Transcat, Inc. (NASDAQ:TRNS) Q4 2022 Earnings Conference Call May 24, 2022 11:00 AM ET Company Participants Thomas Barbato - Senior Vice President of Finance Lee Rudow - President and Chief Executive Officer Mark Doheny - Vice President and Chief Financial Officer Conference Call Participants Gerard Sweeney - ROTH Capital Partners, LLC Gregory Palm - Craig-Hallum Capital Group LLC Mitra Ramgopal - Sidoti & Company, LLC Operator Greetings, and welcome to Transcat Incorporated Fourth Quarter and Full Fiscal Y ...

Fiscal 2022 Q4 Financial Results | --- | --- | |----------------------------------------|-------| | | | | Lee D. Rudow President and CEO | | | Mark A. Doheny Chief Financial Officer | | | | | Safe Harbor Statement This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact and thus are subject to risks, uncertainties and assumptions. Forward-looking statements are identified ...

Fiscal 2022 Q3 Financial Results | --- | --- | --- | |-------------------------|-------|-------| | | | | | Lee D. Rudow | | | | President and CEO | | | | Mark A. Doheny | | | | Chief Financial Officer | | | | | | | Safe Harbor Statement This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact and thus are subject to risks, uncertainties and assumptions. Forward-looking st ...

PART I. FINANCIAL INFORMATION [**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**](index=3&type=section&id=ITEM%201.%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) Presents unaudited consolidated financial statements and notes for Q3 and 9M FY22, detailing operations, policies, and acquisitions [**Consolidated Statements of Income**](index=3&type=section&id=Consolidated%20Statements%20of%20Income) | Metric (in Thousands) | Q3 FY22 (Dec 25, 2021) | Q3 FY21 (Dec 26, 2020) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | | :-------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Service Revenue | $30,237 | $24,776 | $87,338 | $72,297 | | Distribution Sales | $20,665 | $19,286 | $61,741 | $52,276 | | Total Revenue | $50,902 | $44,062 | $149,079 | $124,573 | | Gross Profit | $13,636 | $11,245 | $41,767 | $32,148 | | Operating Income | $2,361 | $2,519 | $9,628 | $6,561 | | Net Income | $1,629 | $1,761 | $8,332 | $4,583 | | Basic EPS | $0.22 | $0.24 | $1.11 | $0.62 | | Diluted EPS | $0.21 | $0.23 | $1.10 | $0.61 | [**Consolidated Statements of Comprehensive Income**](index=4&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) | Metric (in Thousands) | Q3 FY22 (Dec 25, 2021) | Q3 FY21 (Dec 26, 2020) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | | :-------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net Income | $1,629 | $1,761 | $8,332 | $4,583 | | Currency Translation Adjustment | ($233) | $251 | ($314) | $505 | | Other, net of tax effects | $18 | $21 | $48 | $95 | | Total Other Comprehensive (Loss) Income | ($215) | $272 | ($266) | $600 | | Comprehensive Income | $1,414 | $2,033 | $8,066 | $5,183 | [**Consolidated Balance Sheets**](index=5&type=section&id=Consolidated%20Balance%20Sheets) | Metric (in Thousands) | Dec 25, 2021 | Mar 27, 2021 | | :-------------------- | :----------- | :----------- | | Cash | $2,779 | $560 | | Accounts Receivable, net | $34,702 | $33,950 | | Inventory, net | $13,868 | $11,636 | | Total Current Assets | $57,549 | $48,928 | | Property and Equipment, net | $23,781 | $22,203 | | Goodwill | $59,133 | $43,272 | | Intangible Assets, net | $11,503 | $7,513 | | Total Assets | $161,600 | $132,116 | | Total Current Liabilities | $24,619 | $25,142 | | Long-Term Debt | $38,616 | $17,494 | | Total Liabilities | $78,702 | $57,038 | | Total Shareholders' Equity | $82,898 | $75,078 | [**Consolidated Statements of Cash Flows**](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) | Metric (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | | :-------------------- | :--------------------- | :--------------------- | | Net Cash Provided by Operating Activities | $12,378 | $15,647 | | Net Cash Used in Investing Activities | ($26,759) | ($7,742) | | Net Cash Provided by (Used in) Financing Activities | $16,900 | ($6,619) | | Net Increase in Cash | $2,219 | $535 | | Cash at End of Period | $2,779 | $1,034 | [**Consolidated Statements of Shareholders' Equity**](index=7&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) | Metric (in Thousands) | Balance as of March 27, 2021 | Balance as of December 25, 2021 | | :-------------------- | :--------------------------- | :------------------------------ | | Common Stock, $0.50 Par Value | $3,729 | $3,760 | | Capital in Excess of Par Value | $19,287 | $23,452 | | Accumulated Other Comprehensive Loss | ($451) | ($717) | | Retained Earnings | $52,513 | $56,403 | | Total Shareholders' Equity | $75,078 | $82,898 | [**Notes to Consolidated Financial Statements**](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) [**NOTE 1 – GENERAL**](index=9&type=section&id=NOTE%201%20%E2%80%93%20GENERAL) Details Transcat's business, key accounting policies, and confirms no material impact from ASU 2016-13 on credit losses - Transcat, Inc. is a **leading provider** of accredited calibration and laboratory instrument services and a value-added distributor of professional grade test, measurement and control instrumentation, focusing on highly regulated industries like life science[23](index=23&type=chunk) | Metric (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | | :-------------------- | :--------------------- | :--------------------- | | Non-cash stock-based compensation expense | $1,700 | $900 | - The company uses short-term foreign exchange forward contracts to reduce risk from Canadian dollar fluctuations, recognizing net changes in fair value as a component of other expense[30](index=30&type=chunk) | Metric (in Thousands) | Dec 25, 2021 | Mar 27, 2021 | | :-------------------- | :----------- | :----------- | | Goodwill | $59,133 | $43,272 | | Intangible Assets | $11,503 | $7,513 | | Goodwill Additions | $15,980 | - | | Intangible Assets Additions | $6,690 | - | | Intangible Assets Amortization | ($2,696) | - | - The adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), is **not expected to have a material impact** on consolidated financial statements, as credit losses from trade receivables have not historically been significant[34](index=34&type=chunk) [**NOTE 2 – LONG-TERM DEBT**](index=11&type=section&id=NOTE%202%20%E2%80%93%20LONG-TERM%20DEBT) Details the 2021 Credit Agreement, increasing revolving credit and acquisition limits, and confirming covenant compliance - The **2021 Credit Agreement increased the revolving credit commitment from $40.0 million to $80.0 million and extended its term to June 2026**[36](index=36&type=chunk) - **Permitted acquisitions aggregate purchase price increased from $1.0 million to $65.0 million for the current fiscal year, with an additional $40.0 million for UK/EU businesses**[36](index=36&type=chunk) - **Restricted payments for share repurchases and dividends increased to $25.0 million in aggregate and $10.0 million in any single fiscal year**[37](index=37&type=chunk) - The **LIBOR floor was reduced from 1.0% to 0.25%**, and the **fixed interest rate on the $15.0 million term loan was reduced from 4.15% to 3.90%**[37](index=37&type=chunk) | Debt Type (in Thousands) | Outstanding as of Dec 25, 2021 | | :----------------------- | :----------------------------- | | Revolving Credit Facility | $31,700 | | 2018 Term Loan | $9,100 | - The company was **in compliance with all loan covenants**, with a **leverage ratio of 1.47** at December 25, 2021, compared to **0.94** at March 27, 2021[43](index=43&type=chunk) [**NOTE 3 – STOCK-BASED COMPENSATION**](index=13&type=section&id=NOTE%203%20%E2%80%93%20STOCK-BASED%20COMPENSATION) Outlines the 2021 Stock Incentive Plan, restricted stock units, options, and related compensation expense and tax benefits - As of December 25, 2021, **0.7 million shares of common stock were available for future grant** under the 2021 Plan[46](index=46&type=chunk) | Metric (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | | :-------------------- | :--------------------- | :--------------------- | | Discrete tax benefits related to share-based compensation | $1,700 | $300 | | Metric (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | | :-------------------- | :--------------------- | :--------------------- | | Expense relating to restricted stock units | $1,200 | $700 | | Unearned compensation for restricted stock units (as of Dec 25, 2021) | $2,400 | - | | Metric (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | | :-------------------- | :--------------------- | :--------------------- | | Expense related to stock options | $400 | $100 | | Aggregate intrinsic value of stock options exercised | $6,900 | $300 | | Cash received from exercise of options | $1,000 | $400 | [**NOTE 4 – SEGMENT INFORMATION**](index=14&type=section&id=NOTE%204%20%E2%80%93%20SEGMENT%20INFORMATION) Provides disaggregated financial data for Service and Distribution segments, including revenue, gross profit, and operating income | Metric (in Thousands) | Q3 FY22 (Dec 25, 2021) | Q3 FY21 (Dec 26, 2020) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | | :-------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | **Revenue:** | | | | | | Service | $30,237 | $24,776 | $87,338 | $72,297 | | Distribution | $20,665 | $19,286 | $61,741 | $52,276 | | Total | $50,902 | $44,062 | $149,079 | $124,573 | | **Gross Profit:** | | | | | | Service | $8,983 | $6,915 | $27,447 | $20,884 | | Distribution | $4,653 | $4,330 | $14,320 | $11,264 | | Total | $13,636 | $11,245 | $41,767 | $32,148 | | **Operating Expenses:** | | | | | | Service | $7,322 | $4,959 | $20,165 | $14,822 | | Distribution | $3,953 | $3,767 | $11,974 | $10,765 | | Total | $11,275 | $8,726 | $32,139 | $25,587 | | **Operating Income:** | | | | | | Service | $1,661 | $1,956 | $7,282 | $6,062 | | Distribution | $700 | $563 | $2,346 | $499 | | Total | $2,361 | $2,519 | $9,628 | $6,561 | [**NOTE 5 – BUSINESS ACQUISITIONS**](index=16&type=section&id=NOTE%205%20%E2%80%93%20BUSINESS%20ACQUISITIONS) Details recent business acquisitions, including purchase prices, allocations, strategic rationale, and pro forma results - Transcat acquired Tangent Labs, LLC for approximately **$9.0 million** in cash on December 31, 2021, **expanding its local calibration capabilities** in attractive geographies[57](index=57&type=chunk)[58](index=58&type=chunk) - Transcat acquired NEXA Enterprise Asset Management for approximately **$26.2 million** (**$23.9 million** cash, **$2.4 million** stock) on August 31, 2021, **enhancing Service capabilities globally**[60](index=60&type=chunk)[62](index=62&type=chunk) NEXA Preliminary Purchase Price Allocation (in Thousands): | Asset/Liability | Amount | | :-------------- | :----- | | Goodwill | $15,497 | | Intangible Assets – Customer Base & Contracts | $5,600 | | Intangible Assets – Backlog | $490 | | Intangible Assets – Covenant Not to Compete | $600 | | Cash | $3,732 | | Accounts Receivable | $2,434 | | Non-Current Assets | $38 | | Current Liabilities | ($453) | | Deferred Tax Liability | ($1,706) | | **Total Purchase Price** | **$26,232** | - Transcat acquired Upstate Metrology Inc. for approximately **$0.9 million** on April 29, 2021, **leveraging existing operating infrastructure**[65](index=65&type=chunk)[67](index=67&type=chunk) Upstate Metrology Purchase Price Allocation (in Thousands): | Asset/Liability | Amount | | :-------------- | :----- | | Goodwill | $483 | | Current Assets | $189 | | Non-Current Assets | $270 | | Current Liabilities | ($11) | | **Total Purchase Price** | **$931** | - Transcat acquired BioTek Services, Inc. for approximately **$3.5 million** on December 16, 2020, **expanding pipette calibration services in the life science sector**[68](index=68&type=chunk)[70](index=70&type=chunk) BioTek Purchase Price Allocation (in Thousands): | Asset/Liability | Amount | | :-------------- | :----- | | Goodwill | $1,063 | | Intangible Assets – Customer Base & Contracts | $1,930 | | Intangible Assets – Covenant Not to Compete | $100 | | Current Assets | $406 | | Non-Current Assets | $8 | | **Total Purchase