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TRNS Transcat

Filed: 3 Feb 21, 4:00pm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________

FORM 10-Q

(Mark one)

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

 

For the quarterly period ended: December 26, 2020

 

or

 

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

 

For the transition period from __________ to __________

Commission File Number: 000-03905

TRANSCAT, INC.

(Exact name of registrant as specified in its charter)

Ohio

16-0874418

(State or other jurisdiction of

incorporation or organization)

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

 

35 Vantage Point Drive, Rochester, New York 14624

(Address of principal executive offices) (Zip Code)

 

(585) 352-7777

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.50 par value

TRNS

Nasdaq Global Market

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

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

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

 

Large accelerated filer ☐

 

 

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

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

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

The number of shares of common stock, par value $0.50 per share, of the registrant outstanding as of January 29, 2021 was 7,445,797.


Table of Contents

Page(s)

PART I.FINANCIAL INFORMATION

Item 1.Consolidated Financial Statements:

Statements of Income for the Third Quarter and Nine Months Ended December 26, 2020 and December 28, 2019

1

Statements of Comprehensive Income for the Third Quarter and Nine Months Ended December 26, 2020 and December 28, 2019

2

Balance Sheets as of December 26, 2020 and March 28, 2020

3

Statements of Cash Flows for the Nine Months Ended December 26, 2020 and December 28, 2019

4

Statements of Shareholders’ Equity for the Third Quarter and Nine Months Ended December 26, 2020 and December 28, 2019

5

Notes to Consolidated Financial Statements

7

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.Quantitative and Qualitative Disclosures about Market Risk

25

Item 4.Controls and Procedures

26

PART II.OTHER INFORMATION

Item 6.Exhibits

26

SIGNATURES

27


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

(Unaudited)

Third Quarter Ended

Nine Months Ended

December 26,

December 28,

December 26,

December 28,

2020

2019

2020

2019

 

Service Revenue

$

24,776

$

22,087

$

72,297

$

67,987

Distribution Sales

19,286

21,092

52,276

59,350

Total Revenue

44,062

43,179

124,573

127,337

 

Cost of Service Revenue

17,861

17,221

51,413

51,737

Cost of Distribution Sales

14,956

16,030

41,012

45,175

Total Cost of Revenue

32,817

33,251

92,425

96,912

 

Gross Profit

11,245

9,928

32,148

30,425

 

Selling, Marketing and Warehouse Expenses

4,675

4,463

13,040

13,166

General and Administrative Expenses

4,051

3,374

12,547

10,151

Total Operating Expenses

8,726

7,837

25,587

23,317

 

Operating Income

2,519

2,091

6,561

7,108

 

Interest and Other Expense, net

219

194

779

776

 

Income Before Income Taxes

2,300

1,897

5,782

6,332

Provision for Income Taxes

539

420

1,199

758

 

Net Income

$

1,761

$

1,477

$

4,583

$

5,574

 

Basic Earnings Per Share

$

0.24

$

0.20

$

0.62

$

0.76

Average Shares Outstanding

7,437

7,367

7,415

7,316

 

Diluted Earnings Per Share

$

0.23

$

0.20

$

0.61

$

0.75

Average Shares Outstanding

7,580

7,557

7,532

7,470

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

(Unaudited)

Third Quarter Ended

Nine Months Ended

December 26,

December 28,

December 26,

December 28,

2020

2019

2020

2019

 

Net Income

$

1,761

$

1,477

$

4,583

$

5,574

 

Other Comprehensive Income:

Currency Translation Adjustment

251

73

505

119

Other, net of tax effects

21

22

95

48

Total Other Comprehensive Income

272

95

600

167

 

Comprehensive Income

$

2,033

$

1,572

$

5,183

$

5,741

See accompanying notes to consolidated financial statements.

2


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TRANSCAT, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

(Audited)

December 26,

March 28,

2020

2020

ASSETS

Current Assets:

Cash

$

1,034

$

499

Accounts Receivable, less allowance for doubtful accounts of $640 and $480 as of December 26, 2020 and March 28, 2020, respectively

30,562

30,952

Other Receivables

860

1,132

Inventory, net

12,437

14,180

Prepaid Expenses and Other Current Assets

2,317

1,697

Total Current Assets

47,210

48,460

Property and Equipment, net

21,292

20,833

Goodwill

43,945

41,540

Intangible Assets, net

7,325

7,977

Right Of Use Assets, net

10,205

8,593

Other Assets

793

719

Total Assets

$

130,770

$

128,122

 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

Accounts Payable

$

9,844

$

11,947

Accrued Compensation and Other Liabilities

7,856

6,907

Income Taxes Payable

289

86

Current Portion of Long-Term Debt

2,046

1,982

Total Current Liabilities

20,035

20,922

Long-Term Debt

22,317

28,362

Deferred Tax Liabilities

3,100

3,025

Lease Liabilities

8,753

6,832

Other Liabilities

4,058

1,894

Total Liabilities

58,263

61,035

 

Shareholders' Equity:

Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,441,571 and 7,381,180 shares issued and outstanding as of December 26, 2020 and March 28, 2020, respectively

3,721

3,691

Capital in Excess of Par Value

18,820

17,929

Accumulated Other Comprehensive Loss

(410

)

(1,010

)

Retained Earnings

50,376

46,477

Total Shareholders' Equity

72,507

67,087

Total Liabilities and Shareholders' Equity

$

130,770

$

128,122

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

Nine Months Ended

December 26,

December 28,

2020

2019

Cash Flows from Operating Activities:

Net Income

$

4,583

$

5,574

Adjustments to Reconcile Net Income to Net Cash

 

Provided by Operating Activities:

 

Net Loss on Disposal of Property and Equipment

65

253

Deferred Income Taxes

75

22

Depreciation and Amortization

5,596

4,951

Provision for Accounts Receivable and Inventory Reserves

699

311

Stock-Based Compensation

875

610

Changes in Assets and Liabilities:

 

Accounts Receivable and Other Receivables

902

398

Inventory

2,072

341

Prepaid Expenses and Other Assets

(678

)

(689

)

Accounts Payable

(2,103

)

(3,679

)

Accrued Compensation and Other Liabilities

3,391

347

 

Income Taxes Payable

170

(204

)

Net Cash Provided by Operating Activities

15,647

8,235

 

Cash Flows from Investing Activities:

Purchases of Property and Equipment

(4,295

)

(5,001

)

Proceeds from Sale of Property and Equipment

0-

184

Business Acquisitions, net of cash acquired

(3,447

)

(452

)

Payment of Holdbacks Related to Business Acquisitions

0-

(864

)

Net Cash Used in Investing Activities

(7,742

)

(6,133

)

 

Cash Flows from Financing Activities:

(Repayments of) Proceeds from Revolving Credit Facility, net

(4,504

)

122

Proceeds from Term Loan

0-

0-

Repayments of Term Loan

(1,477

)

(1,416

)

Issuance of Common Stock

649

1,625

Repurchase of Common Stock

(1,287

)

