | 198 | ||||
Income Taxes, net |
$ | 177 | $ | 85 | ||||
Supplemental Disclosure of Non-Cash Financing Activity: |
||||||||
Treasury Stock Acquired in Cashless Exercise of Stock Options |
$ | | $ | 50 |
See accompanying notes to consolidated financial statements.
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TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In Thousands)
(Unaudited)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In Thousands)
(Unaudited)
Capital | ||||||||||||||||||||||||||||||||||||
Common Stock | In | Accumulated | Treasury Stock | |||||||||||||||||||||||||||||||||
Issued | Excess | Other | Outstanding | |||||||||||||||||||||||||||||||||
$0.50 Par Value | of Par | Comprehensive | Retained | at Cost | ||||||||||||||||||||||||||||||||
Shares | Amount | Value | Warrants | Income | Earnings | Shares | Amount | Total | ||||||||||||||||||||||||||||
Balance as of March 31, 2007 |
7,286 | $ | 3,643 | $ | 5,268 | $ | 329 | $ | 43 | $ | 2,934 | 276 | $ | (988 | ) | $ | 11,229 | |||||||||||||||||||
Issuance of Common Stock |
98 | 49 | 111 | 160 | ||||||||||||||||||||||||||||||||
Stock-Based Compensation |
256 | 256 | ||||||||||||||||||||||||||||||||||
Issuance of Restricted Stock |
29 | 15 | 157 | 172 | ||||||||||||||||||||||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||||||||||||||
Currency Translation
Adjustment |
453 | 453 | ||||||||||||||||||||||||||||||||||
Unrecognized Prior Service
Cost, net of tax |
4 | 4 | ||||||||||||||||||||||||||||||||||
Net Income |
432 | 432 | ||||||||||||||||||||||||||||||||||
Balance as of September 29, 2007 |
7,413 | $ | 3,707 | $ | 5,792 | $ | 329 | $ | 500 | $ | 3,366 | 276 | $ | (988 | ) | $ | 12,706 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
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TRANSCAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
NOTE 1 GENERAL
Description of Business: Transcat, Inc. (Transcat or the Company) is a leading distributor of
professional grade test, measurement, and calibration instruments and a provider of calibration and
repair services, primarily throughout the process, life science and manufacturing industries.
Basis of Presentation: Transcats unaudited Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the United States of America
(GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and
Article 10 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 Companys 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 the results to be expected 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 31, 2007 (fiscal year 2007) contained in the
Companys 2007 Annual Report on Form 10-K filed with the SEC.
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 dilutive stock options, warrants, and unvested
restricted stock awards. In computing the per share effect of assumed conversion, funds which
would have been received from the exercise of options, warrants and unvested restricted stock are
considered to have been used to purchase shares of common stock at the average market prices during
the period, and the resulting net additional shares of common stock are included in the calculation
of average shares of common stock outstanding.
For the second quarter and the first six months of the fiscal year ending March 29, 2008 (fiscal
year 2008), the net additional common stock equivalents had no effect on the calculation of
dilutive earnings per share. For the second quarter and the first six months of fiscal year 2007,
the net additional common stock equivalents had a $.01 per share effect and no effect,
respectively, on the calculation of dilutive earnings per share. The total number of dilutive and
anti-dilutive common stock equivalents resulting from stock options, warrants and unvested
restricted stock are summarized as follows:
Second Quarter Ended | Six Months Ended | |||||||||||||||
September 29, | September 23, | September 29, | September 23, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Shares Outstanding: |
||||||||||||||||
Dilutive |
450 | 523 | 375 | 513 | ||||||||||||
Anti-dilutive |
626 | 368 | 701 | 378 | ||||||||||||
Total |
1,076 | 891 | 1,076 | 891 | ||||||||||||
Range of Exercise Prices per
Share: |
||||||||||||||||
Options |
$ | 1.50-$7.72 | $ | 0.80-$5.80 | $ | 1.50-$7.72 | $ | 0.80-$5.80 | ||||||||
Warrants |
$ | 1.50-$5.80 | $ | 0.97-$5.80 | $ | 1.50-$5.80 | $ | 0.97-$5.80 |
Stock-Based Compensation: In accordance with Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based Payment, the Company measures the cost of services
received in exchange for all equity awards granted, including stock options, warrants and
restricted stock, based on the fair market value of the award as of the grant date. The Company
uses the modified prospective application method to record compensation cost related to unvested
stock awards as of March 25, 2006 by recognizing the unamortized grant date fair value of the
awards over the remaining service periods of those awards with no change in historical reported
earnings. Awards granted after March 25, 2006 are valued at fair value and are recognized on a
straight line basis over the service periods of each award. Excess tax benefits from the exercise
of stock awards are presented in the consolidated statements of cash flows as a financing activity.
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 have any stock-based compensation costs capitalized as part of an asset. The Company
estimates forfeiture rates based on its historical experience.
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The estimated fair value of the awards granted during the first six months of fiscal year 2008 was
calculated using the Black-Scholes-Merton pricing model (Black-Scholes), which produced a
weighted average fair value of awards granted of $4.62 per share. During the first six months of
fiscal year 2008, the Company recorded, as a non-cash administrative expense in the Consolidated Statement
of Operations, stock-based compensation in the amount of $0.4 million.
The following summarizes the assumptions used in the Black-Scholes model during the first six
months of fiscal year 2008:
Expected life |
6 years | |||
Annualized volatility rate |
70.8 | % | ||
Risk-free rate of return |
4.6 | % | ||
Dividend rate |
0.0 | % |
The Black-Scholes model incorporates assumptions to value stock-based awards. The risk-free
rate of return for periods within the contractual life of the award is based on a zero-coupon U.S.
government instrument over the contractual term of the equity instrument. Expected volatility is
based on historical volatility of the Companys stock. The expected term of all awards granted is
estimated by taking the average of the weighted average vesting term and the contractual term, as
illustrated in SEC Staff Accounting Bulletin 107. This methodology is not materially different
from the Companys historical data on exercise timing. Separate groups having similar historical
exercise behavior with regard to award exercise timing and forfeiture rates are considered
separately for valuation and attribution purposes.
NOTE 2 DEBT
Description. On November 21, 2006, Transcat entered into a Credit Agreement (the Chase Credit
Agreement) with JPMorgan Chase Bank, N.A. The Chase Credit Agreement provides for a three-year
revolving credit facility in the amount of $10 million (the Revolving Credit Facility). The
Chase Credit Agreement replaced the Amended and Restated Loan and Security Agreement dated November
1, 2004, as further amended, with GMAC Commercial Finance LLC.