Price** | **$3,507** | Unaudited Pro Forma Results (in Thousands, except per share): | Metric | Q4 FY21 (Dec 26, 2020) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | | :----- | :--------------------- | :--------------------- | :--------------------- | | Total Revenue | $47,384 | $153,011 | $131,096 | | Net Income | $3,129 | $8,943 | $5,998 | | Basic EPS | $0.42 | $1.19 | $0.81 | | Diluted EPS | $0.41 | $1.18 | $0.80 | [**ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**](index=19&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management's discussion of financial condition and results for Q3 and 9M FY22, covering revenue, expenses, and liquidity [**Forward-Looking Statements**](index=19&type=section&id=Forward-Looking%20Statements) - The report contains forward-looking statements subject to risks and uncertainties, including the **impact of COVID-19, competition, cybersecurity, employee retention, operating result fluctuations, and acquisition integration**[75](index=75&type=chunk) [**Critical Accounting Policies and Estimates**](index=19&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - There have been **no material changes to critical accounting policies and estimates** from the information provided in the Annual Report on Form 10-K for the fiscal year ended March 27, 2021[76](index=76&type=chunk) [**RESULTS OF OPERATIONS**](index=19&type=section&id=RESULTS%20OF%20OPERATIONS) [**Executive Summary**](index=19&type=section&id=Executive%20Summary) Transcat's Q3 FY22 revenue grew **15.5%** to **$50.9 million** from strong Service and Distribution, with Adjusted EBITDA up **19.8%** | Metric (in Millions) | Q3 FY22 (Dec 25, 2021) | Q3 FY21 (Dec 26, 2020) | Change ($M) | Change (%) | | :------------------- | :--------------------- | :--------------------- | :---------- | :--------- | | Consolidated Revenue | $50.9 | $44.1 | $6.8 | 15.5% | | Gross Profit | $13.6 | $11.2 | $2.4 | 21.3% | | Gross Margin | 26.8% | 25.5% | 1.3 pp | | | Total Operating Expenses | $11.3 | $8.7 | $2.6 | 29.2% | | Operating Income | $2.4 | $2.5 | ($0.1) | (4.0%) | | Net Income | $1.6 | $1.8 | ($0.2) | (7.5%) | [**Third Quarter Ended December 25, 2021 Compared to Third Quarter Ended December 26, 2020**](index=20&type=section&id=Third%20Quarter%20Ended%20December%2025,%202021%20Compared%20to%20Third%20Quarter%20Ended%20December%2026,%202020) Q3 FY22 revenue grew **15.5%** to **$50.9 million** from strong Service and Distribution, with Adjusted EBITDA up **19.8%** [**Revenue**](index=20&type=section&id=Revenue_Q3) | Revenue (in Thousands) | Q3 FY22 (Dec 25, 2021) | Q3 FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :--------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Service | $30,237 | $24,776 | $5,461 | 22.0% | | Distribution | $20,665 | $19,286 | $1,379 | 7.2% | | Total | $50,902 | $44,062 | $6,840 | 15.5% | - **Service revenue growth included $2.9 million from acquisitions and 10.2% organic revenue growth**[83](index=83&type=chunk) Service Revenue Growth (YoY %): | Quarter | FY22 Q3 | FY22 Q2 | FY22 Q1 | FY21 Q4 | FY21 Q3 | FY21 Q2 | FY21 Q1 | | :------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Growth | 22.0% | 20.3% | 20.0% | 15.8% | 12.2% | 4.5% | 2.5% | Trailing Twelve-Month Service Revenue (in Thousands): | Quarter | FY22 Q3 | FY22 Q2 | FY22 Q1 | FY21 Q4 | FY21 Q3 | FY21 Q2 | FY21 Q1 | | :------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Revenue | $116,315 | $110,854 | $105,864 | $101,274 | $97,225 | $94,624 | $93,572 | | Growth | 19.5% | 17.1% | 13.1% | 8.9% | 5.4% | 4.3% | 7.4% | Distribution Sales Growth (Decline) (YoY %): | Quarter | FY22 Q3 | FY22 Q2 | FY22 Q1 | FY21 Q4 | FY21 Q3 | FY21 Q2 | FY21 Q1 | | :------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Growth | 7.2% | 22.2% | 27.0% | (4.6%) | (8.6%) | (6.6%) | (20.3%) | Total Pending Product Shipments (in Thousands): | Quarter | FY22 Q3 (Dec 25, 2021) | FY21 Q3 (Dec 26, 2020) | Change ($) | | :------ | :--------------------- | :--------------------- | :--------- | | Amount | $8,854 | $5,533 | $3,321 | | % Backorders | 81.3% | 79.3% | | [**Gross Profit**](index=22&type=section&id=Gross_Profit_Q3) | Gross Profit (in Thousands) | Q3 FY22 (Dec 25, 2021) | Q3 FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :-------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Service | $8,983 | $6,915 | $2,068 | 29.9% | | Distribution | $4,653 | $4,330 | $323 | 7.5% | | Total | $13,636 | $11,245 | $2,391 | 21.3% | - Total gross margin expanded by **130 basis points** to **26.8%** in Q3 FY22, driven by **operating leverage and accretive gross margins from recent acquisitions**[90](index=90&type=chunk)[91](index=91&type=chunk) Service Gross Margin (% of Service Revenue): | Quarter | FY22 Q3 | FY22 Q2 | FY22 Q1 | FY21 Q4 | FY21 Q3 | FY21 Q2 | FY21 Q1 | | :------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Margin | 29.7% | 32.9% | 31.8% | 33.9% | 27.9% | 32.2% | 26.4% | Distribution Gross Margin (% of Distribution Sales): | Quarter | FY22 Q3 | FY22 Q2 | FY22 Q1 | FY21 Q4 | FY21 Q3 | FY21 Q2 | FY21 Q1 | | :------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Margin | 22.5% | 23.5% | 23.6% | 21.0% | 22.5% | 21.1% | 21.0% | [**Operating Expenses**](index=23&type=section&id=Operating_Expenses_Q3) | Operating Expenses (in Thousands) | Q3 FY22 (Dec 25, 2021) | Q3 FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Selling, Marketing and Warehouse | $5,051 | $4,675 | $376 | 8.0% | | General and Administrative | $6,224 | $4,051 | $2,173 | 53.6% | | Total | $11,275 | $8,726 | $2,549 | 29.2% | - Increase in operating expenses was due to **higher performance-based sales incentives, direct marketing costs, one-time transaction expenses from acquisitions, incremental expenses from acquired companies, increased payroll, and technology investments**[94](index=94&type=chunk) [**Provision for Income Taxes**](index=23&type=section&id=Provision_for_Income_Taxes_Q3) | Provision for Income Taxes (in Thousands) | Q3 FY22 (Dec 25, 2021) | Q3 FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :---------------------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Amount | $596 | $539 | $57 | 10.6% | - Effective tax rates were **26.8%** for Q3 FY22 and **23.4%** for Q3 FY21, with the increase **due to higher non-deductible expenses**[95](index=95&type=chunk) - Expected total fiscal year 2022 effective tax rate is approximately **14% to 15%**[96](index=96&type=chunk) [**Net Income**](index=23&type=section&id=Net_Income_Q3) | Net Income (in Thousands) | Q3 FY22 (Dec 25, 2021) | Q3 FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :------------------------ | :--------------------- | :--------------------- | :--------- | :--------- | | Amount | $1,629 | $1,761 | ($132) | (7.5%) | - Net income decreased **primarily due to lower operating income and a higher provision for income taxes**[97](index=97&type=chunk) [**Adjusted EBITDA**](index=24&type=section&id=Adjusted_EBITDA_Q3) | Adjusted EBITDA (in Thousands) | Q3 FY22 (Dec 25, 2021) | Q3 FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :----------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Amount | $5,466 | $4,562 | $904 | 19.8% | - Adjusted EBITDA as a percentage of revenue increased to **10.7%** for Q3 FY22 from **10.4%** for Q3 FY21[100](index=100&type=chunk) - The increase in Adjusted EBITDA was **primarily driven by increases in depreciation and amortization expense and non-cash stock compensation expense, offsetting lower net income**[100](index=100&type=chunk) [**Nine Months Ended December 25, 2021 Compared to Nine Months Ended December 26, 2020**](index=24&type=section&id=Nine%20Months%20Ended%20December%2025,%202021%20Compared%20to%20Nine%20Months%20Ended%20December%2026,%202020) 9M FY22 revenue increased **19.7%** to **$149.1 million**, net income surged **81.8%**, and Adjusted EBITDA rose **40.5%** [**Revenue**](index=24&type=section&id=Revenue_9M) | Revenue (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :--------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Service | $87,338 | $72,297 | $15,041 | 20.8% | | Distribution | $61,741 | $52,276 | $9,465 | 18.1% | | Total | $149,079 | $124,573 | $24,506 | 19.7% | - **Service revenue increase included $5.3 million of incremental revenue from acquisitions**[102](index=102&type=chunk) - **Distribution sales increase was due to increased orders and an easier comparison to the prior year, which was adversely impacted by COVID-19**[103](index=103&type=chunk) [**Gross Profit**](index=25&type=section&id=Gross_Profit_9M) | Gross Profit (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :-------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Service | $27,447 | $20,884 | $6,563 | 31.4% | | Distribution | $14,320 | $11,264 | $3,056 | 27.1% | | Total | $41,767 | $32,148 | $9,619 | 29.9% | - Total gross margin for the first nine months of fiscal year 2022 was **28.0%**, a **220 basis points** increase compared to **25.8%** in the prior year[104](index=104&type=chunk) - Increase in gross margin was **primarily due to operating leverage on fixed costs, accretive margins from recent acquisitions, strong technician productivity in Service, and a favorable product mix in Distribution**[104](index=104&type=chunk) [**Operating Expenses**](index=25&type=section&id=Operating_Expenses_9M) | Operating Expenses (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Selling, Marketing and Warehouse | $15,022 | $13,040 | $1,982 | 15.2% | | General and Administrative | $17,117 | $12,547 | $4,570 | 36.4% | | Total | $32,139 | $25,587 | $6,552 | 25.6% | - Increase in general and administrative expenses includes **$0.9 million** of one-time transaction related expenses from business acquisitions, **incremental expenses from acquired companies, increased payroll, and technology investments**[105](index=105&type=chunk) [**Provision for Income Taxes**](index=25&type=section&id=Provision_for_Income_Taxes_9M) | Provision for Income Taxes (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :---------------------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Amount | $715 | $1,199 | ($484) | (40.4%) | - Effective tax rates were **7.9%** for 9M FY22 and **20.7%** for 9M FY21, with the decrease **due to increased discrete tax benefits from share-based compensation activity** (**$1.7 million** in FY22 vs. **$300 thousand** in FY21)[107](index=107&type=chunk) [**Net Income**](index=26&type=section&id=Net_Income_9M) | Net Income (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :------------------------ | :--------------------- | :--------------------- | :--------- | :--------- | | Amount | $8,332 | $4,583 | $3,749 | 81.8% | - The year-over-year increase in net income was **due to higher operating income and lower provision for income taxes**[108](index=108&type=chunk) [**Adjusted EBITDA**](index=26&type=section&id=Adjusted_EBITDA_9M) | Adjusted EBITDA (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | Change ($) | Change (%) | | :----------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Amount | $18,655 | $13,273 | $5,382 | 40.5% | - Adjusted EBITDA as a percentage of revenue was **12.5%** for 9M FY22, up from **10.7%** for 9M FY21[112](index=112&type=chunk) - The increase in Adjusted EBITDA was **primarily driven by the increase in net income, depreciation and amortization expense, non-cash stock compensation expense, and acquisition transaction expenses**[112](index=112&type=chunk) [**LIQUIDITY AND CAPITAL RESOURCES**](index=27&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) Transcat expects to meet liquidity needs via operations and credit facility, which was expanded, while cash flows reflect acquisitions - Foreseeable liquidity and capital resource requirements are **expected to be met through anticipated cash flows from operations and borrowings from the $80.0 million revolving credit facility**[113](index=113&type=chunk)[115](index=115&type=chunk) - The **2021 Credit Agreement increased the revolving credit commitment to $80.0 million, expanded permitted acquisition limits to $65.0 million (current fiscal year) plus $40.0 million for UK/EU businesses, and