Transcat Reports Second Quarter Fiscal 2010 Financial Results

http://www.businesswire.com/news/home/20091026006064/en

* Service segment revenue grows 15.5%; offsets 7.6% decline in product segment
sales
* Total net revenue of $18.5 million; relatively flat with prior fiscal year
second quarter
* Diluted earnings per share of $0.02 compared with $0.06 in prior year second
quarter
* Significant liquidity: Generated $3.5 million in cash from operations in first
six months of fiscal 2010

ROCHESTER, N.Y.--(Business Wire)--
Transcat, Inc. (Nasdaq: TRNS), a leading global distributor of professional
grade handheld test and measurement instruments and accredited provider of
calibration, repair services, parts inspection and production model engineering,
today reported financial results for its second quarter of fiscal 2010 which
ended September 26, 2009.

Net revenue in the second quarter of fiscal 2010 was $18.5 million, relatively
flat when compared with net revenue of $18.6 million in the second quarter of
fiscal 2009. Second quarter fiscal 2009 results included six weeks of Westcon,
Inc. operations, which the Company acquired on August 14, 2008.

Net income was $0.2 million, or $0.02 per diluted share, in the second quarter
of fiscal 2010, down from net income of $0.4 million, or $0.06 per diluted share
for the same period of the prior fiscal year. Net income was negatively impacted
by lower operating income from the Company`s product segment.

Charles P. Hadeed, President, CEO and COO of Transcat, commented, "As the severe
decline in the economy stabilized during the quarter, our performance also
improved. Service segment revenue grew 15.5%, which reflects our sales and
marketing investments in our targeted markets and the quality of services we
provide, all of which we believe leads to high revenue retention. This growth
was leveraged into expanding that segment`s gross profit margin by 180 basis
points and achieving near breakeven segment operating profit. Although product
segment results remained soft, sustained growth within our wind energy customer
base, which accounted for 13.1% of product segment sales, somewhat mitigated
external economic factors."

Service segment revenue, which represented 35.3% of total net revenue, was up
$0.9 million, or 15.5%, to $6.5 million in the second quarter of fiscal 2010,
when compared with revenue of $5.7 million in the prior year second quarter.
Product segment sales, representing the Company`s distribution business, for the
second quarter of fiscal 2010 were $12.0 million, down $1.0 million, or 7.6%,
when compared with the same period of the prior fiscal year.

Second Quarter Fiscal 2010 Review

Gross profit was $4.1 million, or 22.3% of net revenue, in the second quarter of
fiscal 2010 compared with $4.5 million, or 24.4% of net revenue, in the same
period of the prior fiscal year. The lower gross profit and margin was primarily
due to reduced product segment sales volume, lower manufacturer volume-based
rebate income, and additional product pricing pressures, offset partially by
improved leverage in the service segment.

Selling, marketing and warehouse expenses increased to $2.4 million in the
second quarter of fiscal 2010 compared with $2.1 million in the same period the
prior fiscal year. Investment in the wind energy market and additional sales
personnel led to the $0.3 million increase. Offsetting this increase was a $0.3
million, or 18.4%, reduction in administrative expenses from cost control
measures. As a result, operating expenses in the quarter were flat when compared
with the prior fiscal year period.

Operating income for the second quarter of fiscal 2010 was $0.3 million, or 1.8%
of net revenue, compared with $0.7 million, or 4.0% of net revenue, in the
second quarter of fiscal 2009. The decline was the result of lower product
segment gross profit.

The effective tax rate in the second quarter of fiscal 2010 was 39.0%. For the
fiscal year, the effective tax rate is expected to be in the 38% to 40% range.