Interest and Commitment Fees. Interest on the Revolving Credit Facility accrues, at Transcats
election, at either a base rate (defined as the highest of prime, a three month certificate of
deposit plus 1%, or the federal funds rate plus 1/2 of 1%) (the Base Rate) or the London Interbank
Offered Rate (LIBOR), in each case, plus a margin. Commitment fees accrue based on the average
daily amount of unused credit available on the Revolving Credit Facility. Interest and commitment
fees are adjusted on a quarterly basis based upon the Companys calculated leverage ratio, as
defined in the Chase Credit Agreement. The Base Rate and the LIBOR rates as of September 29, 2007
were 7.8% and 5.1%, respectively. The Companys interest rate for the first six months of fiscal
year 2008 ranged from 5.8% to 7.6%.
Covenants. The Chase Credit Agreement has certain covenants with which the Company has to comply,
including a fixed charge ratio covenant and a leverage ratio covenant. The Company was in
compliance with all loan covenants and requirements throughout the first six months of fiscal year
2008.
Other Terms. The Company has pledged all of its U.S. tangible and intangible personal property as
collateral security for the loans made under the Revolving Credit Facility.
NOTE 3 INCOME TAXES
Effective April 1, 2007, the Company adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 establishes a single model to address accounting for
uncertain tax positions and clarifies the accounting for income taxes by prescribing a minimum
recognition threshold that a tax position is required to meet before being recognized in the
financial statements. Upon adoption of FIN 48, the Company had no unrecognized tax benefits.
During the first six months of fiscal year 2008, the Company recognized no adjustments for
uncertain tax benefits and expects no material changes to unrecognized tax positions within the
next twelve months.
The Company recognizes interest and penalties, if any, related to uncertain tax positions in the
provision for income taxes. No interest and penalties related to uncertain tax positions were
recognized during the first six months of fiscal year 2008 or accrued at September 29, 2007.
The Company files income tax returns in the U.S. federal jurisdiction, various states and Canada.
The Company is no longer subject to examination by U.S. federal income tax authorities for the tax
years 2004 and prior, by state tax authorities for the tax years 2003 and prior, and by Canadian
tax authorities for the tax years 2002 and prior. There are no tax years currently under
examination by U.S. federal, state or Canadian tax authorities.
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In May 2007, the FASB issued Staff Position FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether
a tax position is effectively settled for the purpose of recognizing previously unrecognized tax
benefits. The implementation of this standard did not have an impact on the Companys Consolidated
Financial Statements.
Transcat accounts for certain income and expense items differently for financial reporting purposes
than for income tax reporting purposes. Deferred taxes are provided in recognition of these
temporary differences. A valuation allowance on net deferred tax assets is provided for items for
which it is more likely than not that the benefit of such items will not be realized, in accordance
with the provisions of SFAS No. 109, Accounting for Income Taxes (SFAS 109). SFAS 109 requires
an assessment of both positive and negative evidence when measuring the need for a deferred tax
valuation allowance.
NOTE 4 STOCK-BASED COMPENSATION
Stock Options: In June 2003, the Company adopted the Transcat, Inc. 2003 Incentive Plan
(the 2003 Plan). The 2003 Plan provides for grants of options to directors, officers and key
employees to purchase Common Stock at no less than the fair market value at the date of grant.
Options generally vest ratably over a period of up to four years and expire up to ten years from
the date of grant. Options granted to executive officers during the second quarter of fiscal year
2008 vest using a graded schedule of 0% in the first year, 20% in each of the second and third
years, and 60% in the fourth year. The expense relating to these executive officer options is
recognized on a straight-line basis over the requisite service period for the entire award.
The following table summarizes the Companys options as of and for the first six months ended
September 29, 2007:
Weighted | Weighted Average | |||||||||||||||
Number | Average | Remaining | Aggregate | |||||||||||||
Of | Price Per | Contractual | Intrinsic | |||||||||||||
Shares | Share | Term (in years) | Value | |||||||||||||
Outstanding as of March 31, 2007 |
329 | $ | 3.11 | |||||||||||||
Granted |
392 | 6.94 | ||||||||||||||
Exercised |
(50 | ) | 1.09 | |||||||||||||
Cancelled/Forfeited |
(2 | ) | 1.40 | |||||||||||||
Outstanding as of September 29, 2007 |
669 | 5.51 | 9 | $ | 956 | |||||||||||
Exercisable as of September 29, 2007 |
194 | 3.01 | 7 | $ | 668 | |||||||||||
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value
(the difference between the Companys closing stock price on the last trading day of the second
quarter of fiscal year 2008 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 option holders exercised their
options on September 29, 2007. The amount of aggregate intrinsic value will change based on the
fair market value of the Companys stock.
Total unrecognized compensation cost related to non-vested stock options as of September 29, 2007
was $1.6 million, which is expected to be recognized over a weighted average period of 2 years.
The aggregate intrinsic value of stock options exercised during the first six months of fiscal year
2008 was $0.3 million. Cash received from the exercise of options was less than $0.1 million
during the first six months of fiscal year 2008.
Warrants: Under the Directors Warrant Plan, as amended, warrants have been granted to
non-employee directors to purchase Common Stock at the fair market value at the date of grant.
Warrants vest over a period of three or four years and expire in five years from the date of grant.
The following table summarizes warrants as of and for the first six months ended September 29,
2007:
Weighted | Weighted Average | |||||||||||||||
Number | Average | Remaining | Aggregate | |||||||||||||
Of | Price Per | Contractual | Intrinsic | |||||||||||||
Shares | Share | Term (in years) | Value | |||||||||||||
Outstanding as of March 31, 2007 |
153 | $ | 3.27 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(43 | ) | 1.81 | |||||||||||||
Cancelled/Forfeited |
(3 | ) | 5.10 | |||||||||||||
Outstanding as of September 29, 2007 |
107 | 3.81 | 2 | $ | 284 | |||||||||||
Exercisable as of September 29, 2007 |
81 | 3.38 | 2 | $ | 248 | |||||||||||
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The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value
(the difference between the Companys closing stock price on the last trading day of the second
quarter of fiscal year 2008 and the exercise price, multiplied by the number of in-the-money
warrants) that would have been received by the warrant holders had all warrant holders exercised
their warrants on September 29, 2007. The amount of aggregate intrinsic value will change based on
the fair market value of the Companys stock.
