TRANSCAT INC - Quarter Report: 2021 June (Form 10-Q)

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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)