(2,822

)

Net Cash Used in Financing Activities

(6,619

)

(2,491

)

 

Effect of Exchange Rate Changes on Cash

(751

)

(195

)

 

Net Increase (Decrease) in Cash

535

(584

)

Cash at Beginning of Period

499

788

Cash at End of Period

$

1,034

$

204

 

Supplemental Disclosure of Cash Flow Activity:

Cash paid during the period for:

Interest

$

679

$

723

Income Taxes

$

1,018

$

944

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In Thousands, Except Par Value Amounts)

(Unaudited)

Capital

 

Common Stock

In

Accumulated

 

Issued

Excess

Other

 

$0.50 Par Value

of Par

Comprehensive

Retained

 

Shares

Amount

Value

Loss

Earnings

Total

Balance as of March 30, 2019

7,211

$

3,605

$

16,467

$

(611

)

$

40,169

$

59,630

 

Issuance of Common Stock

28

14

355

-

-

369

 

Repurchase of Common Stock

(55

)

(27

)

(561

)

-

(758

)

(1,346

)

Stock-Based Compensation

120

60

143

-

-

203

 

Other Comprehensive Income

-

-

-

129

-

129

 

Net Income

-

-

-

-

1,718

1,718

 

Balance as of June 29, 2019

7,304

$

3,652

$

16,404

$

(482

)

$

41,129

$

60,703

 

 

Issuance of Common Stock

117

59

944

-

-

1,003

 

Repurchase of Common Stock

(63

)

(32

)

(443

)

-

(1,001

)

(1,476

)

Stock-Based Compensation

-

-

102

-

-

102

 

Other Comprehensive (Loss)

-

-

-

(55

)

-

(55

)

Net Income

-

-

-

-

2,379

2,379

 

Balance as of September 28, 2019

7,358

$

3,679

$

17,007

$

(537

)

$

42,507

$

62,656

 

 

Issuance of Common Stock

18

9

244

-

-

253

 

Stock-Based Compensation

-

-

305

-

-

305

 

Other Comprehensive Income

-

-

-

93

-

93

 

Net Income

-

-

-

-

1,477

1,477

 

Balance as of December 28, 2019

7,376

$

3,688

$

17,556

$

(444

)

$

43,984

$

64,784

 

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In Thousands, Except Par Value Amounts)

(Unaudited)

Capital

 

Common Stock

In

Accumulated

 

Issued

Excess

Other

 

$0.50 Par Value

of Par

Comprehensive

Retained

 

Shares

Amount

Value

Loss

Earnings

Total

Balance as of March 28, 2020

7,381

$

3,691

$

17,929

$

(1,010

)

$

46,477

$

67,087

 

Issuance of Common Stock

28

14

369

-

-

383

 

Repurchase of Common Stock

(48

)

(24

)

(579

)

-

(684

)

(1,287

)

Stock-Based Compensation

50

25

287

-

-

312

 

Other Comprehensive Income

-

-

-

163

-

163

 

Net Income

-

-

-

-

798

798

 

Balance as of June 27, 2020

7,411

$

3,706

$

18,006

$

(847

)

$

46,591

$

67,456

 

 

Issuance of Common Stock

3

1

90

-

-

91

 

Stock-Based Compensation

18

9

357

-

-

366

 

Other Comprehensive Income

-

-

-

165

-

165

 

Net Income

-

-

-

-

2,024

2,024

 

Balance as of September 26, 2020

7,432

$

3,716

$

18,453

$

(682

)

$

48,615

$

70,102

 

 

Issuance of Common Stock

9

5

170

-

-

175

 

Stock-Based Compensation

0-

-

197

-

-

197

 

Other Comprehensive Income

-

-

-

272

-

272

 

Net Income

-

-

-

-

1,761

1,761

 

Balance as of December 26, 2020

7,441

$

3,721

$

18,820

$

(410

)

$

50,376

$

72,507

 

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

NOTE 1 – GENERAL

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

Basis of Presentation: Transcat’s unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 28, 2020 (“fiscal year 2020”) contained in the Company’s 2020 Annual Report on Form 10-K filed with the SEC.

Revenue Recognition: Distribution sales are recorded when an order’s title and risk of loss transfers to the customer. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. The majority of the Company’s revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue over time. Revenue is measured as the amount of consideration the Company expects to receive in exchange for product shipped or services performed. Sales taxes and other taxes billed and collected from customers are excluded from revenue. The Company generally invoices its customers for freight, shipping, and handling charges. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data.

Revenue recognized from prior period performance obligations for the third quarter of the fiscal year ending March 27, 2021 (“fiscal year 2021”) was immaterial. As of December 26, 2020, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”), Revenue from Contracts with Customers (Topic 606), the Company applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of December 26, 2020 and March 28, 2020 were immaterial. Payment terms are generally 30 to 45 days. See Note 4 for disaggregated revenue information.

Fair Value of Financial Instruments: Transcat has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Company to develop its own assumptions. The carrying amount of debt on the Consolidated Balance Sheets approximates fair value due to variable interest rate pricing, and the carrying amounts for cash, accounts receivable and accounts payable approximate fair value due to their short-term nature. Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds and are valued based on Level 1 inputs. At December 26, 2020 and March 28, 2020, investment assets totaled $0.5 million and $0.4 million, respectively, and are included as a component of other assets (non-current) on the Consolidated Balance Sheets.

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Stock-Based Compensation: The Company measures the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. The Company records compensation expense related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period of each award. Excess tax benefits for stock-based award activity are reflected in the Consolidated Statements of Income as a component of the provision for income taxes. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. The Company did not capitalize any stock-based compensation costs as part of an asset. The Company estimates forfeiture rates based on its historical experience. During the first nine months of fiscal year 2021 and fiscal year 2020, the Company recorded non-cash stock-based compensation expense of $0.9 million and $0.6 million, respectively, in the Consolidated Statements of Income.

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

Transcat records foreign currency gains and losses on Canadian business transactions. The net foreign currency loss was less than $0.1 million during the first nine months of each of fiscal years 2021 and 2020. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its earnings will be adversely affected by changes in currency exchange rates. The Company does not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a gain of $0.1 million during the first nine months of fiscal year 2021 and a loss of $0.1 million during the first nine months of fiscal year 2020, 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 December 26, 2020, the Company had a foreign exchange contract, which matured in January 2021, outstanding in the notional amount of $4.5 million. The foreign exchange contract was renewed in January 2021 and continues to be in place. The Company does not use hedging arrangements for speculative purposes.

Earnings Per Share: Basic earnings per share of common stock are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of stock options and unvested restricted stock units using the treasury stock method in periods in which they have a dilutive effect. In computing the per share effect of assumed conversion, funds which would have been received from the exercise of options and unvested restricted stock units and the related tax benefits are considered to have been used to purchase shares of common stock at the average market prices during the period, and the resulting net additional shares of common stock are included in the calculation of average shares of common stock outstanding.