Total unrecognized compensation cost related to non-vested warrants as of September 29, 2007 was
$0.1 million, which is expected to be recognized over a weighted average period of 1 year. The
aggregate intrinsic value of warrants exercised during the first six months of fiscal year 2008 was
$0.2 million. Cash received from the exercise of warrants was $0.1 million during the first six
months of fiscal year 2008.
As of March 31, 2007, all warrants authorized for issuance pursuant to the Directors Warrant Plan
had been granted. Warrants outstanding on September 29, 2007 continue to vest and be exercisable
in accordance with the terms of the Directors Warrant Plan. In August 2006, the Companys
shareholders approved an amendment to the 2003 Plan permitting directors to participate. During
the second quarter of fiscal year 2008, 36 options were granted to directors and are included in
the option table above.
NOTE 5 SEGMENT INFORMATION
Transcat has two reportable segments: Distribution Products (Product) and Calibration Services
(Service). The Company has no inter-segment sales. The following table presents segment
information for the second quarter and the six months ended September 29, 2007 and September 23,
2006:
Second Quarter Ended | Six Months Ended | |||||||||||||||
September 29, | September 23, | September 29, | September 23, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Net Sales: |
||||||||||||||||
Product |
$ | 11,219 | $ | 9,880 | $ | 22,146 | $ | 20,417 | ||||||||
Service |
5,406 | 4,980 | 10,669 | 9,963 | ||||||||||||
Total |
16,625 | 14,860 | 32,815 | 30,380 | ||||||||||||
Gross Profit: |
||||||||||||||||
Product |
3,132 | 2,465 | 6,194 | 5,173 | ||||||||||||
Service |
1,130 | 1,083 | 2,307 | 2,235 | ||||||||||||
Total |
4,262 | 3,548 | 8,501 | 7,408 | ||||||||||||
Operating Expenses: |
||||||||||||||||
Product |
2,209 | 1,856 | 4,558 | 3,962 | ||||||||||||
Service |
1,459 | 1,173 | 2,900 | 2,590 | ||||||||||||
Total |
3,668 | 3,029 | 7,458 | 6,552 | ||||||||||||
Operating Income |
594 | 519 | 1,043 | 856 | ||||||||||||
Unallocated Amounts: |
||||||||||||||||
Other Expense |
238 | 136 | 353 | 304 | ||||||||||||
Provision for Income Taxes |
162 | 137 | 258 | 189 | ||||||||||||
Total |
400 | 273 | 611 | 493 | ||||||||||||
Net Income |
$ | 194 | $ | 246 | $ | 432 | $ | 363 | ||||||||
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements. This report and, in particular, the Managements Discussion and
Analysis of Financial Condition and Results of Operations section of this report, contains
forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.
These include statements concerning expectations, estimates, and projections about the industry,
management beliefs and assumptions of Transcat, Inc. (Transcat, we, us, or our). Words
such as anticipates, expects, intends, plans, believes, seeks, estimates, and
variations of such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to forecast. Therefore, our actual results
may materially differ from those expressed or forecasted in any such forward-looking statements.
When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary
statements elsewhere in this report and in any documents incorporated herein by reference. New
risks and uncertainties arise from time to time and we cannot predict those events or how they may
affect us. For a more detailed discussion of the risks and uncertainties that may affect
Transcats operating and financial results and its ability to achieve its financial objectives,
interested parties should review the Risk Factors sections in Transcats reports filed with the
Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year
ended March 31, 2007. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Rounding. Certain percentages may vary depending on the basis used for the calculation, such as
dollars in thousands or dollars in millions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounts Receivable: Accounts receivable represent receivables from customers in the ordinary
course of business. These amounts are recorded net of the allowance for doubtful accounts and
returns in our Consolidated Balance Sheets. The allowance for doubtful accounts is based upon the
expected collectibility of accounts receivable. We apply a specific formula to our accounts
receivable aging, which may be adjusted on a specific account basis where the specific formula may
not appropriately reserve for loss exposure. After all attempts to collect a receivable have
failed, the receivable is written-off against the allowance for doubtful accounts. The returns
reserve is calculated based upon the historical rate of returns applied to sales over a specific
timeframe. The returns reserve will increase or decrease as a result of changes in the level of
sales and/or the historical rate of returns.
Stock-Based Compensation: In accordance with Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, we measure the cost of services received in exchange for all
equity awards granted, including stock options, warrants and restricted stock, based on the fair
market value of the award as of the grant date. We use the modified prospective application method
to record compensation cost related to unvested stock awards as of March 25, 2006 by recognizing
the unamortized grant date fair value of these awards over the remaining service periods of those
awards with no change in historical reported earnings. Awards granted after March 25, 2006 are
valued at fair value and are recognized on a straight line basis over the service periods of each
award. Excess tax benefits from the exercise of stock awards are presented in the consolidated
statements of cash flows as a financing activity. 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. We did not have any stock-based compensation costs capitalized
as part of an asset. We estimate forfeiture rates based on our historical experience.
Options granted to executive officers during the second quarter of fiscal year 2008 vest using a
graded schedule of 0% in the first year, 20% in each of the second and third years, and 60% in the
fourth year. In previous years, options granted to executive officers vested ratably over three
years. We are recognizing the expense relating to all executive officer options on a
straight-line basis over the requisite service period for the entire award.
Revenue Recognition: Sales are recorded when products are shipped or services are rendered to
customers. Since we generally have no significant post delivery obligations, our prices are fixed
and determinable, collection of the resulting receivable is probable, and returns are reasonably
estimated. Provisions for customer returns are provided for in the period the related sales are
recorded based upon historical data. We recognize the majority of our service revenue based upon
when the calibration or repair activity is performed then shipped and/or delivered to the customer.
Some of our service revenue is generated from managing customers calibration programs in which we
recognize revenue in equal amounts at fixed intervals. Our shipments are generally free on board
shipping point and our customers are generally invoiced for freight, shipping, and handling
charges.
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RESULTS OF OPERATIONS
The following table sets forth, for the second quarter and the first six months of fiscal years
2008 and 2007, the components of our Consolidated Statements of Operations as a percentage of our
net sales (calculated on dollars in thousands).
