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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended:
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: December 29, 2007 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to or Commission File Number: TRANSCAT, INC. (Exact name of registrant as specified in its charter) Ohio (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 35 Vantage Point Drive, Rochester, New York (Address of principal executive offices) (Zip Code) (585) (Registrant s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) 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 February 7, 2008 was 7,165,721. PART I. FINANCIAL INFORMATION Page(s) Item 1. Consolidated Financial Statements: Consolidated Statements of Operations and Comprehensive Income for the Third Quarter and Nine Months Ended December 29, 2007 and December 23, Consolidated Balance Sheets as of December 29, 2007 and March 31, Consolidated Statements of Cash Flows for the Nine Months Ended December 29, 2007 and December 23, Consolidated Statements of Shareholders Equity for the Nine Months Ended December 29, Notes to Consolidated Financial Statements 7-11 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 23 Item 4. Controls and Procedures 23 PART II. OTHER INFORMATION Item 6. Exhibits 23 SIGNATURES 24 INDEX TO EXHIBITS 25 2 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS TRANSCAT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In Thousands, Except Per Share Amounts) (Unaudited) (Unaudited) Third Quarter Ended Nine Months Ended Product Sales $ 13,005 $ 12,296 $ 35,151 $ 32,713 Service Sales 5,435 4,944 16,104 Net Sales 18,440 17,240 51,255 14,907 47,620 Cost of Products Sold 9,351 8,927 25,306 24,177 Cost of Services Sold 4,376 4,015 12,763 11,792 Total Cost of Products and Services Sold 13,727 12,942 38,069 35,969 Gross Profit 4,713 4,298 13,186 11,651 Selling, Marketing and Warehouse Expenses 2,304 2,230 6,627 6,337 Administrative Expenses 1,365 1,315 4,472 3,705 Total Operating Expenses 3,669 3,545 11,099 10,042 Gain on TPG Divestiture 1,544 1,544 Operating Income 1,044 2,297 2,087 3,153 Interest Expense Other Expense, net Total Other Expense Income Before Income Taxes 892 2,068 1,582 2,620 (Benefit From) Provision for Income Taxes (316) 861 (58) 1,050 Net Income 1,208 1,207 1,640 1,570 Other Comprehensive (Loss) Income (19) (239) 438 (145) Comprehensive Income $ 1,189 $ 968 $ 2,078 $ 1,425 Basic Earnings Per Share $ 0.17 $ 0.17 $ 0.23 $ 0.23 Average Shares Outstanding 7,162 6,938 7,119 6,919 Diluted Earnings Per Share $ 0.17 $ 0.16 $ 0.23 $ 0.21 Average Shares Outstanding 7,314 7,428 7,266 7,415 See accompanying notes to consolidated financial statements. 3 TRANSCAT, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Amounts) (Unaudited) December 29, March 31, ASSETS Current Assets: Cash $ 302 $ 357 Accounts Receivable, less allowance for doubtful accounts of $77 and $47 as of December 29, 2007 and March 31, 2007, respectively 8,271 8,846 Other Receivables Inventory, net 5,611 4,336 Prepaid Expenses and Other Current Assets 1, Deferred Tax Asset Total Current Assets 16,632 15,504 Property and Equipment, net 3,344 2,814 Goodwill 2,967 2,967 Deferred Tax Asset 1, Other Assets 348 Total Assets $ 24,843 $ ,422 LIABILITIES AND SHAREHOLDERS EQUITY Current Liabilities: Accounts Payable $ 6,709 $ 5,307 Accrued Compensation and Other Liabilities 2,258 2,578 Income Taxes Payable Total Current Liabilities 9,064 7,927 Long-Term Debt 1,263 2,900 Other Liabilities Total Liabilities 10,716 11,193 Shareholders Equity: Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,430,475 and 7,286,119 shares issued as of December 29, 2007 and March 31, 2007, respectively; 7,154,693 and 7,010,337 shares outstanding as of December 29, 2007 and March 31, 2007, respectively 3,715 3,643 Capital in Excess of Par Value 6,345 5,268 Warrants 329 Accumulated Other Comprehensive Income Retained Earnings 4,574 2,934 Less: Treasury Stock, at cost, 275,782 shares as of December 29, 2007 and March 31, 2007 (988) (988) Total Shareholders Equity 14,127 Total Liabilities and Shareholders Equity $ 24,843 $ 11,229 22,422 See accompanying notes to consolidated financial statements. 4 TRANSCAT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) Nine Months Ended Cash Flows from Operating Activities: Net Income $ 1,640 $ 1,570 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Deferred Income Taxes (333) 975 Depreciation and Amortization 1,290 1,226 Provision for Accounts Receivable and Inventory Reserves (48) 106 Stock-Based Compensation Expense Gain on TPG Divestiture (1,544) Changes in Assets and Liabilities: Accounts Receivable and Other Receivables 409 (537) Inventory (1,200) (245) Prepaid Expenses and Other Assets (859) (721) Accounts Payable 1, Accrued Compensation and Other Liabilities (287) (777) Income Taxes Payable 55 (102) Net Cash Provided by Operating Activities 2, Cash Flows from Investing Activities: Purchase of Property and Equipment (1,351) (709) Net Cash Used in Investing Activities (1,351) (709) Cash Flows from Financing Activities: Chase Revolving Line of Credit, net (1,637) 4,359 GMAC Revolving Line of Credit, net (3,252) Payments on Other Debt Obligations (1,073) Issuance of Common Stock 219 Net Cash (Used in) Provided by Financing Activities (1,418) Effect of Exchange Rate Changes on Cash 44 1 Net (Decrease) Increase in Cash (55) 23 Cash at Beginning of Period Cash at End of Period $ 302 $ 138 Supplemental Disclosures of Cash Flow Activity: Cash paid during the period for: Interest $ 90 $ 278 Income Taxes, net $ 264 $ 177 Supplemental Disclosure of Non-Cash Financing Activity: Treasury Stock Acquired in Cashless Exercise of Stock Options $ $ 50 See accompanying notes to consolidated financial statements. 