Product and Service Segment Review

Transcat is uniquely positioned to serve the pharmaceutical and FDA-regulated,
energy and chemical process industries as well as utilities, industrial
manufacturing and other industries through its ability to bundle a broad variety
of premium test and measurement instruments with quality calibration services,
repair capabilities, parts inspection and production model engineering for its
customers through its distribution operations in New York and Oregon and its 12
Calibration Centers of Excellence in the United States, Canada and Puerto Rico.
Its automated calibration tracking and management systems, breadth of
calibration disciplines and product lines, and its refined product delivery
systems enable it to rapidly respond to its customers` requirements for quick
turn-around times, which it believes provides a competitive advantage.

Product Segment

Through its product segment, Transcat markets and distributes national and
proprietary brand instruments to over 13,000 global customers. The Company
offers access to more than 25,000 test and measurement instruments. The product
segment primarily uses direct marketing and the Company`s website to market to
end-users as well as to resellers.

Product segment net sales decreased $1.0 million, or 7.6%, to $12.0 million in
the second quarter of fiscal 2010 compared with $13.0 million in the same period
of the prior fiscal year. The decline in product segment sales reflected the
impact of the weak economy and aggressive pricing measures partially offset by
increased sales to wind energy customers.

Average product segment sales per day were $190 thousand in the second quarter
of fiscal 2010 compared with $206 thousand in the same period of the prior
fiscal year. Sales of the Company`s products over its website increased 34.3% to
$1.0 million in the second quarter of fiscal 2010 compared with $0.7 million in
the same period the prior fiscal year.

Product segment gross profit in the second quarter of fiscal 2010 was $2.7
million, or 22.2% of net product sales, compared with $3.4 million, or 26.0% of
net product sales, in the second quarter of fiscal 2009. Gross margin for the
product segment is a function of a number of factors including volume, market
channel mix, manufacturers` rebates, product mix and discounts to customers. The
reduction in gross profit and gross margin in the second quarter of fiscal 2010
was due to reduced volume from the recessionary economy, increased price
discounting for market share retention and lower vendor point-of-sale rebates.
Vendor point-of-sale rebates are based on year-over-year growth in product
segment sales. The Company did not qualify for this type of rebate in the second
quarter of fiscal 2010. In the second quarter of fiscal 2009, point-of-sale
rebates were $0.1 million.

Product segment operating income was $0.4 million, or 3.0% of net product sales,
in the second quarter of fiscal 2010 compared with $1.1 million, or 8.3% of net
product sales, in the same period of the prior fiscal year.

Service Segment

Transcat`s customers purchase calibration services for the purpose of measurably
reducing their risk of product or process failures that can be caused by
inaccurate measurements. Transcat annually performs more than 140,000
calibrations at its 12 Calibration Centers of Excellence or at its customers`
locations.

Service segment revenue was $6.5 million in the second quarter of fiscal 2010, a
$0.9 million or 15.5% increase, compared with $5.7 million in the same period of
the prior fiscal year. The timing of calibration orders and segment expenses can
vary on a quarter-to-quarter basis based on the nature of a customers` business
and calibration requirements. In general, a trailing twelve-month trend provides
a better indication of the progress of this segment. Service segment revenue for
the trailing twelve months that ended September 26, 2009 were $25.2 million, up
7.6%, when compared with $23.4 million for the trailing twelve-month period that
ended September 27, 2008. Transcat`s goal is to grow this business in the low
double digit range over the long term.

The Company`s strategy has been to focus its capital and marketing investments
in the electrical, temperature, pressure and dimensional disciplines.
Historically, 15% to 20% of service segment revenue is generated from
outsourcing customer equipment to third-party vendors for calibration beyond
Transcat`s chosen scope of capabilities. In the second quarter of fiscal 2010,
77.3% of service segment revenue was generated by the Company`s staff of
technicians while 20.2% was subcontracted to third-party vendors.

Service segment gross profit in the second quarter of fiscal 2010 was $1.5
million, or 22.5% of service segment net revenue, up from $1.2 million, or 20.7%
of service segment net revenue, in the same period of the prior fiscal year.
Driving this increase is the operational leverage built into the service
segment, where the Company is able to spread the fixed costs of its laboratory
operations over higher volume. Organic revenue expansion provides for full
leverage potential whereas acquired revenue comes with associated cost structure
and therefore does not contribute to expanding margins.