(Unaudited) | (Unaudited) | |||||||||||||||
Second Quarter Ended | Six Months Ended | |||||||||||||||
September 29, | September 23, | September 29, | September 23, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
As a Percentage of Net Sales: |
||||||||||||||||
Product Sales |
67.5 | % | 66.5 | % | 67.5 | % | 67.2 | % | ||||||||
Service Sales |
32.5 | % | 33.5 | % | 32.5 | % | 32.8 | % | ||||||||
Net Sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Product Gross Profit |
27.9 | % | 24.9 | % | 28.0 | % | 25.3 | % | ||||||||
Service Gross Profit |
20.9 | % | 21.7 | % | 21.6 | % | 22.4 | % | ||||||||
Total Gross Profit |
25.6 | % | 23.9 | % | 25.9 | % | 24.4 | % | ||||||||
Selling, Marketing and Warehouse Expenses |
11.5 | % | 12.2 | % | 12.6 | % | 13.0 | % | ||||||||
Administrative Expenses |
10.5 | % | 8.2 | % | 10.2 | % | 8.6 | % | ||||||||
Total Operating Expenses |
22.0 | % | 20.4 | % | 22.8 | % | 21.6 | % | ||||||||
Operating Income |
3.6 | % | 3.5 | % | 3.1 | % | 2.8 | % | ||||||||
Interest Expense |
0.2 | % | 0.6 | % | 0.2 | % | 0.6 | % | ||||||||
Other Expense |
1.3 | % | 0.3 | % | 0.9 | % | 0.4 | % | ||||||||
Total Other Expense |
1.5 | % | 0.9 | % | 1.1 | % | 1.0 | % | ||||||||
Income Before Income Taxes |
2.1 | % | 2.6 | % | 2.0 | % | 1.8 | % | ||||||||
Provision for Income Taxes |
1.0 | % | 0.9 | % | 0.8 | % | 0.6 | % | ||||||||
Net Income |
1.1 | % | 1.7 | % | 1.2 | % | 1.2 | % | ||||||||
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SECOND QUARTER ENDED SEPTEMBER 29, 2007 COMPARED TO SECOND QUARTER ENDED SEPTEMBER 23, 2006
(dollars in millions):
Sales:
Second Quarter Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Net Sales: |
||||||||
Product |
$ | 11.2 | $ | 9.9 | ||||
Service |
5.4 | 5.0 | ||||||
Total |
$ | 16.6 | $ | 14.9 | ||||
Net sales
increased $1.7 million, or 11.4% (calculated on dollars in
millions), from the second
quarter of fiscal year 2007 to the second quarter of fiscal year 2008.
Our distribution products net sales results, which accounted for 67.5% of our sales in the second
quarter of fiscal year 2008 and 66.5% of our sales in the second quarter of fiscal year 2007
(calculated on dollars in thousands), reflect 15.8% year-over-year growth in our direct sales channel (calculated
on dollars in thousands) as a result of increased customer response to our sales and marketing
activities including orders placed through our transcat.com website. For the same time period, our
indirect channel experienced year-over-year sales growth of approximately 1.0%, which exceeded our
expectation of a decline in product sales through our indirect channel as a result of reduced
discounting and a more disciplined pricing structure. Our fiscal years 2008 and 2007 product sales
in relation to prior fiscal year quarter comparisons, is as follows (calculated on dollars in
millions):
FY 2008 | FY 2007 | |||||||||||||||||||||||||
Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||||||
Product Sales Growth |
13.1 | % | 3.8 | % | 21.0 | % | 7.0 | % | 5.3 | % | 11.7 | % |
Sales
growth occurred in both U.S. and international markets, while Canadian sales experienced a
slight year-over-year decrease. In addition to the sales growth, our direct channel gross profit
percentage increased 1.5 points as a result of reduced discounting. Within our indirect channel,
we experienced greater profitability despite the aforementioned relatively flat year-over-year
sales. Sales within this channel are driven by volume-based pricing for each customer and our more
disciplined pricing structure, which generated a 5.0 point increase in gross profit percent for our
indirect customers. The following table provides the percentage of net sales and the approximate
gross profit percentage for significant product distribution channels for the second quarter of
fiscal years 2008 and 2007 (calculated on dollars in thousands):
FY 2008 Second Quarter | FY 2007 Second Quarter | ||||||||||||||||
Percent of | Gross | Percent of | Gross | ||||||||||||||
Net Sales | Profit % (1) | Net Sales | Profit % (1) | ||||||||||||||
Direct |
86 | % | 27.1 | % | 85 | % | 25.6 | % | |||||||||
Indirect |
14 | % | 18.0 | % | 15 | % | 13.0 | % | |||||||||
Total |
100 | % | 25.8 | % | 100 | % | 23.7 | % | |||||||||
(1) Calculated as net sales less purchase costs divided by net sales.
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Customer product orders include orders for products that we routinely stock in our inventory,
customized products, and other products ordered less frequently, which we do not stock.
Unshippable product orders are primarily backorders, but also include products that are requested
to be calibrated in our calibration laboratories prior to shipment, orders required to be shipped
complete, and orders required to be shipped at a future date. Our total unshippable product orders
for the second quarter of fiscal year 2008 were $0.4 million lower than the second quarter of
fiscal year 2007. This is mainly a result of two significant product orders that were received at
the end of the second quarter of fiscal year 2007, but were shipped in future quarters as we
awaited the scheduled receipt of the goods from our suppliers. The elimination of these specific
orders from backorder is the key factor for the decrease in the percentage of unshippable product
orders that are backorders from the second quarter of fiscal year 2007 compared to the second
quarter of fiscal year 2008. The following table reflects the percentage of total unshippable
product orders that are backorders at the end of each fiscal quarter and our historical trend of
total unshippable product orders (calculated on dollars in millions):
FY 2008 | FY 2007 | ||||||||||||||||||||||||
Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||
Total Unshippable Orders |
$ | 1.7 | $ | 1.7 | $ | 1.8 | $ | 2.1 | $ | 2.1 | $ | 1.4 | |||||||||||||
% of Unshippable Orders that
Are Backorders |
76.5 | % | 82.4 | % | 88.9 | % | 90.5 | % | 90.5 | % | 78.6 | % |
Calibration services net sales increased $0.4 million, or 8.0% (calculated on dollars in
millions), from the second quarter of fiscal year 2007 to the second quarter of fiscal year 2008.
This increase is primarily attributable to an increase in calibration services provided to our
customers at one of our in-house laboratories or on-site at a customers facility. In addition,
within any quarter, while we may add new customers, we may also have customers from the prior year
whose calibrations may not repeat during the same quarter for any number of factors. Among those
factors are the variations in the timing of customer periodic calibrations on equipment and repair
services, customer capital expenditures and customer outsourcing
decisions. Our fiscal years 2008
and 2007 calibration services sales in relation to prior fiscal year quarter comparisons, is
as follows (calculated on dollars in millions):
FY 2008 | FY 2007 | ||||||||||||||||||||||||
Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||
Service Sales Growth |
8.0 | % | 6.0 | % | 12.7 | % | 4.3 | % | 6.4 | % | 6.4 | % |
Gross Profit:
Second Quarter Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Gross Profit: |
||||||||
Product |
$ | 3.1 | $ | 2.5 | ||||
Service |
1.1 | 1.1 | ||||||
Total |
$ | 4.2 | $ | 3.6 | ||||
Gross profit increased as a percent of net sales from 23.9% in the second quarter of fiscal
year 2007 to 25.6% in the second quarter of fiscal year 2008 (calculated on dollars in thousands).