5 TRANSCAT, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (In Thousands) (Unaudited) Accum- Capital ulated Common Stock In Other Treasury Stock Issued Excess Compre- Outstanding $0.50 Par Value of Par War- hensive Retained at Cost Shares Amount Value rants Income Earnings Shares Amount Total Balance as of March 31, ,286 $ 3,643 $5,268 $ 329 $ 43 $ 2, $ (988) $11,229 Issuance of Common Stock Stock-Based Compensation Expired Warrants 329 (329) Comprehensive Income: Currency Translation Adjustment Unrecognized Prior Service Cost, net of tax 7 7 Net Income 1,640 1,640 Balance as of December 29, ,430 $ 3,715 $6,345 $ $ 481 $ 4, $ (988) $14,127 See accompanying notes to consolidated financial statements. 6 TRANSCAT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Per Share Amounts) NOTE 1 GENERAL Description of Business: Transcat, Inc. ( Transcat or the Company ) is a leading distributor of professional grade test, measurement, and calibration instruments and a provider of calibration and repair services, primarily throughout the process, life science and manufacturing industries. Basis of Presentation: 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 10 of Regulation S-X of the Securities and Exchange Commission ( SEC ). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the 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 the results to be expected for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 31, 2007 ( fiscal year 2007 ) contained in the Company s 2007 Annual Report on Form 10-K filed with the SEC. Reclassification of Amounts: Certain reclassifications of financial information for prior fiscal years have been made to conform to the presentation for the current fiscal year. Stock-Based Compensation: In accordance with Statement of Financial Accounting Standards ( SFAS ) No. 123 (revised 2004), Share-Based Payment, the Company measures the cost of services received in exchange for all equity awards granted, including stock options, warrants and restricted stock, based on the fair market value of the award as of the grant date. The Company uses the modified prospective application method to record compensation cost related to unvested stock awards as of March 25, 2006 by recognizing the unamortized grant date fair value of the awards over the remaining service periods of those awards with no change in historical reported earnings. Awards granted after March 25, 2006 are valued at fair value and are recognized on a straight line basis over the service periods of each award. Excess tax benefits from the exercise of stock awards are presented in the Consolidated Statements of Cash Flows as a financing activity. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. The Company did not have any stock-based compensation costs capitalized as part of an asset. The Company estimates forfeiture rates based on its historical experience. The estimated fair value of the awards granted during the first nine months of the fiscal year ending March 29, 2008 ( fiscal year 2008 ) was calculated using the Black-Scholes-Merton pricing model ( Black-Scholes ), which produced a weighted average fair value of awards granted of $4.62 per share. During the first nine months of fiscal year 2008, the Company recorded non-cash stock-based compensation in the amount of $0.6 million in the Consolidated Statement of Operations. The following summarizes the assumptions used in the Black-Scholes model during the first nine months of fiscal year 2008: Expected life 6 years Annualized volatility rate 70.8% Risk-free rate of return 4.6% Dividend rate 0.0% The Black-Scholes model incorporates assumptions to value stock-based awards. The risk-free rate of return for periods within the contractual life of the award is based on a zero-coupon U.S. government instrument over the contractual term of the equity instrument. Expected volatility is based on historical volatility of the Company s stock. The expected term of all awards granted is estimated by taking the average of the weighted average vesting term and the contractual term, as illustrated in SEC Staff Accounting Bulletin 107. This methodology is not materially different from the Company s historical data on exercise timing. Separate groups having similar historical exercise behavior with regard to award exercise timing and forfeiture rates are considered separately for valuation and attribution purposes. Gain on TPG Divestiture: During the fiscal year ended March 31, 2002, the Company sold Transmation Products Group ( TPG ). As a result of certain post-closing commitments, the Company deferred recognition of a $1.5 million gain on the sale. During fiscal year 2007, the Company satisfied those commitments and consequently realized the gain as a component of operating income in the accompanying Consolidated Financial Statements. 