increased restricted payments for share repurchases/dividends**[115](index=115&type=chunk)[116](index=116&type=chunk) - As of December 25, 2021, **$31.7 million** was outstanding on the revolving credit facility and **$9.1 million** on the 2018 Term Loan[119](index=119&type=chunk)[120](index=120&type=chunk) - The company was **in compliance with all loan covenants**, with a **leverage ratio of 1.47** at December 25, 2021[121](index=121&type=chunk) | Cash Flows (in Thousands) | 9M FY22 (Dec 25, 2021) | 9M FY21 (Dec 26, 2020) | | :------------------------ | :--------------------- | :--------------------- | | Operating Activities | $12,378 | $15,647 | | Investing Activities | ($26,759) | ($7,742) | | Financing Activities | $16,900 | ($6,619) | - Net cash provided by operating activities **decreased due to changes in net working capital**, **including increases in accounts receivable and inventory, and decreases in accrued compensation and income taxes payable**[124](index=124&type=chunk)[128](index=128&type=chunk) - Investing activities included **$5.9 million** in **capital expenditures and $20.9 million for business acquisitions** in 9M FY22[126](index=126&type=chunk)[127](index=127&type=chunk) - Financing activities in 9M FY22 included **$22.8 million borrowed from the revolving credit facility, $1.4 million from common stock issuance, and $5.6 million for share repurchases to cover employee tax obligations**[128](index=128&type=chunk) [**OUTLOOK**](index=30&type=section&id=OUTLOOK) Q4 FY22 outlook projects high-teens Service revenue growth, high single-digit Distribution growth, and a **14-15%** full-year tax rate - For Q4 FY22, **Service revenue growth is expected to be in the high-teens**, with **Service gross margin in the range of 35%**[130](index=130&type=chunk) - **Distribution revenue is expected to grow in the high single-digits** in Q4 FY22[130](index=130&type=chunk) - **Total operating expenses in Q4 FY22 are expected to increase approximately $0.5 million sequentially** from Q3, including expenses from the Tangent Labs acquisition[130](index=130&type=chunk) - The **expected income tax rate for full fiscal year 2022 is between 14% and 15%**[131](index=131&type=chunk) [**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**](index=30&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) Discusses exposure to interest rate and foreign currency risks, quantifying potential impacts and mitigation strategies [**Interest Rates**](index=30&type=section&id=INTEREST%20RATES) - A **1%** change in interest rates would **impact yearly interest expense by approximately $0.2 million**, assuming constant average borrowing levels[132](index=132&type=chunk) - As of December 25, 2021, **$31.7 million** was outstanding on the **$80.0 million** revolving credit facility, and **$9.1 million** on the **$15.0 million** (original principal) 2018 Term Loan[132](index=132&type=chunk) - The revolving credit facility's interest rate ranged from **1.0% to 2.2%** during the first nine months of fiscal year 2022, while the 2018 Term Loan accrued at a fixed rate of **3.90%** for subsequent periods after Q1 FY22[133](index=133&type=chunk) [**Foreign Currency**](index=30&type=section&id=FOREIGN%20CURRENCY) - **Approximately 90% of total revenues** for the first nine months of fiscal years 2022 and 2021 were **denominated in U.S. dollars**, with the **remainder in Canadian dollars and Euros**[134](index=134&type=chunk) - A **10%** change in the value of the Canadian dollar or Euro against the U.S. dollar would **impact revenue by approximately 1%**[134](index=134&type=chunk) - The company **uses short-term foreign exchange forward contracts to mitigate risk** from Canadian dollar fluctuations, with a **notional amount of $2.6 million outstanding** as of December 25, 2021[135](index=135&type=chunk)[136](index=136&type=chunk) [**ITEM 4. CONTROLS AND PROCEDURES**](index=31&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section confirms the effectiveness of Transcat's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the third fiscal quarter of 2022 [**Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures**](index=31&type=section&id=Conclusion%20Regarding%20the%20Effectiveness%20of%20Disclosure%20Controls%20and%20Procedures) - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were **effective as of December 25, 2021**[137](index=137&type=chunk) [**Changes in Internal Control over Financial Reporting**](index=31&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - There has been **no change in internal control over financial reporting** during the third fiscal quarter of 2022 that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting[138](index=138&type=chunk) PART II. OTHER INFORMATION [**ITEM 6. EXHIBITS**](index=32&type=section&id=ITEM%206.%20EXHIBITS) Lists exhibits filed with Form 10-Q, including SOX certifications and XBRL data - **Key exhibits include** the Membership Unit Purchase Agreement, CEO and CFO certifications (Section 302 and 906 of Sarbanes-Oxley Act), and XBRL Interactive Data Files[141](index=141&type=chunk) [**SIGNATURES**](index=33&type=section&id=SIGNATURES) Contains the duly authorized signatures of Transcat, Inc.'s CEO and CFO, affirming the report's filing

Transcat, Inc. (NASDAQ:TRNS) Q3 2022 Earnings Conference Call February 2, 2022 11:00 AM ET Company Participants Lee Rudow – President and Chief Executive Officer Mark Doheny – Chief Financial Officer Conference Call Participants Gregory Palm – Craig-Hallum Capital Group Scott Buck – H.C. Wainwright Mitra Ramgopal – Sidoti Operator Greetings, and welcome to the Transcat Incorporated Third Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A b ...

December 8, 2021 Sidoti Virtual Conference | --- | --- | --- | |-------------------|-------------------------|--------------| | | | | | | | | | Lee D. Rudow | | | | President and CEO | | | | Mark A. Doheny | | | | | Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | | Nasdaq: TRNS | Safe Harbor Statement This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of histor ...

