Summary of TRANSCAT INC - Yahoo! Finance

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements. This report and, in particular, the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this report, contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These include statements concerning expectations, estimates, and projections about the industry, management beliefs and assumptions of Transcat, Inc. ("Transcat", "we", "us", or "our"). Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast. Therefore, our actual results and outcomes may materially differ from those expressed or forecasted in any such forward-looking statements. When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements elsewhere in this report and in any documents incorporated herein by reference. New risks and uncertainties arise from time to time and we cannot predict those events or how they may affect us. For a more detailed discussion of the risks and uncertainties that may affect Transcat's operating and financial results and its ability to achieve its financial objectives, interested parties should review the "Risk Factors" sections in Transcat's reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended March 28, 2009. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES Accounts Receivable: Accounts receivable represent amounts due from customers in the ordinary course of business. These amounts are recorded net of the allowance for doubtful accounts and returns in the Consolidated Balance Sheets. The allowance for doubtful accounts is based upon the expected collectibility of accounts receivable. We apply a specific formula to our accounts receivable aging, which may be adjusted on a specific account basis where the formula may not appropriately reserve for loss exposure. After all attempts to collect a receivable have failed, the receivable is written-off against the allowance for doubtful accounts. The returns reserve is calculated based upon the historical rate of returns applied to revenues over a specific timeframe. The returns reserve will increase or decrease as a result of changes in the level of revenues and/or the historical rate of returns.
Stock-Based Compensation. We measure the cost of services received in exchange for all equity awards granted, including stock options, warrants and restricted stock, based on the fair market value of the award as of the grant date. We record compensation cost related to unvested stock 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 from the exercise of stock awards are presented in the Consolidated Statements of Cash Flows as a financing activity. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. We did not capitalize any stock-based compensation costs as part of an asset. We estimate forfeiture rates based on our historical experience.
Options vest over a period of up to four years, using either a graded schedule or on a straight-line basis, and expire ten years from the date of grant. The expense relating to options is recognized on a straight-line basis over the requisite service period for the entire award.
During the first quarter of fiscal years 2010 and 2009, we granted performance-based restricted stock awards in place of options as a primary component of executive compensation. The performance-based restricted stock awards will vest after three years subject to certain cumulative diluted earnings per share growth targets over the eligible three-year period. Compensation cost ultimately recognized for these performance-based restricted awards will equal the grant date fair market value of the award that coincides with the actual outcome of the performance conditions. On an interim basis, we record compensation cost based on an assessment of the probability of achieving the performance conditions. At June 27, 2009, we estimated the probability of achievement for the performance-based awards granted in fiscal years 2010 and 2009 to be 100% and 50%, respectively, of the target levels.
Revenue Recognition. Product sales are recorded when a product's title and risk of loss transfer to the customer. We recognize the majority of our service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. Some of our service revenue is generated from managing customers' calibration programs in which we recognize revenue in equal amounts at fixed intervals. We generally invoice our customers for freight, shipping, and handling charges. Provisions for customer returns are provided for in the period the related revenues are recorded based upon historical data.

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RESULTS OF OPERATIONS
The following table presents, for the first quarter of fiscal years 2010 and
2009, the components of our Consolidated Statements of Operations.

                                                            (Unaudited)
                                                        First Quarter Ended
                                                       June 27,       June 28,
                                                         2009           2008
         Gross Profit Percentage:
         Product Gross Profit                             23.5 %         27.3 %
         Service Gross Profit                             20.2 %         21.0 %
         Total Gross Profit                               22.3 %         25.3 %

         As a Percentage of Total Net Revenue:
         Product Sales                                    65.5 %         69.0 %
         Service Revenue                                  34.5 %         31.0 %

         Total Net Revenue                               100.0 %        100.0 %


         Selling, Marketing and Warehouse Expenses        14.9 %         14.5 %
         Administrative Expenses                           8.1 %          8.6 %

         Total Operating Expenses                         23.0 %         23.1 %


         Operating (Loss) Income                          (0.7 )%         2.2 %

         Interest Expense                                  0.1 %            - %
         Total Other Expense, net                          0.1 %            - %

         Total Other Expense                               0.2 %            - %


         (Loss) Income Before Income Taxes                (0.9 )%         2.2 %
         (Benefit from) Provision for Income Taxes        (0.3 )%         0.9 %


         Net (Loss) Income                                (0.6 )%         1.3 %

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FIRST QUARTER ENDED JUNE 27, 2009 COMPARED TO FIRST QUARTER ENDED JUNE 28, 2008
(dollars in thousands):
Revenue:

                                          First Quarter Ended
                                        June 27,       June 28,
                                          2009           2008
                     Net Revenue:
                     Product Sales     $    11,268     $  12,311
                     Service Revenue         5,940         5,542

                     Total             $    17,208     $  17,853

Net revenue decreased $0.6 million or 3.6% from the first quarter of fiscal year 2009 to the first quarter of fiscal year 2010.
Our product net sales accounted for 65.5% of our total net revenue in the first quarter of fiscal year 2010 and 69.0% of our total net revenue in the first quarter of fiscal year 2009. For the first quarter of fiscal year 2010, product sales decreased $1.0 million or 8.5% compared to the first quarter of fiscal year 2009. We believe this decline is reflective of current economic conditions. While we transacted with 2.2% more customers in the first quarter of fiscal year 2010 when compared to the first quarter of fiscal year 2009, our average product sales per customer declined by 9.8%. Our fiscal years 2010 and 2009 product sales growth in relation to prior fiscal year quarter comparisons is as follows:

FY 2010 FY 2009 Q1 Q4 Q3 Q2 Q1 Product Sales (Decline) Growth (8.5 %) (1.4 %) 7.6 % 15.5 % 12.7 %

Our average product sales per business day decreased to $176 in the first quarter of fiscal year 2010, compared with $192 in the first quarter of fiscal year 2009. Our product sales per business day for each fiscal quarter during fiscal years 2010 and 2009 are as follows:

FY 2010 FY 2009 Q1 Q4 Q3 Q2 Q1 Product Sales Per Business Day $ 176 $ 191 $ 226 $ 206 $ 192

In the first quarter of fiscal year 2010, sales through our direct distribution channel decreased 10.0% from the same period in the prior fiscal year. Direct sales to U.S., International and Canadian markets all declined as a result of the current economic climate, but were partially offset by sales to wind energy industry customers. Wind energy product sales represented 10.6% of our total product net sales in the first quarter of fiscal year 2010. While sales through our direct distribution channel declined, our reseller channel had comparable sales quarter-over-quarter for the first quarter of fiscal years 2010 and 2009. With declining direct sales and comparable reseller sales, the mix of reseller sales as a percent of our total product net sales increased 140 basis points from the first quarter of fiscal year 2009 to the first quarter of fiscal year 2010. The following table presents the percent of net sales for the significant product distribution channels for each fiscal quarter during fiscal years 2010 and 2009:

                                    FY 2010                         FY 2009
                                      Q1            Q4          Q3          Q2          Q1
      Percent of Net Sales:
      Direct                          80.5 %        83.0 %      79.7 %      77.6 %      81.8 %
      Reseller                        18.0 %        15.6 %      19.1 %      20.8 %      16.6 %
      Freight Billed to Customer       1.5 %         1.4 %       1.2 %       1.6 %       1.6 %

                                     100.0 %       100.0 %     100.0 %     100.0 %     100.0 %

Customer product 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 calibration laboratories prior to shipment, orders required to be shipped complete, orders awaiting credit approval and orders required to be shipped at a future date. Our total pending product shipments for the first quarter of fiscal year 2010 increased 5.8% from the first quarter of fiscal year 2009. This increase was primarily driven by orders required to be shipped complete associated with our wind energy business, partially offset by a reduction in products awaiting calibration prior to shipment. The following table presents the percentage of total

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pending product shipments that are backorders at the end of the first quarter of fiscal year 2010 and our historical trend of total pending product shipments:

                                        FY 2010                                  FY 2009
                                          Q1              Q4               Q3               Q2               Q1
Total Pending Product Shipments        $ 1,445         $ 1,189          $ 1,701          $ 1,398          $ 1,366
% of Pending Product Shipments
that are Backorders                       72.2 %          81.0 %           84.1 %           70.7 %           74.7 %

Service revenue increased $0.4 million, or 7.2%, from the first quarter of fiscal year 2009 to the first quarter of fiscal year 2010. Within any year, while we add new customers, we also have customers from the prior year whose calibrations may not repeat for any number of factors. Among those factors are variations in the timing of customer periodic calibrations on instruments and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of calibration orders and segment expenses can vary on a quarter-to-quarter basis, we believe a trailing twelve month trend provides a better indication of the progress of this segment. Service segment revenue for the twelve months ended June 27, 2009 were $24.3 million, up 4.9% when compared with $23.2 million for the twelve months ended June 28, 2008. Our fiscal years 2010 and 2009 service revenue growth in relation to prior fiscal year quarter comparisons is as follows:

                                         FY 2010                       FY 2009
                                            Q1            Q4          Q3        Q2        Q1
     Service Revenue Growth (Decline)        7.2 %       (0.9 %)     10.3 %     4.5 %     5.3 %