For the third quarter of fiscal year 2021, the net additional common stock equivalents had a ($0.01) effect on the calculation of diluted earnings per share. For the third quarter of fiscal year 2020, the net additional common stock equivalents had 0no effect on the calculation of diluted earnings per share. For the first nine months of each of fiscal years 2021 and 2020, the net additional common stock equivalents had a ($0.01) effect on the calculation of diluted earnings per share. The average shares outstanding used to compute basic and diluted earnings per share are as follows:

Third Quarter Ended

Nine Months Ended

December 26,

December 28,

December 26,

December 28,

2020

2019

2020

2019

Average Shares Outstanding – Basic

7,437

7,367

7,415

7,316

Effect of Dilutive Common Stock Equivalents

143

190

117

154

Average Shares Outstanding – Diluted

7,580

7,557

7,532

7,470

Anti-dilutive Common Stock Equivalents

0-

35

30

35

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Recently Issued Accounting Pronouncements:

Leases: In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC Topic 842), which requires lessees to recognize substantially all leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right of use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

In July 2018, FASB issued ASU 2018-11, Leases (ASC Topic 842), which provides entities with an additional transition method to adopt the new leases standard. Under this method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the prior comparative period's financials will remain the same as those previously presented.

The Company adopted the new leasing standard on March 31, 2019. The Company adopted the package of practical expedients permitted under the transition guidance which allowed us to carry forward the historical lease classification. Upon adoption, the Company used hindsight in determining lease term. The most significant impact of adoption was adding ROU lease assets and lease liabilities on the Consolidated Balance Sheets by the present value of the Company’s leasing obligations, which are primarily related to facility and vehicle leases. The present value of the remaining lease payments is recognized as lease liabilities on the Consolidated Balance Sheets with a corresponding ROU asset. At the time of adoption, the value of the assets and liabilities added to the Consolidated Balance Sheets was approximately $8 million. The ROU asset is shown separately on the face of the Consolidated Balance Sheets. $1.7 million of the lease liabilities was included in Accrued Compensation and Other Liabilities on the Consolidated Balance Sheets with the remainder included in Lease Liabilities. Adopting the new standard did not have a material impact on our Consolidated Statement of Income or Consolidated Statement of Cash Flows.

Credit Losses: In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU replaces the "incurred loss" model with an "expected credit loss" model that requires entities to estimate an expected lifetime credit loss on financial assets, including trade accounts receivable. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. As credit losses from the Company's trade receivables have not historically been significant, the Company does not expect adoption of the new standard to have a material impact on its consolidated financial statements.

NOTE 2 – LONG-TERM DEBT

Description: On May 18, 2020, the Company entered into the Amended and Restated Credit Facility Agreement Amendment 2 (“Amendment Two”) with Manufacturers and Traders Trust Company that amended the Company’s Credit Agreement (as amended by Amendment Two, the “Credit Agreement”). Amendment Two extended the term of the revolving credit facility (the “Revolving Credit Facility”) to October 20, 2022 and increased the revolving credit commitment to $40 million.

Amendment Two 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 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 modified the leverage ratio and fixed charge coverage ratio covenants with which the Company is required to comply for the fiscal year ending March 27, 2021. Amendment Two also established a London Interbank Offered Rate (“LIBOR”) floor of 1% and included a mechanism for adoption of a different benchmark rate when LIBOR is discontinued. During the third quarter of fiscal year 2021, Manufacturers and Traders Trust Company eliminated the prior requirement included in Amendment Two that limited capital expenditures to $5.5 million for the fiscal year ending March 27, 2021.

On December 10, 2018, the Company entered into an Amended and Restated Credit Agreement Amendment 1 (the “2018 Agreement”). The 2018 Agreement has a term loan (the “2018 Term Loan”) in the amount of $15.0 million. As of December 26, 2020, $11.1 million was outstanding on the 2018 Term Loan, of which $2.0 million was

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included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $0.2 million per month through December 2025.

As of December 26, 2020, $40.0 million was available under the Revolving Credit Facility, of which $13.2 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. During the first nine months of fiscal year 2021, $3.4 million of borrowings were used for business acquisitions.

The allowable leverage ratio under the Credit Agreement for the second, third and fourth fiscal quarter of fiscal year 2021 and the first quarter of fiscal year 2022 is 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, the allowable leverage ratio is a maximum multiple of 3.0. The Credit Agreement provides that the trailing twelve-month pro forma EBITDA of an acquired business is included in the allowable leverage calculation.

Interest and Other Costs: Interest on outstanding borrowings under the Revolving Credit Facility accrue, at Transcat’s election, at either the variable one-month LIBOR or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case (subject to a 1% floor), plus a margin. Interest on outstanding borrowings under the 2018 Term Loan accrue at a fixed rate of 4.15% over the term of the loan. Unused fees accrue based on the average daily amount of unused credit available on the Revolving Credit Facility. Interest rate margins and unused fees are determined on a quarterly basis based upon the Company’s calculated leverage ratio, as defined in the Credit Agreement. The Company’s interest rate for the Revolving Credit Facility for the first nine months of fiscal year 2021 ranged from 1.4% to 2.7%.

Covenants: The Credit Agreement has certain covenants with which the Company must comply, including a fixed charge ratio covenant and a leverage ratio covenant. The Company was in compliance with all loan covenants and requirements during the third quarter of fiscal year 2021. Our leverage ratio, as defined in the Credit Agreement, was 1.24 at December 26, 2020, compared with 1.53 at the end of fiscal year 2020.

Other Terms: The Company has pledged all of its U.S. tangible and intangible personal property, the equity interests of its U.S.-based subsidiaries, and a majority of the common stock of Transcat Canada Inc. as collateral security for the loans made under the Revolving Credit Facility.

NOTE 3 – STOCK-BASED COMPENSATION

The Company has a stock-based incentive plan (the “2003 Plan”) that provides for, among other awards, grants of restricted stock units and stock options to directors, officers and key employees at the fair market value at the date of grant. At December 26, 2020, 0.9 million shares of common stock were available for future grant under the 2003 Plan.

The Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete tax benefit related to stock-based compensation and stock option activity during the first nine months of fiscal year 2021 and 2020 was $0.3 million and $0.9 million, respectively.

Restricted Stock Units: The Company grants time-based and performance-based restricted stock units as a component of executive and key employee compensation. Expense for restricted stock unit grants is recognized on a straight-line basis for the service period of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock unit grants is the quoted market price for the Company’s common stock on the date of grant. These restricted stock units are either time vested, or vest following the third fiscal year from the date of grant subject to cumulative diluted earnings per share targets over the eligible period.

Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the unit that coincides with the actual outcome of the performance conditions. On an interim basis, the Company records compensation cost based on the estimated level of achievement of the performance conditions. The expense relating to the time vested restricted stock units is recognized on a straight-line basis over the requisite service period for the entire award.