The service segment operating loss was virtually breakeven for the second
quarter of fiscal 2010, an improvement of $0.3 million over last year`s second
quarter operating loss.

Six-Month Review

Net revenue for the first six months of fiscal 2010 was $35.7 million, down 2.1%
when compared with net revenue of $36.5 million in the first six months of
fiscal 2009. Fiscal 2009 results included six weeks of operations of Westcon as
previously noted.

Product segment net sales were $23.2 million in the first half of fiscal 2010,
down 8.0%, compared with $25.3 million in the same period of the prior fiscal
year. Sales to wind energy customers in the first half of fiscal 2010 accounted
for 11.9%, or $2.8 million, of net product sales. Product sales generated over
the Company`s website were $1.9 million in the first six months of fiscal 2010,
up 17.5%, when compared with $1.6 million in the first half of fiscal 2009.

Service segment net revenue was $12.5 million in the first six months of fiscal
2010, up 11.4%, compared with net revenue of $11.2 million in the first six
months of fiscal 2009.

Gross margin was 22.3% for the first six months of fiscal 2010 compared with
24.8% in the same period of the prior fiscal year. Product segment gross margin
was 22.8% and 26.6% for the first six months of fiscal 2010 and 2009,
respectively. The year-over-year decrease was a result of aggressive pricing and
reduced vendor volume-based rebate income. Service segment gross margin was
21.4% in the first half of fiscal 2010 compared with 20.8% in the same period of
the prior fiscal year. As previously noted, higher organic service segment
revenue drove the margin expansion.

Operating expenses were $7.8 million in the first six months of fiscal 2010,
slightly lower than the $7.9 million reported in the same period of the prior
fiscal year. Year-over-year strategic investments in sales and marketing for the
service segment and wind energy industry were more than offset by cost control
measures and reductions in performance-based management compensation. Operating
income in the first six months of fiscal 2010 was $0.2 million, or 0.6% of net
revenue, compared with $1.1 million, or 3.1% of net revenue, in the first six
months of fiscal 2009.

Net income was $0.1 million, or $0.01 per diluted share, for the first six
months of fiscal 2010 compared with $0.7 million, or $0.09 per diluted share,
for the same period of the prior fiscal year.

Balance Sheet and Cash Management

Net cash generated from operations was $3.5 million in the first six months of
fiscal 2010 compared with $1.0 million in the same period of the prior fiscal
year. The incremental cash was used to repay long-term debt which decreased to
$1.6 million at September 26, 2009, compared with $2.2 million at June 27, 2009
and $3.6 million at March 28, 2009.

At September 26, 2009, accounts payable were $7.0 million compared with $4.7
million at March 28, 2009. The increase was due to inventory purchases in
September in anticipation of increased demand in the second half of fiscal 2010.

Capital expenditures were $0.6 million in the first six months of fiscal 2010
and were primarily used for additional laboratory capabilities. This is
relatively flat when compared with the same period of the prior fiscal year.
Transcat expects capital spending for fiscal 2010 to be approximately $1.0
million. During the second quarter of fiscal 2010, Transcat made additional
payments to the former owner of Westcon totaling $1.1 million based on the terms
of the acquisition agreement.

Expectations for Stronger Second Half Weighted in the Fourth Quarter of Fiscal
2010

Mr. Hadeed concluded, "We feel that the economic environment is beginning to
stabilize as we head into the second half of our fiscal year. We are cautiously
optimistic that things will continue to improve, which should result in our
second half being stronger than the first. It is still too early for us to
define how wind energy sales will affect our overall business, though we feel
product sales to wind energy customers should continue to be strong. Our solid
cash flow generation and balance sheet will allow us to continue to make prudent
and strategic investments in our infrastructure and people, so that we can
maintain our focus on the execution of our long-term strategy."