Financial Data and Key Metrics Changes - Consolidated Q2 revenue increased by 21% to $50.4 million, setting a record for the second quarter [6][13] - Consolidated gross margin expanded by 140 basis points to 29% [7][16] - Adjusted EBITDA grew by 36% from the prior year to $7.1 million, with an adjusted EBITDA margin of 14% [7][22] - Net income for Q2 was $3 million, an increase of $1 million from the prior year, with diluted earnings per share rising to $0.40, up $0.13 [18] Business Line Data and Key Metrics Changes - Service segment revenue grew by 20.3%, with 14% of this growth being organic and the remainder from acquisitions [14] - Distribution segment revenue increased by 22%, driven by strong demand, particularly in the wind power generation market [11][15] - Service gross margin reached 32.9%, a record for the second quarter, reflecting effective cost management and productivity [10][16] - Distribution gross margin improved to 23.5%, a 240 basis point increase from the prior year [11][16] Market Data and Key Metrics Changes - The life sciences market continues to be a significant driver for service revenue, contributing to the overall growth [9] - The wind power generation market showed particular strength, contributing to distribution growth [11][15] Company Strategy and Development Direction - The company is focused on leveraging its strong balance sheet for strategic capital allocation and pursuing an active M&A pipeline [26] - The acquisition of NEXA is expected to enhance service offerings and expand addressable markets, particularly in the U.S. and Ireland [27] - Future growth is anticipated in both service and distribution segments, with expectations of continued revenue growth and margin expansion [28][30] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to pass on increased costs to customers, maintaining margins despite wage pressures [36] - The company is optimistic about its automation initiatives, which are expected to provide a competitive advantage in a tight labor market [39][60] - Management anticipates continued strong performance in the third quarter, with similar revenue growth to Q2 [28][30] Other Important Information - The company expects to file its Form 10-Q later today [24] - Cash flow from operations was in line with expectations, with year-to-date CapEx at $3.8 million, focused on service segment capabilities [23] Q&A Session All Questions and Answers Question: Can you elaborate on the gross margin guidance for the current quarter? - Management confirmed that the guidance includes a $500,000 gross profit impact from purchase accounting, with an expected 100 basis point positive impact in future quarters [34][35] Question: How is the company managing pricing and cost pressures? - Management noted that they have been able to pass on increased costs to the market, maintaining margins through strategic pricing [36] Question: What is the current concentration of the life sciences business? - Management estimated that life sciences currently represent about 60% of the business [42] Question: What are the expected margin synergies from recent acquisitions? - Management indicated that margins could improve post-acquisition as accounting costs are burned off, with potential for mid-30s margins over time [46] Question: How is the company addressing labor shortages? - Management stated that they are utilizing overtime and training programs to manage labor challenges effectively [57] Question: What are the opportunities in alternative energy markets? - Management expressed optimism about the wind power generation market and the long-term shift towards alternative energy [68] Question: What is the immediate strategy for integrating NEXA? - Management highlighted the focus on cross-selling services between Transcat and NEXA's customer bases [72]

PART I. FINANCIAL INFORMATION This section presents Transcat, Inc.'s unaudited consolidated financial statements and management's discussion for Q2 and H1 FY22 [ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section presents Transcat, Inc.'s unaudited consolidated financial statements and notes for Q2 and H1 FY22, detailing income, balance sheets, cash flows, equity, and accounting policies [Consolidated Statements of Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income) This section provides a summary of Transcat's consolidated statements of income for the second quarter and six months ended September 25, 2021, and September 26, 2020 | Metric (in Thousands) | Second Quarter Ended Sep 25, 2021 | Second Quarter Ended Sep 26, 2020 | Six Months Ended Sep 25, 2021 | Six Months Ended Sep 26, 2020 | | :-------------------- | :-------------------------------- | :-------------------------------- | :---------------------------- | :---------------------------- | | Service Revenue | $29,544 | $24,554 | $57,101 | $47,521 | | Distribution Sales | $20,843 | $17,053 | $41,076 | $32,990 | | **Total Revenue** | **$50,387** | **$41,607** | **$98,177** | **$80,511** | | Gross Profit | $14,611 | $11,494 | $28,131 | $20,903 | | Operating Income | $3,578 | $3,078 | $7,267 | $4,042 | | Net Income | $3,015 | $2,024 | $6,703 | $2,822 | | Basic EPS | $0.40 | $0.27 | $0.90 | $0.38 | | Diluted EPS | $0.40 | $0.27 | $0.88 | $0.38 | [Consolidated Statements of Comprehensive Income](index=4&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This section outlines Transcat's consolidated statements of comprehensive income for the second quarter and six months ended September 25, 2021, and September 26, 2020 | Metric (in Thousands) | Second Quarter Ended Sep 25, 2021 | Second Quarter Ended Sep 26, 2020 | Six Months Ended Sep 25, 2021 | Six Months Ended Sep 26, 2020 | | :-------------------- | :-------------------------------- | :-------------------------------- | :---------------------------- | :---------------------------- | | Net Income | $3,015 | $2,024 | $6,703 | $2,822 | | Currency Translation Adjustment | $(242) | $128 | $(81) | $253 | | Other Comprehensive (Loss) Income | $(233) | $165 | $(51) | $328 | | **Comprehensive Income** | **$2,782** | **$2,189** | **$6,652** | **$3,150** | [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) This section presents Transcat's consolidated balance sheets as of September 25, 2021, and March 27, 2021 | Metric (in Thousands) | September 25, 2021 | March 27, 2021 | | :-------------------- | :----------------- | :------------- | | Cash | $2,551 | $560 | | Total Current Assets | $53,773 | $48,928 | | Property and Equipment, net | $23,034 | $22,203 | | Goodwill | $59,441 | $43,272 | | Intangible Assets, net | $12,753 | $7,513 | | **Total Assets** | **$158,313** | **$132,116** | | Total