The Company achieved 79% of the target level for the performance-based restricted stock units granted in the fiscal year ended March 31, 2018 and as a result, issued 49 shares of common stock to executive officers and certain key

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employees during the first quarter of fiscal year 2021. The following table summarizes the non-vested restricted stock units outstanding as of December 26, 2020:

 

 

Total

Grant Date

Estimated

Number

Fair

Level of

Date

Measurement

of Units

Value

Achievement at

Granted

Period

Outstanding

Per Unit

December 26, 2020

April 2018

April 2018 – March 2021

1

$

15.65

Time Vested

May 2018

April 2018 – March 2021

22

$

15.30

55% of target level

May 2018

April 2018 – March 2021

22

$

15.30

Time Vested

October 2018

October 2018 – September 2027

8

$

20.81

Time Vested

March 2019

April 2019 – March 2022

23

$

23.50

55% of target level

March 2019

April 2019 – March 2022

23

$

23.50

Time Vested

August 2019

August 2019 – August 2022

1

$

23.00

Time Vested

March 2020

April 2020 – March 2023

2

$

26.25

Time Vested

July 2020

July 2020 – March 2023

46

$

27.08

Time Vested

September 2020

September 2020 – September 2021

14

$

28.52

Time Vested

September 2020

September 2020 –July 2023

4

$

28.54

Time Vested

September 2020

September 2020 –July 2023

5

$

29.76

Time Vested

September 2020

September 2020 – September 2023

3

$

29.76

Time Vested

Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $0.7 million and $0.6 million, respectively, in the first nine months of fiscal years 2021 and 2020. As of December 26, 2020, unearned compensation to be recognized over the grants’ respective service periods totaled $2.1 million.

Stock Options: The Company grants stock options to employees and directors equal to the quoted market price of the Company’s stock at the date of the grant. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Expense for stock options is recognized on a straight-line basis over the requisite service period for each award. Options vest either immediately or over a period of up to five years using a straight-line basis and expire either five years or ten years from the date of grant.

The following table summarizes the Company’s options as of and for the first nine months of fiscal year 2021:

Weighted

Weighted

Average

Average

Number

Exercise

Remaining

Aggregate

of

Price Per

Contractual

Intrinsic

Shares

Share

Term (in years)

Value

Outstanding as of March 28, 2020

150

$

14.63

Granted

20

$

27.48

Exercised

(30

)

$

12.75

Forfeited

0-

0-

Redeemed

0-

0-

Outstanding as of December 26, 2020

140

$

16.87

3

$

2,263

Exercisable as of December 26, 2020

85

$

17.04

2

$

1,788

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of fiscal year 2021 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all holders exercised their options on December 26, 2020. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

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Total expense related to stock options was $0.1 million during the first nine months of each of fiscal years 2021 and 2020. Total unrecognized compensation cost related to non-vested stock options as of December 26, 2020 was $0.2 million, which is expected to be recognized over a period of three years. The aggregate intrinsic value of stock options exercised in the first nine months of fiscal years 2021 and 2020 was $0.3 million and $3.5 million, respectively. Cash received from the exercise of options in the first nine months of fiscal years 2021 and 2020 was $0.4 million and $1.4 million, respectively.

NOTE 4 – SEGMENT INFORMATION

Transcat has 2 reportable segments: Distribution and Service. The Company has no inter-segment sales. The following table presents segment information for the third quarter and first nine months of fiscal years 2021 and 2020:

Third Quarter Ended

Nine Months Ended

December 26,

December 28,

December 26,

December 28,

2020

2019

2020

2019

Revenue:

Service

$

24,776

$

22,087

$

72,297

$

67,987

Distribution

19,286

21,092

52,276

59,350

Total

44,062

43,179

124,573

127,337

 

Gross Profit:

Service

6,915

4,866

20,884

16,250

Distribution

4,330

5,062

11,264

14,175

Total

11,245

9,928

32,148

30,425

 

Operating Expenses:

Service (1)

4,959

4,378

14,822

13,187

Distribution (1)

3,767

3,459

10,765

10,130

Total

8,726

7,837

25,587

23,317

 

Operating Income:

Service

563

488

6,062

3,063

Distribution

1,956

1,603

499

4,045

Total

2,519

2,091

6,561

7,108

 

Unallocated Amounts:

Interest and Other Expense, net

219

194

779

776

Provision for Income Taxes

539

420

1,199

758

Total

758

614

1,978

1,534

 

Net Income

$

1,761

$

1,477

$

4,583

$

5,574

 

 

(1)

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

 

NOTE 5 – BUSINESS ACQUISITIONS

The Company applies the acquisition method of accounting for business acquisitions. Under the acquisition method, the purchase price of an acquisition is assigned to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The Company uses a valuation hierarchy, as further described under Fair Value of Financial Instruments in Note 1 above, and typically utilizes independent third-party valuation specialists to determine the fair values used in this allocation. Purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition.

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

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

The total purchase price paid for the assets of BioTek was approximately $3.4 million. $0.4 million of the purchase price has been put into escrow as a holdback for indemnification claims, if any. The following is a preliminary summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of BioTek’s assets and liabilities acquired during the period presented:

FY 2021

Goodwill

$

1,927

 

Intangible Assets – Customer Base & Contracts

1,066

 

Intangible Assets – Covenant Not to Compete

100

 

 

3,093

 

Plus:

Current Assets

406

 

Non-Current Assets

8

 

Less:

Current Liabilities

(60

)

Total Purchase Price

$

3,447

 

TTE: Effective, February 21, 2020, Transcat acquired substantially all of the assets of TTE Laboratories, Inc. (“TTE") a Boston, MA-based provider of pipette calibration services and equipment. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s service capabilities. TTE’s focus on pipettes complements the current offerings Transcat provides to the life science sector. We will refer to TTE as “pipettes.com”.

75% of the goodwill and intangible assets relating to the pipettes.com acquisition has been allocated to the Service segment with the remaining 25% allocated to the Distribution segment. Intangible assets related to the pipettes.com acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to 10 years and are deductible for tax purposes. Amortization of goodwill related to the pipettes.com acquisition is deductible for tax purposes.

The total purchase price paid for the assets of pipettes.com was approximately $12.2 million. $1.2 million of the purchase price has been put into escrow as a holdback for indemnification claims, if any. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of pipettes.com assets and liabilities acquired during the period presented:

FY 2021

Goodwill

$

6,751

 

Intangible Assets – Customer Base & Contracts

4,410

 

Intangible Assets – Covenant Not to Compete

120

 

 

11,281

 

Plus:

Current Assets

928

 

Non-Current Assets

261

 

Less:

Current Liabilities

(239

)

Total Purchase Price

$

12,231

 

The results of acquired businesses are included in Transcat’s consolidated operating results as of the dates the businesses were acquired. The following unaudited pro forma information presents the Company’s results of operations as if the acquisition of pipettes.com and BioTek had occurred at the beginning of fiscal year 2020. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transaction had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods.