ABOUT TRANSCAT

Transcat, Inc. is a leading global distributor of professional grade handheld
test and measurement instruments and accredited provider of calibration, parts
inspection, production model engineering and repair services primarily for the
pharmaceutical and FDA-regulated, industrial manufacturing, energy and
utilities, chemical process, and other industries. Through its distribution
products segment, Transcat markets and distributes national and proprietary
brand instruments to over 13,000 global customers. The Company offers access to
more than 25,000 test and measurement instruments. Transcat delivers precise,
reliable, fast calibration, parts inspection, production model engineering and
repair services across the United States, Canada and Puerto Rico through its 12
strategically located Calibration Centers of Excellence. Transcat`s calibration
laboratories are ISO-9001:2000 registered and the scope of accreditation to
ISO/IEC 17025 is believed to be one of the broadest in the industry.

Transcat`s growth strategy is to expand both its distribution products and
calibration services in markets that value product breadth and availability and
rely on accredited calibration services to maintain the integrity of their
processes.

More information about Transcat can be found on its website at:
www.transcat.com.

Safe Harbor Statement

This press release contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
subject to risks, uncertainties and assumptions and are identified by words such
as "expects," "estimates," "projects," "anticipates," "believes," "could," and
other similar words. All statements addressing operating performance, events, or
developments that Transcat, Inc. expects or anticipates will occur in the
future, including but not limited to statements relating to anticipated revenue,
profit margins, sales operations, its strategy to build its sales representative
channel, customer preferences and changes in market conditions in the industries
in which Transcat operates are forward-looking statements. Because they are
forward-looking, they should be evaluated in light of important risk factors and
uncertainties. These risk factors and uncertainties are more fully described in
Transcat`s Annual and Quarterly Reports filed with the Securities and Exchange
Commission, including under the heading entitled "Risk Factors." Should one or
more of these risks or uncertainties materialize, or should any of the Company`s
underlying assumptions prove incorrect, actual results may vary materially from
those currently anticipated. In addition, undue reliance should not be placed on
the Company`s forward-looking statements. Except as required by law, the Company
disclaims any obligation to update or publicly announce any revisions to any of
the forward-looking statements contained in this press release.

Transcat, Inc.

Consolidated Statements of Operations

(Amounts in thousands, except per share data)

(Unaudited) (Unaudited)
Second Quarter Ended Six Months Ended
September 26, September 27, September 26, September 27,
2009 2008 2009 2008

Product Sales $ 11,970 $ 12,959 $ 23,238 $ 25,270
Service Revenue 6,525 5,651 12,465 11,193
Net Revenue 18,495 18,610 35,703 36,463

Cost of Products Sold 9,308 9,594 17,930 18,543
Cost of Services Sold 5,057 4,481 9,800 8,860
Total Cost of Products and Services Sold 14,365 14,075 27,730 27,403

Gross Profit 4,130 4,535 7,973 9,060

Selling, Marketing and Warehouse Expenses 2,449 2,148 5,008 4,743
Administrative Expenses 1,345 1,648 2,745 3,190
Total Operating Expenses 3,794 3,796 7,753 7,933

Operating Income 336 739 220 1,127

Interest Expense 11 28 25 27
Other Expense, net 17 4 32 12
Total Other Expense 28 32 57 39

Income Before Income Taxes 308 707 163 1,088
Provision for Income Taxes 120 277 64 430

Net Income $ 188 $ 430 $ 99 $ 658

Basic Earnings Per Share $ 0.03 $ 0.06 $ 0.01 $ 0.09
Average Shares Outstanding 7,402 7,282 7,396 7,239

Diluted Earnings Per Share $ 0.02 $ 0.06 $ 0.01 $ 0.09
Average Shares Outstanding 7,611 7,511 7,609 7,453

Transcat, Inc.

Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

(Unaudited)
September 26, March 28,
2009 2009
ASSETS
Current Assets:
Cash $ 36 $ 59
Accounts Receivable, less allowance for doubtful accounts of $100 and $75 as of September 26, 2009 and March 28, 2009, respectively 8,279 8,981
Other Receivables 510 119
Inventory, net 4,865 4,887
Prepaid Expenses and Other Current Assets 1,024 774
Deferred Tax Asset 482 380
Total Current Assets 15,196 15,200
Property and Equipment, net 4,157 4,174
Goodwill 9,016 7,923
Intangible Asset, net 996 1,091
Deferred Tax Asset 608 635
Other Assets 385 368
Total Assets $ 30,358 $ 29,391

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 7,038 $ 4,748
Accrued Compensation and Other Liabilities 1,787 1,757
Income Taxes Payable 94 215
Total Current Liabilities 8,919 6,720
Long-Term Debt 1,592 3,559
Other Liabilities 568 493
Total Liabilities 11,079 10,772

Shareholders' Equity:
Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,682,617 and 7,656,358 shares issued as of September 26, 2009 and March 28, 2009, respectively; 7,406,835 and 7,380,576 shares outstanding as of September 26, 2009 and March 28, 2009, respectively 3,841 3,828
Capital in Excess of Par Value 9,082 8,606
Accumulated Other Comprehensive Income 392 320
Retained Earnings 6,952 6,853
Less: Treasury Stock, at cost, 275,782 shares as of September 26, 2009 and March 28, 2009 (988 ) (988 )
Total Shareholders' Equity 19,279 18,619
Total Liabilities and Shareholders' Equity $ 30,358 $ 29,391

Transcat, Inc.

Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)
Second Quarter Ended
September 26, September 27,
2009 2008
Cash Flows from Operating Activities:
Net Income $ 99 $ 658
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Deferred Income Taxes (68 ) 55
Depreciation and Amortization 959 772
Provision for Accounts Receivable and Inventory Reserves 25 84
Stock-Based Compensation Expense 370 355
Changes in Assets and Liabilities:
Accounts Receivable and Other Receivables 333 654
Inventory 27 (40 )
Prepaid Expenses and Other Assets (511 ) (710 )
Accounts Payable 2,290 (269 )
Accrued Compensation and Other Liabilities 114 (601 )
Income Taxes Payable (131 ) 45
Net Cash Provided by Operating Activities 3,507 1,003

Cash Flows from Investing Activities:
Purchase of Property and Equipment (603 ) (587 )
Payments of Contingent Consideration (1,093 ) -
Purchase of Westcon, Inc., net of cash acquired - (4,625 )
Net Cash Used in Investing Activities (1,696 ) (5,212 )

Cash Flows from Financing Activities:
Revolving Line of Credit, net (1,955 ) 4,026
Payments on Other Debt Obligations (12 ) -
Issuance of Common Stock 109 119
Excess Tax Benefits Related to Stock-Based Compensation 10 41
Net Cash (Used in) Provided by Financing Activities (1,848 ) 4,186

Effect of Exchange Rate Changes on Cash 14 (1 )

Net Decrease in Cash (23 ) (24 )
Cash at Beginning of Period 59 208
Cash at End of Period $ 36 $ 184

Transcat Inc.

Fiscal 2010 Second Quarter

Additional Information

Business Segment Data

(Dollars in thousands)

(Unaudited) (Unaudited)
Quarter ended Quarter ended $ Change % Change
September 26, 2009 September 27, 2008

Products
Net sales $ 11,970 $ 12,959 $ (989 ) (7.6 %)

Gross profit 2,662 3,365 (703 ) (20.9 %)
Margin 22.2 % 26.0 %

Operating income 364 1,071 (707 ) (66.0 %)
Margin 3.0 % 8.3 %

Services
Net revenue $ 6,525 $ 5,651 $ 874 15.5 %

Gross profit 1,468 1,170 298 25.5 %
Margin 22.5 % 20.7 %

Operating loss (28 ) (332 ) 304 91.6 %
Margin (0.4 %) (5.9 %)

Consolidated
Net revenue $ 18,495 $ 18,610 $ (115 ) (0.6 %)

Gross profit 4,130 4,535 (405 ) (8.9 %)
Margin 22.3 % 24.4 %

Operating income 336 739 (403 ) (54.5 %)
Margin 1.8 % 4.0 %

Transcat Inc.