Distribution products gross profit increased $0.6 million, or 24.0% (calculated on dollars in
millions), from the second quarter of fiscal year 2007 to the second quarter of fiscal year 2008,
primarily attributable to the 13.1% (calculated on dollars in millions) increase in product net
sales. As a percentage of product net sales, product gross profit increased 2.4 points (calculated
on dollars in millions) from 25.3% in the second quarter of fiscal year 2007 to 27.7% in the second
quarter of fiscal year 2008. This was primarily attributable to improved pricing in both our
direct and indirect channels, as well as a slightly increased mix of sales into our direct channel.
Also contributing to the profitability increase is a combination of $0.2 million more in product
purchase rebates achieved and cooperative advertising income received in the second quarter of
fiscal year 2008 compared to the second quarter of fiscal year 2007.
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Our
distribution products gross profit can be impacted by a number of factors that can impact quarterly
comparisons. Among those factors are sales to certain channels that do not support the margins of
our core customer base, periodic rebates on purchases, and cooperative advertising received from
suppliers. The following table reflects the quarterly historical trend of our distribution
products gross profit as a percent of net sales (calculated on dollars in millions):
FY 2008 | FY 2007 | ||||||||||||||||||||||||
Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||
Product Gross Profit % (1)
|
25.5 | % | 25.0 | % | 24.0 | % | 24.0 | % | 23.7 | % | 22.1 | % | |||||||||||||
Other Income (Expense) % (2)
|
2.2 | % | 2.5 | % | 3.6 | % | 3.6 | % | 1.6 | % | 3.6 | % | |||||||||||||
Product Gross Profit %
|
27.7 | % | 27.5 | % | 27.6 | % | 27.6 | % | 25.3 | % | 25.7 | % | |||||||||||||
(1) | Calculated as net sales less purchase costs divided by net sales. | |
(2) | Includes vendor rebates, cooperative advertising income, freight billed to customers, freight expenses, and direct shipping costs. |
Calibration services gross profit dollars remained flat (calculated on dollars in millions)
from the second quarter of fiscal year 2007 to the second quarter of fiscal year 2008. As a
percentage of service net sales, service gross profit decreased 1.6 points (calculated on dollars
in millions) from the second quarter of fiscal year 2007 compared to the second quarter of fiscal year 2008.
Our gross profit percentage for calibration services fluctuates on a quarterly basis due to the
seasonality of our sales (our fiscal fourth quarter is generally our strongest) and the timing of
operating costs associated with our calibration laboratory operations. The following table
reflects the quarterly historical trend of our calibration services gross profit as a percent of
net sales (calculated on dollars in millions):
FY 2008 | FY 2007 | ||||||||||||||||||||||||
Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||
Service Gross Profit %
|
20.4 | % | 22.6 | % | 24.2 | % | 18.4 | % | 22.0 | % | 24.0 | % |
Operating Expenses:
Second Quarter Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Operating Expenses: |
||||||||
Selling, Marketing and Warehouse |
$ | 1.9 | $ | 1.8 | ||||
Administrative |
1.7 | 1.2 | ||||||
Total |
$ | 3.6 | $ | 3.0 | ||||
Operating expenses increased $0.6 million, or 20.0% (calculated on dollars in millions), from
the second quarter of fiscal year 2007 to the second quarter of fiscal year 2008. Operating
expenses as a percent of total net sales increased from 20.4% in the second quarter fiscal year
2007 to 22.0% in the second quarter fiscal year 2008 (calculated on dollars in thousands).
Selling, marketing and warehouse expenses increased $0.1 million, or 5.5% (calculated on dollars in
millions), in support of our sales growth. Administrative expenses increased from $1.2 to $1.7
million from the second quarter of fiscal year 2007 compared to the second quarter of fiscal year 2008 due
primarily to increases in stock-based compensation expense, professional and bank fees and the
timing of bonus accruals.
The increase in stock-based compensation expense was due to an overall increase in options issued,
including 0.1 million shares issued in April 2007 to our CEO; a higher Black-Scholes value for
options issued in the current fiscal year as compared with the value for options issued in the
prior fiscal year; and a change in the vesting of restricted stock. Restricted stock granted
during the second quarter of fiscal year 2008 vested immediately while in previous years, one-half
vested immediately and the remainder vested at the one year anniversary of the date of grant. As a
result, we realized $0.2 million in non-cash stock-based compensation expense relating to the issuance of
restricted stock during the second quarter of fiscal year 2008 compared with $0.1 million during
the second quarter of fiscal year 2007.
Additionally, we will not realize any stock-based compensation
expense in the next three fiscal quarters relating to the restricted
stock issued during the second quarter of fiscal year 2008.
Professional and bank fees increased in the second quarter of fiscal year 2008 due to additional
effort associated with the preparation of our annual proxy statement, which included new
compensation discussion and analysis disclosures, an increase in fees charged by our independent
accountants for audit and tax services, as well as additional credit card charges
15
Table of Contents
associated with the growth in sales occurring through our web site. In the second quarter of
fiscal year 2008, we met our bonus objectives and, therefore, accrued a pro rata portion of the
annual bonus target pay out, compared to the second quarter of fiscal year 2007, when we did not
meet our bonus objectives and, therefore, did not accrue any bonus expense.
The aggregate effect of increases in our stock-based compensation expense, professional and bank
fees and the timing of bonus accruals was approximately $0.4 million for the second quarter of
fiscal year 2008. The remainder of the increase in administrative expenses was due to general
increases in employee-related expenses, including benefits.
For the second half of fiscal year 2008, we expect administrative expenses as a percentage of net
sales to be consistent with the fiscal year 2007 full year percentage of approximately 9.0%.
Other Expense:
Second Quarter Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Other Expense: |
||||||||
Interest Expense |
$ | | $ | 0.1 | ||||
Other Expense |
0.2 | | ||||||
Total |
$ | 0.2 | $ | 0.1 | ||||
Interest expense decreased $0.1 million from the second quarter of fiscal year 2007 to the
second quarter of fiscal year 2008 as a result of our reduced debt. Other expense increased $0.2
million from the second quarter of fiscal year 2007 to the second
quarter of fiscal year 2008. This increase was primarily attributable to net losses relating to foreign currency transactions
resulting from an appreciation of the Canadian dollar compared to the U.S. dollar of 7.1% during
the second quarter of fiscal year 2008.