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Table of Contents

(Unaudited)

(Unaudited)

Nine Months Ended

Nine Months Ended

December 26, 2020

 

December 28, 2019

Total Revenue

$

126,121

 

$

135,115

Net Income

$

4,843

 

$

6,493

Basic Earnings Per Share

$

0.65

 

$

0.89

Diluted Earnings Per Share

$

0.64

 

$

0.87

IIS: Effective July 19, 2019, Transcat acquired Infinite Integral Solutions Inc. (“IIS”). IIS, headquartered in Mississauga, Ontario, Canada, is the owner and developer of the CalTree™ suite of software solutions for the automation of calibration procedures and datasheet generation. Total consideration for the shares of IIS was 1.4 million Canadian dollars, subject in part to the achievement of certain milestones. 1.0 million Canadian dollars was paid during fiscal year 2020 and was included as a business acquisition in the Consolidated Statement of Cash Flows. 1.0 million Canadian dollars has been allocated to software and property and equipment and 0.3 million Canadian has been allocated to goodwill. Due to the immaterial amount of pre-acquisition revenue and expenses, no pro forma table of results has been presented.

GRS: Effective April 1, 2019, Transcat acquired substantially all of the assets of Gauge Repair Service (“GRS”), a California-based provider of calibration services. This transaction leveraged the Company’s infrastructure while also increasing the depth and breadth of the Company’s service capabilities. Due to the immaterial amount of the purchase price of the GRS assets, it has been included in the purchases of property and equipment in the Consolidated Statement of Cash Flows.

Certain of the Company’s acquisition agreements include provisions for contingent consideration and other holdback amounts. The Company accrues for contingent consideration and holdback provisions based on their estimated fair value at the date of acquisition. As of December 26, 2020, there was $0.1 million of other holdback amounts unpaid and reflected in current liabilities on the Consolidated Balance Sheets. During the third quarter of each of fiscal year 2021 and fiscal year 2020, 00no contingent consideration or other holdback amounts were paid.

During each of the first nine months of fiscal years 2021 and 2020, acquisition costs of less than $0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.

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

Forward-Looking Statements. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, estimates, beliefs, assumptions and predictions of future events and are identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “projects,” “intends,” “could,” “plans,” “may” 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 the COVID-19 pandemic on our business, 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, 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, our 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 28, 2020. 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 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.

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Table of Contents

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 28, 2020.

RESULTS OF OPERATIONS

During the third quarter of fiscal year 2021, we recorded consolidated revenue of $44.1 million. This represented an increase of $0.9 million or 2.0% versus the third quarter of fiscal year 2020. Revenue growth was primarily due to our Service segment, which increased 12.2% or $2.7 million to $24.8 million. Our Distribution segment showed a sales decrease of 8.6% to $19.3 million. This decrease is due to the economic downturn from the COVID-19 pandemic that has impacted customer demand.

Gross profit for the third quarter of fiscal year 2021 was $11.2 million, an increase of $1.3 million or 13.3% versus the third quarter of fiscal year 2020. In addition, gross margin expanded by 250 basis points to 25.5% from 23.0%. The increase in gross profit and gross margin were positively affected by continued increases in productivity in the Service segment, strategic customer price increases, favorable changes in sales product and channel mix and various cost reduction efforts implemented in response to the COVID-19 pandemic.

Total operating expenses were $8.7 million, an increase of $0.9 million or 11.3% as compared to the third quarter of fiscal year 2020, as we continued to invest in our technology initiatives. Also, included in operating expenses during the third quarter of fiscal year 2021 were incremental operating expenses related to the acquisition of pipettes.com and BioTek which closed in December 2020. As a percentage of total revenue, operating expenses were 19.8%, up 160 basis points from 18.2% in the third quarter of fiscal year 2020.

Net income was $1.8 million, a 19.2% increase as compared to $1.5 million in the third quarter of fiscal year 2020. The increase in net income was due to higher operating income which was offset by higher provision for income taxes. The higher provision for income taxes was a result of decreased discrete income tax benefits related to stock-based awards.

The following table presents, for the third quarter and first nine months of fiscal years 2021 and 2020, the components of our Consolidated Statements of Income:

(Unaudited)

(Unaudited)

Third Quarter Ended

Nine Months Ended

December 26,

December 28,

December 26,

December 28,

2020

2019

2020

2019

As a Percentage of Total Revenue:

Service Revenue

56.2

%

51.2

%

58.0

%

53.4

%

Distribution Sales

43.8

%

48.8

%

42.0

%

46.6

%

Total Revenue

100.0

%

100.0

%

100.0

%

100.0

%

 

Gross Profit Percentage:

Service Gross Profit

27.9

%

22.0

%

28.9

%

23.9

%

Distribution Gross Profit

22.5

%

24.0

%

21.5

%

23.9

%

Total Gross Profit

25.5

%

23.0

%

25.8

%

23.9

%

 

Selling, Marketing and Warehouse Expenses

10.6

%

10.3

%

10.5

%

10.3

%

General and Administrative Expenses

9.2

%

7.9

%

10.0

%

8.0

%

Total Operating Expenses

19.8

%

18.2

%

20.5

%

18.3

%

 

Operating Income

5.7

%

4.8

%

5.3

%

5.6

%

 

Interest and Other Expense, net

0.5

%

0.4

%

0.6

%

0.6

%

 

Income Before Income Taxes

5.2

%

4.4

%

4.7

%

5.0

%

Provision for Income Taxes

1.2

%

1.0

%

1.0

%

0.6

%

 

Net Income

4.0

%

3.4

%

3.7

%

4.4

%

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THIRD QUARTER ENDED DECEMBER 26, 2020 COMPARED TO THIRD QUARTER ENDED DECEMBER 28, 2019 (dollars in thousands):

Revenue:

Third Quarter Ended

Change

December 26,

December 28,

2020

2019

$

%

Revenue:

Service

$

24,776

$

22,087

$

2,689

12.2

%

Distribution

19,286

21,092

(1,806

)

(8.6

%)

Total

$

44,062

$

43,179

$

883

 

2.0

%

Total revenue increased $0.9 million, or 2.0%, in our fiscal year 2021 third quarter compared to the prior year third quarter. Excluding acquired revenue of $2.1 million, organic revenue declined by 3.0%.

Service revenue, which accounted for 56.2% and 51.2% of our total revenue in the third quarter of fiscal years 2021 and 2020, respectively, increased 12.2% from the third quarter of fiscal year 2020 to the third quarter of fiscal year 2021. This year-over-year increase reflected new Life Science business and, combined with $1.4 million of incremental revenue from pipettes.com and BioTek, more than offset reduced demand from other markets caused primarily by the COVID-19 pandemic. Excluding acquired revenue of $1.4 million, the Service segment organic revenue increased by 5.9%.

Our fiscal years 2021 and 2020 quarterly Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows:

FY 2021

FY 2020

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Service Revenue Growth

12.2

%

4.5

%

2.5

%

2.9

%

7.8

%

18.1

%

15.9

%

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 an 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 2021

FY 2020

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Trailing Twelve-Month:

Service Revenue

$

97,225

$

94,624

$

93,572

$

93,003

$

92,309

$

90,714

$

87,114

Service Revenue Growth

5.4

%

4.3

%

7.4

%

10.7

%

13.0

%

13.5

%

11.3

%

The growth in Service segment revenue during the third quarter of each of fiscal years 2021 and 2020 reflected both organic growth and acquisitions.