Within the calibration industry, there is a broad array of measurement disciplines making it costly and inefficient for any one provider to invest the needed capital for facilities, equipment and uniquely-trained personnel necessary to perform all measurement disciplines with in-house calibration capabilities. Our strategy has been to focus our investments in the core electrical, temperature, pressure and dimensional disciplines. Accordingly, 15% to 20% of our service segment revenue is generated from outsourcing customer equipment to third party vendors for calibration beyond our chosen scope of capabilities. The following table presents the source of our service segment revenue and the percent of service segment revenue for the first quarter of fiscal years 2010 and 2009:

                                   FY 2010 First Quarter            FY 2009 First Quarter
                                                     % of                             % of
                                   Service         Service          Service         Service
                                   Segment         Segment          Segment         Segment
                                   Revenue         Revenue          Revenue         Revenue
   Depot/On-Site                 $     4,710           79.3 %     $     4,478           80.8 %
   Outsourced                          1,079           18.2 %             911           16.4 %
   Freight Billed to Customers           151            2.5 %             153            2.8 %

   Total                         $     5,940          100.0 %     $     5,542          100.0 %

Gross Profit:

                                         First Quarter Ended
                                      June 27,         June 28,
                                        2009             2008
                     Gross Profit:
                     Product         $    2,646       $    3,362
                     Service              1,197            1,163

                     Total           $    3,843       $    4,525

Total gross profit dollars in the first quarter of fiscal year 2010 declined $0.7 million, or 15.1%, from the first quarter of fiscal year 2009. As a percentage of total net revenue, total gross profit declined 300 basis points over the same time period.
We evaluate product gross profit from two perspectives. Channel gross profit includes net sales less the direct cost of inventory sold. Our total product gross profit includes channel gross profit as well as the impact of vendor rebates, cooperative advertising income, freight billed to customers, freight expenses and direct shipping costs. In general, our total product gross profit can vary based upon price discounting; the mix of sales to our reseller channel, which have lower margins than our direct customer base; and the timing of periodic vendor rebates and cooperative advertising income received from suppliers.

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The channel gross profit percentage in our direct distribution channel declined 140 basis points from the first quarter of fiscal year 2009 to the first quarter of fiscal year 2010 as we increased discounting in efforts to maintain competitive pricing in the current economic environment. Within the reseller channel, we maintained a relatively consistent quarter-over-quarter channel gross profit percentage as a result of our continued use of a volume-based pricing structure.
Total product gross profit in the first quarter of fiscal year 2010 was 23.5% of total product sales and declined 380 basis points when compared with 27.3% of total product sales in the first quarter of fiscal year 2009. Product gross profit declined $0.7 million in the first quarter of fiscal year 2010 compared to the first quarter of fiscal year 2009, which was the result of reduced volume, increased price discounting and lower vendor point-of-sale rebates. Vendor point-of-sale rebates are based on year-over-year growth in product segment sales. We did not qualify for this type of rebate in the first quarter of fiscal year 2010. In the first quarter of fiscal year 2009, point-of-sale rebates were $0.1 million. The following table reflects the quarterly historical trend of our product gross profit as a percent of total product sales:

                                            FY 2010                       FY 2009
                                              Q1            Q4         Q3         Q2         Q1
   Channel Gross Profit % - Direct (1)        23.8 %       23.6 %     23.9 %     25.8 %     25.2 %
   Channel Gross Profit % - Reseller (1)      17.4 %       18.7 %     18.1 %     18.2 %     17.5 %

   Channel Gross Profit % - Combined (2)      22.6 %       22.8 %     22.8 %     24.2 %     23.9 %
   Other Items % (3)                           0.9 %        1.2 %      1.6 %      1.8 %      3.4 %

   Total Product Gross Profit %               23.5 %       24.0 %     24.4 %     26.0 %     27.3 %

(1) Channel gross profit % calculated as net sales less purchase costs divided by net sales.

(2) Represents aggregate gross profit % for direct and reseller channels, calculated as net sales less purchase costs divided by net sales.

(3) Includes vendor rebates, cooperative advertising income, freight billed to customers, freight expenses, and direct shipping costs.