Taxes:
Second Quarter Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Provision for Income Taxes |
$ | 0.2 | $ | 0.1 |
In the second quarter of fiscal year 2008, we recognized a $0.2 million provision for income
taxes, compared to a $0.1 million provision in the second quarter of fiscal year 2007. The
increase in our effective tax rate was primarily due to permanent differences. We continue to
evaluate our tax provision on a quarterly basis and make adjustments, as deemed necessary, to our
effective tax rate given changes in facts and circumstances expected for the entire fiscal year.
When calculating income tax expense, we recognize valuation allowances for deferred tax assets,
which may not be realized, using a more likely than not approach.
Other Comprehensive Income:
Second Quarter Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Other Comprehensive Income |
$ | 0.3 | $ | |
Other comprehensive income increased $0.3 million from the second quarter of fiscal year 2007
to the second quarter of fiscal year 2008. This increase was primarily attributable to income relating
to our foreign currency translation resulting from an appreciation of the Canadian dollar compared
to the U.S. dollar of 7.1% during the second quarter of fiscal year 2008.
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SIX
MONTHS ENDED SEPTEMBER 29, 2007 COMPARED TO SIX MONTHS ENDED
SEPTEMBER 23, 2006
(dollars in millions):
(dollars in millions):
Sales:
Six Months Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Net Sales: |
||||||||
Product |
$ | 22.1 | $ | 20.4 | ||||
Service |
10.7 | 10.0 | ||||||
Total |
$ | 32.8 | $ | 30.4 | ||||
Net sales
increased $2.4 million, or 7.9% (calculated on dollars in
millions), from the first
six months of fiscal year 2007 to the first six months of fiscal year 2008.
Our distribution products net sales results, which accounted for 67.5% of our sales in the first
six months of fiscal year 2008 and 67.2% of our sales in the first six months of fiscal year 2007
(calculated on dollars in thousands), reflect 11.5% year-over-year growth in our direct sales channel (calculated
on dollars in thousands) as a result of increased customer response to our sales and marketing activities
including orders placed through our transcat.com website.
Distribution product net sales have increased 8.3% (calculated on dollars in millions) for the
first six months of fiscal year 2008 compared to the first six months of fiscal year 2007. This is
a result of growth in both U.S. and international sales, while
Canadian sales remained flat
year-over-year. In addition to the sales growth, our direct channel gross profit percent increased
1.5 points as a result of reduced discounting. Within our indirect channel, we experienced a 25.6%
increase in profitability despite a sales decrease of 7.1% (calculated on dollars in thousands).
Sales within this channel are driven by volume-based pricing for each customer and our more
disciplined pricing structure, which generated a 4.4 point increase in gross profit percent for our
indirect customers and a 3.0 point decline in indirect sales as a percent of total product sales.
Our fiscal years 2008 and 2007 product sales in relation to prior fiscal year first six months
comparisons, is as follows (calculated on dollars in millions):
Six Months Ended | Six Months Ended | ||||||||||||||||
September 29, 2007 | September 23, 2006 | ||||||||||||||||
Percent of | Gross | Percent of | Gross | ||||||||||||||
Net Sales | Profit % (1) | Net Sales | Profit % (1) | ||||||||||||||
Direct |
86 | % | 26.6 | % | 83 | % | 25.1 | % | |||||||||
Indirect |
14 | % | 16.9 | % | 17 | % | 12.5 | % | |||||||||
Total |
100 | % | 25.2 | % | 100 | % | 23.0 | % | |||||||||
(1) | Calculated at net sales less purchase costs divided by net sales. |
Calibration services net sales increased $0.7 million, or 7.0% (calculated on dollars in
millions), from the first six months of fiscal year 2007 to the first six months of fiscal year
2008. This increase is primarily attributable to an increase in calibration services provided to
our customers at one of our in-house laboratories or on-site at a customers facility. In
addition, within any six month period, while we may add new customers, we may also have customers
from the prior year whose calibrations may not repeat during the same period for any number of
factors. Among those factors are the variations in the timing of customer periodic calibrations on
equipment and repair services, customer capital expenditures and customer outsourcing decisions.
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Table of Contents
Gross Profit:
Six Months Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Gross Profit: |
||||||||
Product |
$ | 6.2 | $ | 5.2 | ||||
Service |
2.3 | 2.2 | ||||||
Total |
$ | 8.5 | $ | 7.4 | ||||
Gross profit increased as a percent of net sales from 24.4% in the first six months of fiscal
year 2007 to 25.9% in the first six months of fiscal year 2008 (calculated on dollars in
thousands).
Distribution
products gross profit increased $1.0 million, or 19.2%
(calculated on dollars in millions), from the
first six months of fiscal year 2007 to the first six months of fiscal year 2008, primarily because
of the aforementioned 8.3% (calculated on dollars in millions) increase in product net sales. As a
percent of product net sales, product gross profit increased 2.7 points (calculated on dollars in
thousands) from the first six months of fiscal year 2007 to the first six months of fiscal year
2008. This is primarily attributable to a declining mix of sales into our less profitable indirect
channel, improved pricing programs, and a combination of $0.2 million more in rebates achieved and
cooperative advertising income received in the first half of fiscal
year 2008 compared to the
first half of fiscal year 2007.
Calibration services gross profit increased $0.1 million, or 4.5% (calculated on dollars in
millions). As a percent of calibration services sales, calibration gross profit decreased 0.8
points (calculated on dollars in thousands) from the first six months of fiscal year 2007 compared
to the first six months of fiscal year 2008. This percentage decrease is primarily attributed to
$0.1 million increase in bonus and profit sharing related expense in the first half of fiscal year
2008, compared to none in the first half of fiscal year 2007.
Operating Expenses:
Six Months Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Operating Expenses: |
||||||||
Selling, Marketing and Warehouse |
$ | 4.1 | $ | 3.9 | ||||
Administrative |
3.3 | 2.6 | ||||||
Total |
$ | 7.4 | $ | 6.5 | ||||
Operating expenses increased $0.9 million, or 13.8% (calculated on dollars in millions), from
the first six months of fiscal year 2007 to the first six months of fiscal year 2008. Selling,
marketing and warehouse expenses increased $0.2 million, or 5.1%
(calculated on dollars in millions), primarily in support of revenue
growth initiatives. Administrative expenses increased
from $2.6 to $3.3 million from the first six months of fiscal
year 2007 compared to the first six months of
fiscal year 2008 due primarily to increases in stock-based compensation expense, professional and
bank fees and the timing of bonus accruals.