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 we seek to reduce the need for outsourcing. The following table presents the source of our Service revenue and the percentage of Service

16


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revenue derived from each source for each quarter during fiscal years 2021 and 2020:

FY 2021

FY 2020

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Percent of Service Revenue:

In-House

83.1

%

83.7

%

82.9

%

84.9

%

82.9

%

82.9

%

83.3

%

Outsourced

15.3

%

14.7

%

15.6

%

13.5

%

15.6

%

15.6

%

15.1

%

Freight Billed to Customers

1.6

%

1.6

%

1.5

%

1.6

%

1.5

%

1.5

%

1.6

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

100.0

%

Our Distribution sales accounted for 43.8% of our total revenue in the third quarter of fiscal year 2021 and 48.8% of our total revenue in the third quarter of fiscal year 2020. During the third quarter of fiscal year 2021, Distribution segment sales decreased 8.6% to $19.3 million. These results were impacted by the COVID-19 pandemic, with reduced demand from oil and gas related businesses and most other industrial manufacturing sectors. However, rental revenue increased by 12.2% to $1.4 million compared to the third quarter of fiscal year 2020.

Our fiscal years 2021 and 2020 Distribution sales (decline) growth, in relation to prior fiscal year quarter comparisons, was as follows:

FY 2021

FY 2020

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Distribution Sales (Decline) Growth

(8.6

%)

(6.6

%)

(20.3

%)

2.9

%

3.5

%

(3.8

%)

15.4

%

Distribution 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 third quarter of fiscal year 2021 were $5.5 million, an increase of $1.8 million from the third quarter of fiscal year 2020. 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 2021 and 2020:

FY 2021

FY 2020

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Total Pending Product Shipments

$

5,533

$

4,251

$

3,890

$

4,330

$

3,743

$

4,205

$

4,115

% of Pending Product

Shipments that were Backorders

79.3

%

76.6

%

75.8

%

66.5

%

77.6

%

71.7

%

77.2

%

Gross Profit:

Third Quarter Ended

Change

December 26,

December 28,

2020

2019

$

%

Gross Profit:

Service

$

6,915

$

4,866

$

2,049

42.1

%

Distribution

4,330

5,062

(732

)

(14.5

%)

Total

$

11,245

$

9,928

$

1,317

13.3

%

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Total gross profit for the third quarter of fiscal year 2021 was $11.2 million, an increase of $1.3 million or 13.3% versus the third quarter of fiscal year 2020. Total gross margin was 25.5% in the third quarter of fiscal year 2021, up from 23.0% in the third quarter of fiscal year 2020, an increase of 250 basis points.

Service gross profit in the third quarter of fiscal year 2021 increased $2.1 million, or 42.1%, from the third quarter of fiscal year 2020. Service gross margin was 27.9% in the third quarter of fiscal year 2021 versus 22.0% in the third quarter of fiscal year 2020, an increase of 590 basis points. This increase in gross margin was primarily due to ongoing productivity improvements, cost controls implemented in response to the COVID-19 pandemic and strategic pricing.

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

FY 2021

FY 2020

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Service Gross Margin

27.9

%

32.2

%

26.4

%

28.9

%

22.0

%

25.6

%

24.0

%

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 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 2021

FY 2020

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Distribution Gross Margin

22.5

%

21.1

%

21.0

%

23.2

%

24.0

%

24.3

%

23.4

%

Distribution segment gross margin was 22.5% in the third quarter of fiscal year 2021 versus 24.0% in the third quarter of fiscal year 2020, a 150 basis point decrease. The decrease in segment gross margin was primarily due to lower volume, less demand from core product sales and reduced cooperative advertising and rebate programs as certain vendors reduced these programs to lower their own costs in response to the COVID-19 pandemic.

Operating Expenses:

Third Quarter Ended

Change

December 26,

December 28,

2020

2019

$

%

Operating Expenses:

Selling, Marketing and Warehouse

$

4,675

$

4,463

$

212

4.8

%

General and Administrative

4,051

3,374

677

20.1

%

Total

$

8,726

$

7,837

$

889

11.3

%

Total operating expenses were $8.7 million in the third quarter of fiscal year 2021 versus $7.8 million during the third quarter of fiscal year 2020. The year-over-year increase in selling, marketing and warehouse expenses is due to incremental costs related to the acquisition of pipettes.com and BioTek, especially increased acquisition related amortization expense offset by reduced sales incentives and direct marketing costs. The increase in general and administrative expenses includes incremental expenses related to the acquisition of pipettes.com and BioTek and increased expenses related to our continued investment in technology and operational infrastructure. Operating expenses as a percentage of total revenue were 19.8% in the third quarter of fiscal year 2021, up from 18.2% in the third quarter of fiscal year 2020.

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Provision for Income Taxes:

Third Quarter Ended

Change

December 26,

December 28,

2020

2019

$

%

Provision for Income Taxes

$

539

$

420

$

119

28.3

%

Our effective tax rates for the third quarter of fiscal years 2021 and 2020 were 23.4% and 22.1%, respectively. Our quarterly provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to stock-based compensation activity in the third quarter of each of fiscal years 2021 and 2020, were less than $0.1 million. 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 2021 effective tax rate to be approximately 22.0% to 23.0%.

Net Income:

Third Quarter Ended

Change

December 26,

December 28,

2020

2019

$

%

Net Income

$

1,761

$

1,477

$

284

 

19.2

%

Net income for the third quarter of fiscal year 2021 was $1.8 million, an increase of $0.3 million or 19.2% versus the third quarter of fiscal year 2020. The increase is primarily due to increased operating income discussed above offset by increased provision for 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, rather 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.

Third Quarter Ended

December 26,

December 28,

2020

2019

Net Income

$

1,761

$

1,477

+ Interest Expense

203

216

+ Other Expense (Income)

16

(22

)

+ Tax Provision

539

420

Operating Income

2,519

2,091

+ Depreciation & Amortization

1,861

1,648

+ Restructuring Expense

-

-

+ Other Expense (Income)

(15

)

22

+ Non-cash Stock Compensation

197

305

Adjusted EBITDA

$

4,562

$

4,066

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Total Adjusted EBITDA for the third quarter of fiscal year 2021 was $4.6 million, versus $4.1 million during the third quarter of fiscal year 2020, a $0.5 million or 12.2% increase. As a percentage of revenue, Adjusted EBITDA was 10.4% for the third quarter of fiscal year 2021 and 9.4% for the third quarter of fiscal year 2020. The difference between the fiscal year 2021 third quarter increase in Adjusted EBITDA and the increase in net income was primarily driven by increased provision for income taxes and depreciation and amortization offset by lower non-cash stock compensation expense.