Calibration service gross profit dollars increased 2.9% from the first quarter of fiscal year 2009 to the first quarter of fiscal year 2010. As a percent of service revenue, calibration service gross profit decreased 80 basis points over the same time period. We realized a quarter-over-quarter increase in cost of calibration services sold of 8.3% in the first quarter of fiscal year 2010 compared to the first quarter of fiscal year 2009, which was primarily the result of costs associated with adding a lab in Portland, Oregon. The following table reflects our calibration services gross profit growth in relation to prior fiscal year quarters:

                                        FY 2010                               FY 2009
                                          Q1             Q4              Q3             Q2              Q1
Service Gross Profit Dollar
Growth (Decline)                           2.9 %         5.7 %          16.8 %          4.8 %          (0.3 %)


Operating Expenses:

                                                   First Quarter Ended
                                                June 27,         June 28,
                                                  2009             2008
            Operating Expenses:
            Selling, Marketing and Warehouse   $    2,559       $    2,595
            Administrative                          1,400            1,542

            Total                              $    3,959       $    4,137

Operating expenses decreased $0.2 million, or 4.3%, from the first quarter of fiscal year 2009 to the first quarter of fiscal year 2010. Sales, Marketing and Warehouse expenses as a percent of total revenue increased slightly from 14.5% in the first quarter of fiscal year 2009 to 14.9% in the first quarter of fiscal year 2010. The increase is primarily driven by incremental costs associated with adding Westcon selling and warehouse personnel, partially offset by reduced spending on selling and marketing initiatives. Administrative expenses as a percent of total revenue decreased from 8.6% in the first quarter of fiscal year 2009 to 8.1% in the first quarter of fiscal year 2010 primarily due to a reduction in performance-based management bonus and employee profit sharing expense.

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Taxes:

                                                        First Quarter Ended
                                                      June 27,       June 28,
                                                        2009           2008
        (Benefit from) Provision for Income Taxes    $    (56 )      $    153

In the first quarter of fiscal year 2010, we realized a $0.1 million benefit from income taxes, compared with a $0.2 million provision for income taxes in the first quarter of fiscal year 2009. We continue to evaluate our tax provision on a quarterly basis and make adjustments, as deemed necessary, to our effective tax rate given changes in facts and circumstances expected for the entire fiscal year.

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LIQUIDITY AND CAPITAL RESOURCES
We believe that amounts available under our current credit facility and our cash
on hand are sufficient to satisfy our expected working capital and capital
expenditure needs as well as our lease commitments for the foreseeable future.
Cash Flows. The following table is a summary of our Consolidated Statements of
Cash Flows (dollars in thousands):

                                                 First Quarter Ended
                                                June 27,       June 28,
                                                  2009           2008
               Cash Provided by (Used in):
               Operating Activities           $    1,549       $    359
               Investing Activities                 (290 )         (195 )
               Financing Activities               (1,282 )         (244 )

Operating Activities: Cash provided by operating activities for the first quarter of fiscal year 2010 was $1.5 million compared to the $0.4 million of cash provided by operating activities in the first quarter of fiscal year 2009. Significant working capital fluctuations were as follows:
� Inventory/Accounts Payable: Due to recent recessionary economic conditions, we have implemented tight monitoring controls to drive down inventory levels. These efforts provided approximately $0.6 million of cash from operations in the first quarter of fiscal year 2010 compared to cash used of approximately $1.1 million in the first quarter of fiscal year 2009. In general, our accounts payable balance increases or decreases as a result of timing of vendor payments for inventory receipts.

� Receivables: We continue to generate positive operating cash flows and maintain strong collections on our accounts receivable.

                                             June 27,     June 28,
                                               2009         2008
Net Sales, for the last two fiscal months   $ 12,394     $ 12,317
Accounts Receivable, net                    $  8,116     $  7,501
Days Sales Outstanding                            39           37

� Accrued Compensation and Other Liabilities: During the first quarter of fiscal year 2010, we used $0.2 million in cash to pay accrued compensation and other liabilities compared with $1.0 million in the first quarter of fiscal year 2009. This decline was primarily attributable to lower payments for employee profit sharing and performance-based management bonuses.

Investing Activities: The $0.3 million of cash used in investing activities in the first quarter of fiscal year 2010, an increase of approximately $0.1 million when compared to the first quarter of fiscal year 2009, was primarily for expansion of capabilities in our calibration laboratories and equipment replacement.
Financing Activities: During the first quarter of fiscal year 2010, we used approximately $1.3 million in cash from operations to reduce our debt, compared to $0.3 million used in the first quarter of fiscal year 2009.
OUTLOOK
We believe that our next two fiscal quarters will continue to be soft and anticipate some recovery in our fiscal fourth quarter. Our strong balance sheet and cash flow have positioned us to take advantage of opportunities that may present themselves, as we prudently seek appropriate acquisition candidates to further grow our service segment. We expect product sales to wind energy customers to continue to grow at a faster rate than product sales to customers in other industries for the rest of fiscal year 2010.
Most critical in our decision making is our commitment to our longer-term strategy where we believe the investments in our sales team, calibration technicians and support staff are fundamental in achieving our growth objectives.

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