Current Liabilities | $21,572 | $25,142 | | Long-Term Debt | $40,917 | $17,494 | | **Total Liabilities** | **$77,569** | **$57,038** | | Total Shareholders' Equity | $80,744 | $75,078 | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section details Transcat's consolidated statements of cash flows for the six months ended September 25, 2021, and September 26, 2020 | Cash Flow Activity (in Thousands) | Six Months Ended Sep 25, 2021 | Six Months Ended Sep 26, 2020 | | :-------------------------------- | :---------------------------- | :---------------------------- | | Net Cash Provided by Operating Activities | $7,502 | $12,476 | | Net Cash Used in Investing Activities | $(24,680) | $(3,116) | | Net Cash Provided by (Used in) Financing Activities | $19,079 | $(8,424) | | Net Increase in Cash | $1,991 | $463 | | Cash at End of Period | $2,551 | $962 | - Investing activities for the six months ended September 25, 2021, included **$20.9 million for business acquisitions**, a significant increase from the prior year[16](index=16&type=chunk) [Consolidated Statements of Shareholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity) This section outlines Transcat's consolidated statements of shareholders' equity as of September 25, 2021, and March 27, 2021 - Total Shareholders' Equity increased from **$75,078 thousand** as of March 27, 2021, to **$80,744 thousand** as of September 25, 2021, driven by net income and common stock issuance, partially offset by share repurchases and other comprehensive loss[18](index=18&type=chunk) | Metric (in Thousands) | March 27, 2021 | September 25, 2021 | | :-------------------- | :------------- | :----------------- | | Common Stock Amount | $3,729 | $3,759 | | Capital in Excess of Par Value | $19,287 | $22,713 | | Accumulated Other Comprehensive Loss | $(451) | $(502) | | Retained Earnings | $52,513 | $54,774 | | **Total Shareholders' Equity** | **$75,078** | **$80,744** | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed notes to Transcat's consolidated financial statements, explaining accounting policies, debt, compensation, segments, and acquisitions [NOTE 1 – GENERAL](index=8&type=section&id=NOTE%201%20%E2%80%93%20GENERAL) This note describes Transcat, Inc.'s business operations and general accounting policies - Transcat, Inc. is a leading provider of accredited calibration and laboratory instrument services and a value-added distributor of professional grade test, measurement, and control instrumentation, primarily serving highly regulated industries like life sciences[21](index=21&type=chunk) - The company recognized non-cash stock-based compensation expense of **$1.1 million** for the first six months of fiscal year 2022, up from **$0.7 million** in the prior year period[26](index=26&type=chunk) | Metric (in Thousands) | September 25, 2021 | March 27, 2021 | | :-------------------- | :----------------- | :------------- | | Goodwill | $59,441 | $43,272 | | Intangible Assets | $12,753 | $7,513 | [NOTE 2 – LONG-TERM DEBT](index=10&type=section&id=NOTE%202%20%E2%80%93%20LONG-TERM%20DEBT) This note details Transcat's long-term debt obligations and credit facility agreements - Transcat entered into a Second Amended and Restated Credit Facility Agreement on July 7, 2021, increasing the revolving credit commitment from **$40.0 million to $80.0 million** and extending its term to June 2026[33](index=33&type=chunk)[34](index=34&type=chunk) - The new credit agreement increased the aggregate purchase price for permitted acquisitions to **$65.0 million** for the current fiscal year and **$50.0 million** for subsequent fiscal years, with an additional **$40.0 million** for UK/EU businesses[34](index=34&type=chunk) - The company's leverage ratio was **1.54** at September 25, 2021, compared to **0.94** at March 27, 2021, and it was in compliance with all loan covenants[42](index=42&type=chunk) [NOTE 3 – STOCK-BASED COMPENSATION](index=12&type=section&id=NOTE%203%20%E2%80%93%20STOCK-BASED%20COMPENSATION) This note describes Transcat's stock-based compensation plans and related expenses - The Transcat, Inc. 2021 Stock Incentive Plan was approved in September 2021, replacing the 2003 Plan, with **0.7 million shares** available for future grants[45](index=45&type=chunk) - Total expense for restricted stock units was **$0.9 million** in the first six months of fiscal year 2022, up from **$

September 13, 2021 HC Wainwright Conference | --- | --- | --- | |-------|----------------------------------------|--------------| | | | | | | | | | | Lee D. Rudow | | | | President and CEO | | | | Mark A. Doheny Chief Financial Officer | | | | | | | | | | | | | | | | | Nasdaq: TRNS | Safe Harbor Statement This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact and thus a ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Consolidated Financial Statements](index=3&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) This section presents the unaudited consolidated financial statements for the first quarter ended June 26, 2021, compared to the same period in 2020 [Consolidated Statements of Income](index=3&type=section&id=Consolidated%20Statements%20of%20Income) Transcat reported significant Q1 FY2022 growth, with total revenue up 22.8% and net income surging over 360% Consolidated Statements of Income (Q1 FY2022 vs Q1 FY2021) | Metric | Q1 Ended June 26, 2021 (In Thousands) | Q1 Ended June 27, 2020 (In Thousands) | YoY Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | **$47,790** | **$38,904** | **+22.8%** | | Service Revenue | $27,557 | $22,967 | +20.0% | | Distribution Sales | $20,233 | $15,937 | +27.0% | | **Gross Profit** | **$13,520** | **$9,409** | **+43.7%** | | **Operating Income** | **$3,689** | **$964** | **+282.7%** | | **Net Income** | **$3,688** | **$798** | **+362.2%** | | **Diluted EPS** | **$0.49** | **$0.11** | **+345.5%** | [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) As of June 26, 2021, Transcat's balance sheet showed a slight decrease in total assets, a reduction in liabilities, and an increase in shareholders' equity Key Balance Sheet Items (As of June 26, 2021) | Account | June 26, 2021 (In Thousands) | March 27, 2021 (In Thousands) | | :--- | :--- | :--- | | **Total Assets** | **$131,139** | **$132,116** | | Total Current Assets | $48,739 | $48,928 | | Goodwill | $43,904 | $43,272 | | **Total Liabilities** | **$54,432** | **$57,038** | | Long-Term Debt | $20,107 | $17,494 | | **Total Shareholders' Equity** | **$76,707** | **$75,078** | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities decreased in Q1 FY2022 due to working capital changes, while investing activities used cash for