NINE MONTHS ENDED DECEMBER 26, 2020 COMPARED TO NINE MONTHS ENDED DECEMBER 28, 2019 (dollars in thousands):

Revenue:

Nine Months Ended

Change

December 26,

December 28,

2020

2019

$

%

Revenue:

Service

$

72,297

$

67,987

$

4,310

6.3

%

Distribution

52,276

59,350

(7,074

)

(11.9

%)

Total

$

124,573

$

127,337

$

(2,764

)

2.2

%

Our Service revenue accounted for 58.0% and 53.4% of our total revenue during the first nine months of fiscal years 2021 and 2020, respectively. For the first nine months of fiscal year 2021, Service revenue increased $4.3 million, or 6.3%, compared to the first nine months of fiscal year 2020. This year-over-year increase reflected increased demand from the Life Sciences market and, combined with $3.8 million of incremental revenue from pipettes.com and BioTek, more than offset reduced demand from other markets caused primarily by the COVID-19 pandemic.

Our Distribution sales accounted for 42.0% and 46.6% of our total revenue in the first nine months of fiscal years 2021 and 2020, respectively. For the first nine months of fiscal year 2021, Distribution sales decreased $7.1 million, or 11.9%, compared to the first nine months of fiscal year 2020. These results were impacted by the COVID-19 pandemic, with reduced demand from oil and gas related businesses and most other industrial manufacturing sectors. In addition, rental revenue decreased during the first nine months of fiscal year 2021 by 1.6% to $3.7 million compared to the first nine months of fiscal year 2020.

Gross Profit:

Nine Months Ended

Change

December 26,

December 28,

2020

2019

$

%

Gross Profit:

Service

$

20,884

$

16,250

$

4,634

28.5

%

Distribution

11,264

14,175

(2,911

)

(20.5

%)

Total

$

32,148

$

30,425

$

1,723

5.7

%

Total gross profit for the first nine months of fiscal year 2021 was $32.1 million, an increase of $1.7 million or 5.7% versus the first nine months of fiscal year 2020. Total gross margin was 25.8%, a 190 basis point increase compared to 23.9% in the first nine months of fiscal year 2020. This increase in gross margin was primarily due to increased Service revenues, primarily from pipettes.com and BioTek, and ongoing productivity improvements in the Service segment which more than offset a decrease in Distribution gross profit from lower Distribution sales.

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Table of Contents

Operating Expenses:

Nine Months Ended

Change

December 26,

December 28,

2020

2019

$

%

Operating Expenses:

Selling, Marketing and Warehouse

$

13,040

$

13,166

$

(126

)

(1.0

%)

General and Administrative

12,547

10,151

2,396

23.6

%

Total

$

25,587

$

23,317

$

2,270

9.7

%

Total operating expenses for the first nine months of fiscal year 2021 were $25.6 million, an increase of $2.3 million or 9.7% compared to the first nine months of fiscal year 2020. The year-over-year decrease in selling, marketing and warehouse expenses is due to reduced sales incentives and direct marketing costs offset by increased expenses related to the acquisition of pipettes.com and BioTek, especially acquisition related amortization expense. The increase in general and administrative expenses includes incremental increased expenses related to our continued investment in technology and operational infrastructure, increased expenses related to the acquisition of pipettes.com and BioTek and approximately $0.4 million of severance expenses. As a percentage of total revenue, operating expenses during the first nine months of fiscal year 2021 were 20.5%, compared to 18.3% during the first nine months of fiscal year 2020, a 220 basis point increase.

Provision for Income Taxes:

Nine Months Ended

Change

December 26,

December 28,

2020

2019

$

%

Provision for Income Taxes

$

1,199

$

758

$

441

58.2

%

Our effective tax rates for the first nine months of fiscal years 2021 and 2020 were 20.7% and 12.0% respectively. The increase in our tax rate is due to the decreased discrete tax benefits from stock-based compensation activity. Our provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to stock-based compensation activity in the first nine months of fiscal years 2021 and 2020 were $0.3 million and $0.9 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 2021 effective tax rate to be approximately 22.0% to 23.0%.

Net Income:

Nine Months Ended

Change

December 26,

December 28,

2020

2019

$

%

Net Income

$

4,583

$

5,574

$

(991

)

(17.8

%)

Net income for the first nine months of fiscal year 2021 was $4.6 million, a decrease of $1.0 million or 17.8% versus the first nine months of fiscal year 2020. The year over year decrease in net income is due to lower operating income and an increase in provision for 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

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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, rather 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.

Nine Months Ended

December 26,

December 28,

2020

2019

Net Income

$

4,583

$

5,574

+ Interest Expense

660

703

+ Other Expense

119

73

+ Tax Provision

1,199

758

Operating Income

6,561

7,108

+ Depreciation & Amortization

5,596

4,951

+ Restructuring Expense

360

-

+ Other (Expense) Income

(119

)

127

+ Non-cash Stock Compensation

875

610

Adjusted EBITDA

$

13,273

$

12,796

During the first nine months of fiscal year 2021, Adjusted EBITDA was $13.3 million, an increase of $0.5 million or 3.7% versus the first nine months of fiscal year 2020. As a percentage of revenue, Adjusted EBITDA was 10.7% for the first nine months of fiscal year 2021 and 10.0% for the first nine months of fiscal year 2020. The increase in Adjusted EBITDA during the first nine months of fiscal year 2021 was primarily driven by the increase in provision for income taxes, non-cash stock compensation expense and depreciation and amortization.

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 May 18, 2020, we entered into Amendment Two with Manufacturers and Traders Trust Company that amended our Credit Agreement. Amendment Two extended the term of the Revolving Credit Facility to October 20, 2022 and increased the revolving credit commitment to $40 million.

Amendment Two modified the definition of 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 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 related to stock-based payment and stock option activity, and modified certain restrictions to our ability to repurchase our shares and pay dividends. Amendment Two modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply. Amendment Two also established a LIBOR floor of 1% and included a mechanism for adoption of a different benchmark rate when LIBOR is discontinued. During the third quarter of fiscal year 2021, Manufacturers and Traders Trust Company eliminated the prior requirement included in Amendment Two that limited capital expenditures to $5.5 million for the fiscal year ending March 27, 2021.

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Table of Contents

On December 10, 2018, we entered into the 2018 Agreement that has the 2018 Term Loan in the amount of $15.0 million, which replaced the previous 2017 Term Loan. As of December 26, 2020, $11.1 million was outstanding on the 2018 Term Loan, of which $2.0 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $0.2 million per month through December 2025.

As of December 26, 2020, $40.0 million was available under the Revolving Credit Facility, of which $13.2 million was outstanding and included in long-term debt on the Consolidated Balance Sheets.

During the third quarter of fiscal year 2021, $3.4 million of borrowings were used for business acquisitions.

The allowable leverage ratio under the Credit Agreement for the second, third and fourth fiscal quarter of fiscal year 2021, and the first quarter of fiscal year 2022 is 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, the allowable leverage ratio is a maximum multiple of 3.0. The Credit Agreement provides that the trailing twelve-month pro forma EBITDA of an acquired business is included in the allowable leverage calculation.