7 Foreign Currency Translation and Transactions: The accounts of Transmation (Canada) Inc., the Company s wholly owned subsidiary, are maintained in the local currency and have been translated to United States dollars in accordance with SFAS No. 52, Foreign Currency Translation. Accordingly, the amounts representing assets and liabilities, except for long-term intercompany accounts and equity, have been translated at the period-end rates of exchange and related sales and expense amounts have been translated at average rates of exchange during the period. Gains and losses arising from translation of Transmation (Canada) Inc. s balance sheets into United States dollars are recorded directly to the accumulated other comprehensive income component of shareholders equity. During the third quarter of fiscal year 2008, the Company entered into a foreign exchange forward contract to reduce any further risk that its earnings would be adversely affected by changes in currency exchange rates. The contract, which expired in December 2007, was accounted for in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company did not apply hedge accounting and therefore, the change in the contract s fair value, which totaled $0.2 million, was recognized in current earnings as a component of other expense in the Consolidated Statements of Operations. This change in the contract s fair value was offset by the change in fair value on the underlying intercompany assets and liabilities being hedged. At December 29, 2007, there were no hedging arrangements outstanding. 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 dilutive stock options, warrants, and unvested restricted stock awards. In computing the per share effect of assumed conversion, funds which would have been received from the exercise of options and warrants 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 and the first nine months of fiscal year 2008, the net additional common stock equivalents had no effect on the calculation of dilutive earnings per share. For the third quarter and the first nine months of fiscal year 2007, the net additional common stock equivalents had a $.01 per share effect and a $.02 per share effect, respectively, on the calculation of dilutive earnings per share. The total number of dilutive and anti-dilutive common stock equivalents resulting from stock options, warrants and unvested restricted stock are summarized as follows: Third Quarter Ended Nine Months Ended Shares Outstanding: Dilutive Anti-dilutive Total Range of Exercise Prices per Share: Options $2.20-$7.72 $0.80-$5.80 $2.20-$7.72 $0.80-$5.80 Warrants $2.31-$5.80 $0.97-$5.80 $2.31-$5.80 $0.97-$5.80 Recently Issued Accounting Pronouncements: In December 2007, the Financial Accounting Standards Board ( FASB ) issued SFAS No. 141 (revised 2007), Business Combinations ( SFAS 141R ). This statement establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. SFAS 141R is to be applied prospectively to business combinations beginning in the Company s fiscal year ending March In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51 ( SFAS 160 ). This statement applies to the accounting for noncontrolling interests (previously referred to as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires noncontrolling interests to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. SFAS 160 becomes effective for the Company in the fiscal year ending March Since the Company does not currently have any noncontrolling interests, the adoption of this statement is not expected to have an impact on the Company s Consolidated Financial Statements. 8 NOTE 2 DEBT Description. On November 21, 2006, Transcat entered into a Credit Agreement (the Chase Credit Agreement ) with JPMorgan Chase Bank, N.A. The Chase Credit Agreement provides for a three-year revolving credit facility in the amount of $10 million (the Revolving Credit Facility ). The Chase Credit Agreement replaced the Amended and Restated Loan and Security Agreement dated November 1, 2004, as further amended, with GMAC Commercial Finance LLC (the GMAC Credit Agreement ). Interest and Commitment Fees. Interest on the Revolving Credit Facility accrues, at Transcat s election, at either a base rate (defined as the highest of prime, a three month certificate of deposit plus 1%, or the federal funds rate plus 1 /2 of 1%) (the Base Rate ) or the London Interbank Offered Rate ( LIBOR ), in each case, plus a margin. Commitment fees accrue based on the average daily amount of unused credit available on the Revolving Credit Facility. Interest and commitment fees are adjusted on a quarterly basis based upon the Company s calculated leverage ratio, as defined in the Chase Credit Agreement. The Base Rate and the LIBOR rates as of December 29, 2007 were 7.3% and 4.6%, respectively. The Company s interest rate for the first nine months of fiscal year 2008 ranged from 5.3% to 7.6%. Covenants. The Chase Credit Agreement has certain covenants with which the Company has to comply, including a fixed charge ratio covenant and a leverage ratio covenant. The Company was in compliance with all loan covenants and requirements throughout the first nine months of fiscal year Other Terms. The Company has pledged all of its U.S. tangible and intangible personal property as collateral security for the loans made under the Revolving Credit Facility. NOTE 3 INCOME TAXES Effective April 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 ( FIN 48 ). FIN 48 establishes a single model to address accounting for uncertain tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. Upon adoption of FIN 48, the Company had no un
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