property and an acquisition Cash Flow Summary (Q1 FY2022 vs Q1 FY2021) | Activity | Q1 Ended June 26, 2021 (In Thousands) | Q1 Ended June 27, 2020 (In Thousands) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $2,055 | $4,042 | | Net Cash Used in Investing Activities | ($2,134) | ($1,261) | | Net Cash Used in Financing Activities | ($43) | ($2,721) | | **Net Decrease in Cash** | **($306)** | **($133)** | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes detail the company's business, accounting policies, debt amendments, stock compensation, segment performance, and recent acquisitions - On July 7, 2021, the company entered into a new credit agreement that increased the revolving credit commitment from **$40.0 million to $80.0 million** and extended the term to June 2026[32](index=32&type=chunk)[33](index=33&type=chunk) - The Service segment's operating income **more than doubled** to **$3.0 million** from **$1.1 million** year-over-year, while the Distribution segment's operating income turned positive at **$0.7 million** from a **loss of $0.2 million**[52](index=52&type=chunk) - Effective April 29, 2021, Transcat acquired Upstate Metrology for a total purchase price of approximately **$0.9 million**, with the goodwill allocated to the Service segment[54](index=54&type=chunk)[56](index=56&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=16&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes strong Q1 FY2022 performance to economic rebound, with significant revenue growth, gross margin expansion, and increased borrowing capacity - Consolidated revenue for Q1 FY2022 increased **22.8%** to **$47.8 million** compared to the prior year, driven by economic rebound and lower customer demand in the prior year due to the COVID-19 pandemic[66](index=66&type=chunk) - Gross margin increased by **410 basis points** to **28.3%** due to operating leverage in the Service segment and a favorable product mix in the Distribution segment[67](index=67&type=chunk) - Adjusted EBITDA for Q1 FY2022 was **$6.1 million**, a **75.2% increase** from **$3.5 million** in the prior-year quarter[88](index=88&type=chunk) [Results of Operations](index=17&type=section&id=Results%20of%20Operations) Q1 FY2022 saw strong revenue growth in both segments, significant gross margin expansion, and improved operating margin due to expense management Segment Revenue Growth (Q1 FY2022 vs Q1 FY2021) | Segment | Q1 FY2022 Revenue (in thousands) | Q1 FY2021 Revenue (in thousands) | YoY Growth | | :--- | :--- | :--- | :--- | | Service | $27,557 | $22,967 | 20.0% | | Distribution | $20,233 | $15,937 | 27.0% | | **Total** | **$47,790** | **$38,904** | **22.8%** | Segment Gross Margin (Q1 FY2022 vs Q1 FY2021) | Segment | Q1 FY2022 Gross Margin | Q1 FY2021 Gross Margin | Basis Point Change | | :--- | :--- | :--- | :--- | | Service | 31.8% | 26.4% | +540 bps | | Distribution | 23.6% | 21.0% | +260 bps | | **Total** | **28.3%** | **24.2%** | **+410 bps** | [Liquidity and Capital Resources](index=22&type=section&id=Liquidity%20and%20Capital%20Resources) The company enhanced financial flexibility with a new credit agreement, increasing borrowing capacity, despite a decrease in net cash from operations - Entered into a Second Amended and Restated Credit Facility Agreement on July 7, 2021, increasing the revolving credit commitment from **$40.0 million to $80.0 million** and extending the term to June 2026[91](index=91&type=chunk)[92](index=92&type=chunk) - As of June 26, 2021, the company had **$12.1 million** outstanding on its revolving credit facility and **$10.0 million** outstanding on its term loan[96](index=96&type=chunk)[97](index=97&type=chunk) - Net cash provided by operations **decreased from $4.0 million to $2.1 million** in Q1 FY2022, primarily due to changes in net working capital, including a **$3.1 million decrease** in accrued compensation and other liabilities[102](index=102&type=chunk) [Outlook](index=24&type=section&id=Outlook) Management anticipates continued strong organic growth for Q2 FY2022, with revised tax rate expectations and projected capital expenditures - For Q2 FY2022, Service organic growth is expected to be **similar to Q1**, while Distribution sales are expected to see **high teens growth**[108](index=108&type=chunk)[109](index=109&type=chunk) - The estimated effective tax rate for fiscal year 2022 has been revised down to a range of **16% to 18%**[110](index=110&type=chunk) - Total capital expenditures for fiscal year 2022 are anticipated to be between **$7.5 million and $8.5 million**[111](index=111&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risks are interest rate fluctuations and foreign currency exposure, mitigated by hedging strategies - A **1% change** in interest rates would result in an approximate **$0.1 million change** in annual interest expense[112](index=112&type=chunk) - Approximately **10% of total revenues** are denominated in Canadian dollars The company utilizes short-term foreign exchange forward contracts to reduce currency risk[114](index=114&type=chunk)[115](index=115&type=chunk) [Item 4. Controls and Procedures](index=25&type=section&id=Item%204.%20Controls%20and%20Procedures) The company's disclosure controls and procedures were deemed effective, with no material changes in internal control over financial reporting - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were **effective** as of June 26, 2021[116](index=116&type=chunk)[117](index=117&type=chunk) - **No changes** in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[118](index=118&type=chunk) [PART II. OTHER INFORMATION](index=26&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=26&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q1 FY2022, the company repurchased 62,191 shares of common stock, primarily to cover employee tax-withholding obligations Issuer Purchases of Equity Securities (Q1 FY2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | 03/28/21 - 04/24/21 | 279 | $49.08 | | 04/25/21 - 05/22/21 | 61,912 | $54.35 | | 05/23/21 - 06/26/21 | - | - | | **Total** | **62,191** | **$54.33** | - The repurchased shares were withheld **to cover employee tax-withholding obligations** upon the vesting of restricted stock units and stock option exercises under the company's 2003 Incentive Plan[120](index=120&type=chunk) [Item 6. Exhibits](index=27&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q report, including certifications and XBRL data files - Lists exhibits filed with the report, including the **Second Amended and Restated Credit Facility Agreement**, **CEO/CFO certifications (Sections 302 and 906)**, and **XBRL data files**[122](index=122&type=chunk)