The 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 during the third quarter of fiscal year 2021. Our leverage ratio, as defined in the Credit Agreement, was 1.24 at December 26, 2020, compared with 1.53 at the end of fiscal year 2020.

Interest on the Revolving Credit Facility continues to accrue, at our election, at either the variable one-month LIBOR (subject to a 1% floor) 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 with principal and interest payments made monthly. Unused fees accrue based on the average daily amount of unused credit available under the Credit Agreement. Interest rate margins and unused fees are determined on a quarterly basis based upon our calculated leverage ratio, as defined in the Credit Agreement.

Cash Flows: The following table is a summary of our Consolidated Statements of Cash Flows:

Nine Months Ended

December 26,

December 28,

2020

2019

Cash Provided by (Used in):

Operating Activities

$

15,647

$

8,235

Investing Activities

$

(7,742

)

$

(6,133

)

Financing Activities

$

(6,619

)

$

(2,491

)

Operating Activities:

Net cash provided by operating activities was $15.6 million during the first nine months of fiscal year 2021 compared to $8.2 million during the first nine months of fiscal year 2020. The year-over-year increase in cash provided by operations is 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 $0.4 million during the first nine months of fiscal year 2021, inclusive of $0.4 million of accounts receivable acquired as part of the BioTek acquisition completed during the period. During the first nine months of fiscal year 2020, accounts receivable decreased by $0.8 million. The year-over-year variation reflects the impact of acquisitions and changes in the timing of collections. The following table illustrates our days sales outstanding as of December 26, 2020 and December 28, 2019:

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Table of Contents

December 26,

December 28,

2020

2019

Net Sales, for the last two fiscal months

$

30,819

$

29,487

Accounts Receivable, net

$

30,562

$

26,718

Days Sales Outstanding

62

54

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 purchase and sales 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 decreased $1.7 million during the first nine months of fiscal year 2021. Inventory increased $0.1 million during the first nine months of fiscal year 2020.

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 $2.1 million during the first nine months of fiscal year 2021. Accounts payable decreased by $3.7 million during the first nine months of fiscal year 2020.

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 nine months of fiscal year 2021, accrued compensation and other liabilities increased by $0.9 million, due primarily to increased accrued incentives and payroll related expense. During the first nine months of fiscal year 2020, accrued compensation and other liabilities increased by $1.4 million, due primarily to the adoption of the new lease accounting standard.

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 nine months of fiscal year 2021, income taxes payable increased by $0.2 million whereas in the first nine months of fiscal year 2020, income taxes payable decreased by $0.2 million. The year-over-year difference is due to timing of income tax payments.

Investing Activities:

During the first nine months of fiscal year 2021, we invested $4.3 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and our rental business.

During the first nine months of fiscal year 2020, we invested $5.0 million in capital expenditures, that was also largely used primarily for assets for our rental business and customer-driven expansion of Service segment capabilities. The purchase of assets from GRS during the first nine months of fiscal year 2020 are included in our capital expenditures above for that prior year period.

During the first nine months of fiscal year 2021, we used $3.4 million for a business acquisition. During the first nine months of fiscal year 2020, we used $0.5 million for a business acquisition. During the first nine months of fiscal year 2021, no contingent consideration or other holdback amounts were paid related to a business acquisition. During the first nine months of fiscal year 2020, we used $0.9 million for a holdback payment related to a business acquisition.

Financing Activities:

During the first nine months of fiscal year 2021, $0.6 million in cash was generated from the issuance of our common stock. In addition, we repaid $4.5 million of our Revolving Credit Facility, we used $1.5 million for scheduled repayments of our term loan and used $1.3 million for the “net” award of certain share awards to

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Table of Contents

cover tax-withholding obligations for share award activity in the period which are shown as a repurchase of shares of our common stock.

During the first nine months of fiscal year 2020, $1.6 million in cash was generated from the issuance of our common stock and we received $0.1 million from our Revolving Credit Facility. In addition, we used $1.4 million for scheduled repayments of our term loan and used $2.8 million for the “net” award of certain share awards to cover tax-withholding obligations for share award activity in the period which are shown as a repurchase of shares of our common stock.

OUTLOOK

The results of the third quarter were strong and we are pleased with our Service segment’s return to organic growth and its continued margin expansion. Our balance sheet is solid and our acquisition pipeline is growing and active. We believe that our disciplined focus on highly regulated end markets and our new customer pipeline positions us well for strong organic growth as we continue to operate in a very challenging environment.

While we have navigated the current operating environment well to date, we remain cautious of the potential impacts of the COVID-19 pandemic on our business. For the fourth quarter of fiscal 2021, we expect solid Service revenue growth as compared to last fiscal year’s fourth quarter. We expect improvement in gross margin year-over-year, but not to the same degree we have experienced in the last two quarters, largely due to more difficult technician productivity comparisons and the anniversary of our acquisition of pipettes.com, which occurred in February 2020. Distribution is expected to continue to be negatively impacted by the current operating environment. We expect operating income for the fourth quarter of fiscal 2021 to be similar to the fourth quarter of fiscal 2020.

We expect our income tax rate to range between 22.0% and 23.0% for full fiscal year 2021.

The Company expects capital expenditures to be approximately $6.0 million to $6.5 million for fiscal year 2021. Capital investments are expected to be primarily for technology, growth-oriented opportunities within both of its operating segments, and rental pool assets. Maintenance and existing asset replacements for fiscal year 2021 are expected to be consistent with fiscal 2020 at approximately $1.0 million to $1.5 million.

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 on our variable rate Revolving Credit Facility. As of December 26, 2020, $40.0 million was available under our Revolving Credit Facility, of which $13.2 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 term loan is considered a fixed interest rate loan. As of December 26, 2020, $11.1 million was outstanding on the term loan and was included in long-term debt and current portion of long-term debt on the Consolidated Balance Sheets. The 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) 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 nine months of fiscal year 2021 for our Revolving Credit Facility ranged from 1.4% to 2.7%. Interest on outstanding borrowings of the 2018 Term Loan accrue at a fixed rate of 4.15% over the term of the loan. On December 26, 2020, 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 nine months of fiscal years 2021 and 2020 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.

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Table of Contents

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 nine months of each of the fiscal years 2021 and 2020, 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 December 26, 2020, we had a foreign exchange contract, which matured in January 2021, outstanding in the notional amount of $4.5 million. The foreign exchange contract was renewed in January 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 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 third quarter of fiscal year 2021) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

INDEX TO EXHIBITS

(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)

 

*

Filed herewith

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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: February 3, 2021

/s/ Lee D. Rudow

Lee D. Rudow

President and Chief Executive Officer

(Principal Executive Officer)

 

Date: February 3, 2021

/s/ Mark A. Doheny

Mark A. Doheny

Vice President of Finance and Chief Financial Officer

(Principal Financial Officer)

27