The increase in stock-based compensation expense was due to an overall increase in options issued,
including 0.1 million shares issued in April 2007 to our CEO; a higher Black-Scholes value for
options issued in the current fiscal year as compared with the value for options issued in the
prior fiscal year; and a change in the vesting of restricted stock issued. Restricted stock
granted during the first six months of fiscal year 2008 vested immediately while in previous years,
one-half vested immediately and the remainder vested at the one year anniversary of the date of
grant. As a result, we realized $0.2 million in non-cash stock-based compensation expense related to the
issuance of restricted stock during the first six months of fiscal year 2008 compared with $0.1
million during the first six months of fiscal year 2007.
Additionally, we will not realize any stock-based compensation
expense in the next three fiscal quarters relating to the restricted
stock issued during the second quarter of fiscal year 2008.
Professional and bank fees increased in the first six months of fiscal year 2008 due to additional
effort associated with the preparation of our annual proxy statement, which included new
compensation discussion and analysis disclosures, an increase in fees charged by our independent
accountants for audit and tax services, as well as additional credit card charges associated with
the growth in sales occurring through our web site. In the first six months of fiscal year 2008,
we met our bonus objectives and, therefore, accrued a pro rata portion of the annual bonus target
pay out compared to the first six months of fiscal year 2007, when we did not meet our bonus
objectives and, therefore, did not accrue any bonus expense.
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Table of Contents
The aggregate effect of increases in our stock-based compensation expense, professional and bank
fees and the timing of bonus accruals was approximately $0.5 million for the first six months of
fiscal year 2008. The remainder of the increase in administrative expenses was due to general
increases in employee-related expenses, including benefits.
For the second half of fiscal year 2008, we expect administrative expenses as a percentage of net
sales to be consistent with the fiscal year 2007 full year percentage of approximately 9.0%.
Other Expense:
Six Months Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Other Expense: |
||||||||
Interest Expense |
$ | 0.1 | $ | 0.2 | ||||
Other Expense |
0.3 | 0.1 | ||||||
Total |
$ | 0.4 | $ | 0.3 | ||||
Interest expense decreased $0.1 million from the first six months of fiscal year 2007 to the
first six months of fiscal year 2008 as a result of our reduced debt. Other expense increased $0.2
million from the first half of fiscal year 2007 to the first half of
fiscal year 2008. This increase was primarily
attributable to net losses relating to foreign currency transactions resulting from
an appreciation of the Canadian dollar compared to the U.S. dollar of 16.1% during the first six
months of fiscal year 2008.
Taxes:
Six Months Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Provision for Income Taxes |
$ | 0.3 | $ | 0.2 |
In the first half of fiscal year 2008, we recognized a $0.3 million provision for income
taxes, compared to a $0.2 million provision in the first half of fiscal year 2007, as a result of a
$0.1 million increase in our Income Before Taxes and an increase in our effective tax rate due to
permanent differences. We continue to evaluate our tax provision on a quarterly basis and make
adjustments, as deemed necessary, to our effective tax rate given changes in facts and
circumstances expected for the entire fiscal year. When calculating income tax expense, we
recognize valuation allowances for deferred tax assets, which may not be realized, using a more
likely than not approach.
Other Comprehensive Income:
Six Months Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Other Comprehensive Income |
$ | 0.5 | $ | 0.1 |
Other comprehensive income increased $0.4 million from the first six months of fiscal year
2007 compared to the first six months of fiscal year 2008. This
increase was primarily attributable to income relating to our foreign currency translation resulting from an appreciation of the Canadian
dollar compared to the U.S. dollar of 16.1% during the first six months of fiscal year 2008.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. The following table is a summary of our Consolidated Statements of Cash Flows (in
thousands):
Six Months Ended | ||||||||
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Cash (Used in) Provided by: |
||||||||
Operating Activities |
$ | 2,222 | $ | 467 | ||||
Investing Activities |
(999 | ) | (454 | ) | ||||
Financing Activities |
(1,407 | ) | (35 | ) |
Operating Activities:
Cash provided by operating activities for the first six months of fiscal year 2008 was $2.2
million, an increase of approximately $1.7 million (calculated on millions of dollars) when
compared to the $0.5 million of cash provided by operating activities in the first six months of
fiscal year 2007. This is mainly attributable to an approximate $0.8 million increase in cash
provided by inventory reductions, $0.4 million more cash provided by receivables reductions, and
$0.3 million reduction in cash used in accrued payrolls and commissions in the first six months of
fiscal year 2008 compared to the first six months of fiscal year 2007. Significant working
capital fluctuations were as follows:
| Inventory/Accounts Payable: Our inventory of $3.7 million on September 29, 2007 is $0.6 million less than our fiscal year 2007 year-end inventory on March 31, 2007 and $0.3 million less than the inventory level on September 23, 2006. The year-over-year decrease is due to refined inventory ordering models and increased focus on lower inventory levels while maintaining consistently high order fulfillment rates. Our $1.6 million increase in accounts payable, as the following table illustrates (dollars in millions), is primarily the result of the timing of payments and inventory purchases made in support of the high quarter-end sales volume during the second quarter of fiscal year 2008: |
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Accounts Payable |
$ | 5.4 | $ | 3.8 | ||||
Inventory, net |
$ | 3.7 | $ | 4.0 | ||||
Accounts Payable/Inventory Ratio |
1.46 | 0.95 |
| Receivables: The increase in our accounts receivable at the end of our second quarter of fiscal year 2008 compared to the end of the second quarter of fiscal year 2007 is primarily due to sales growth in our fiscal year 2008 second quarter. We have continued to maintain strong collections on our accounts receivable, reflected in our days sales outstanding, as the following table illustrates (dollars in millions): |
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Net Sales, for the last two fiscal months |
$ | 12.0 | $ | 10.4 | ||||
Accounts Receivable, net |
$ | 7.9 | $ | 7.1 | ||||
Days Sales Outstanding (based on 60 days) |
40 | 41 |
Investing Activities: The $1.0 million of cash used in investing activities during the first
six months of fiscal year 2008, an increase of $0.5 million (calculated on millions of dollars)
when compared to the first six months of fiscal year 2007, was primarily the result of capital
expenditures incurred in connection with the expansion of our capabilities within our calibration
laboratories.
Financing Activities: The $2.9 million decrease in our overall debt, as shown in the table below
(dollars in millions), is the result of the $4.4 million of cash provided by operating activities
during the last six months of fiscal year 2007 and the first six months of fiscal year 2008. See
Note 2 of our Consolidated Financial Statements in this report for further information regarding
our debt.
September 29, | September 23, | |||||||
2007 | 2006 | |||||||
Total Debt |
$ | 1.3 | $ | 4.2 | ||||
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Debt. On November 21, 2006, we entered into a Credit Agreement (the Chase Credit
Agreement) with JPMorgan Chase Bank, N.A. The Chase Credit Agreement provides for a three-year
revolving credit facility in the amount of $10 million. The Chase Credit Agreement replaced our
Amended and Restated Loan and Security Agreement dated November 1, 2004, as further amended, with
GMAC Commercial Finance LLC.
The Chase Credit Agreement has certain covenants with which we must comply, including a fixed
charge ratio covenant and a leverage ratio covenant. We were in compliance with all loan covenants
and requirements throughout the first six months of fiscal year 2008. We expect to meet the
covenants on an on-going basis.
See Note 2 of our Consolidated Financial Statements in this report for more information on our
debt. See Item 3, Quantitative and Qualitative Disclosures about
Market Risk, in this report for a
discussion of interest rates on our debt.
OUTLOOK
During the first half of fiscal year 2008, we experienced sales increases in both our Distribution
Products and Calibration Services segments. We expect continued growth for the balance of fiscal
year 2008, with a sustained increase in operating earnings (excluding the one-time deferred gain of
$1.5 million which was recognized in the fiscal year 2007 third quarter) and continued strong cash
flow.
Within our Distribution Products segment, we expect net sales within our direct channel to continue
to grow in the low double-digit range on a year-over-year basis. At the same time, we anticipate
that sales in our indirect channel may be flat or decline slightly when compared to the prior year.
Overall, we expect our Distribution Products gross profit margins for the remainder of fiscal
year 2008 to be consistent with those reported for the first half of fiscal year 2008.
During the first six months of fiscal year 2008, laboratory expenses grew at a faster rate than net
sales. However, we expect growth in our Calibration Services net sales to increase at a faster rate than
laboratory costs in the second half of fiscal year 2008 with a corresponding increase in gross
profit percentage.
For the second half of fiscal year 2008, we expect administrative expenses as a percentage of net
sales to be consistent with the fiscal year 2007 full year percentage of approximately 9.0%.
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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 less
than $0.1 million assuming our average-borrowing levels remained constant. On September 29, 2007
and September 23, 2006, we had no hedging arrangements in place to limit our exposure to upward
movements in interest rates.
Under our Chase Credit Agreement described in Note 2 of our Consolidated Financial Statements in
this report, interest is adjusted on a quarterly basis based upon our calculated leverage ratio.
The base rate, as defined in the Chase Credit Agreement, and the London Interbank Offered Rate as
of September 29, 2007 were 7.8% and 5.1%, respectively. Our interest rate for the first six months
of fiscal year 2008 ranged from 5.8% to 7.6%.
FOREIGN CURRENCY
Approximately 90% of our net sales for the six months ended September 29, 2007 and September 23,
2006 were denominated in United States dollars, with the remainder denominated in Canadian dollars.
A 10% change in the value of the Canadian dollar to the United States dollar would impact our net
sales by approximately 1%. We monitor the relationship between the United States and Canadian
currencies on a continuous basis and adjust sales prices for products and services sold in Canadian
dollars as we believe to be appropriate. On September 29, 2007 and September 23, 2006, we had no
hedging arrangements in place to limit our exposure to foreign currency fluctuations.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer, President and
Chief Operating Officer (our principal executive officer) and our Vice President of Finance and
Chief Financial Officer (our principal financial officer) evaluated our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period
covered by this quarterly report. Based on this evaluation, our Chief Executive Officer, President
and Chief Operating Officer and our Vice President of Finance and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of such date.
(b) Changes in Internal Controls 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 second fiscal quarter) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 21, 2007, our shareholders voted on the proposals set forth below at the annual meeting.
Proposal 1:
Charles P. Hadeed, Nancy D. Hessler and Paul D. Moore were elected as directors of the Company,
each to serve until the annual meeting of shareholders to be held in 2010. The number of shares
that voted for the election of each director nominee and the number of shares that withheld
authority to vote for each director nominee are as follows:
Nominees | Votes For | Votes Withheld | ||||||
Charles P. Hadeed |
6,775,888 | 21,110 | ||||||
Nancy D. Hessler |
6,771,936 | 25,062 | ||||||
Paul D. Moore |
6,772,241 | 24,757 |
The other directors, whose terms of office continued after the meeting, are Francis R. Bradley, E.
Lee Garelick, Richard J. Harrison, Cornelius J. Murphy, Harvey J. Palmer, John T. Smith, Alan H.
Resnick and Carl E. Sassano.
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In a
letter dated October 23, 2007, Cornelius J. Murphy, age 77, informed the Company of his
voluntary resignation from the board of directors after 16 years of service on the board, effective
as of October 23, 2007. There were no disagreements between Mr. Murphy and the Company on any matter relating to the Companys operations, policies or
practices that resulted in Mr. Murphys resignation. Mr. Murphys term as a director was scheduled
to expire at the 2009 annual meeting of shareholders. The vacancy created by Mr. Murphys
resignation will remain open until a candidate that meets the criteria established by the corporate
governance and nominating committee is identified and elected.
Proposal 2:
The amendment to the Transcat, Inc. Code of Regulations (or bylaws) to permit the issuance of
uncertificated shares was approved. The number of shares that voted for, against and abstained
from voting on this proposal are as follows:
Votes For: |
6,575,588 | |||
Votes Against: |
146,567 | |||
Votes Abstained: |
74,842 | |||
Broker Non-Votes |
|
Proposal 3:
The selection of BDO Seidman, LLP as the Companys independent auditors for the fiscal year ending
March 29, 2008 was ratified. The number of shares that voted for, against and abstained from
voting on this proposal are as follows:
Votes For: |
6,767,630 | |||
Votes Against: |
22,938 | |||
Votes Abstained: |
6,429 | |||
Broker Non-Votes: |
|
ITEM 6. EXHIBITS
See Index to Exhibits.
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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: November 9, 2007
|
/s/ Charles P. Hadded | |||
Charles P. Hadeed | ||||
Chief Executive Officer, President and Chief Operating Officer | ||||
Date: November 9, 2007
|
/s/ John J. Zimmer | |||
John J. Zimmer | ||||
Vice President of Finance and Chief Financial Officer |
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