Fiscal 2010 Six Months

Additional Information

Business Segment Data

(Dollars in thousands)

(Unaudited) (Unaudited)
Six months ended Six months ended $ Change % Change
September 26, 2009 September 27, 2008

Products
Net sales $ 23,238 $ 25,270 $ (2,032 ) (8.0 %)

Gross profit 5,308 6,727 (1,419 ) (21.1 %)
Margin 22.8 % 26.6 %

Operating income 660 2,019 (1,359 ) (67.3 %)
Margin 2.8 % 8.0 %

Services
Net revenue $ 12,465 $ 11,193 $ 1,272 11.4 %

Gross profit 2,665 2,333 332 14.2 %
Margin 21.4 % 20.8 %

Operating loss (440 ) (892 ) 452 50.7 %
Margin (3.5 %) (8.0 %)

Consolidated
Net revenue $ 35,703 $ 36,463 $ (760 ) (2.1 %)

Gross profit 7,973 9,060 (1,087 ) (12.0 %)
Margin 22.3 % 24.8 %

Operating income 220 1,127 (907 ) (80.5 %)
Margin 0.6 % 3.1 %

Transcat Inc.

Additional Information

PRODUCT SEGMENT SALES BY MARKET CHANNEL
(Amounts in thousands)
(Unaudited)

FY 2010
Q1 Q2 FY 2010 % of
YTD Total Total
Direct $ 9,069 $ 10,079 $ 19,148 82.4 %
Reseller 2,028 1,724 3,752 16.1 %
Freight Billed to Customers 171 167 338 1.5 %
Total Product Sales $ 11,268 $ 11,970 $ 23,238

FY 2009
Q1 Q2 Q3 Q4 FY 2009 % of
Total Total
Direct $ 10,074 $ 10,051 $ 11,147 $ 10,140 $ 41,412 80.4 %
Reseller 2,039 2,699 2,675 1,906 9,319 18.1 %
Freight Billed to Customers 198 209 173 169 749 1.5 %
Total Product Sales $ 12,311 $ 12,959 $ 13,995 $ 12,215 $ 51,480

PRODUCT SEGMENT SALES PER BUSINESS DAY
(Dollars in thousands)
(Unaudited)

FY 2010
Q1 Q2 FY 2010
YTD Total
Number of business days 64 63 127
Total product sales $ 11,268 $ 11,970 $ 23,238
Sales per day $ 176 $ 190 $ 183

FY 2009
Q1 Q2 Q3 Q4 FY 2009
Total
Number of business days 64 63 62 64 253
Total product sales $ 12,311 $ 12,959 $ 13,995 $ 12,215 $ 51,480
Sales per day $ 192 $ 206 $ 226 $ 191 $ 203

PRODUCT SEGMENT SALES BY REGION
(Amounts in thousands)
(Unaudited)

FY 2010
Q1 Q2 FY 2010 % of
YTD Total Total
United States $ 9,349 $ 9,713 $ 19,062 82.0 %
Canada 637 773 1,410 6.1 %
Other International 1,111 1,317 2,428 10.4 %
Freight Billed to Customers 171 167 338 1.5 %
Total $ 11,268 $ 11,970 $ 23,238

FY 2009
Q1 Q2 Q3 Q4 FY 2009 % of
Total Total
United States $ 9,484 $ 10,066 $ 11,540 $ 9,853 $ 40,943 79.5 %
Canada 784 999 866 797 3,446 6.7 %
Other International 1,845 1,685 1,416 1,396 6,342 12.3 %
Freight Billed to Customers 198 209 173 169 749 1.5 %
Total $ 12,311 $ 12,959 $ 13,995 $ 12,215 $ 51,480

SERVICE SEGMENT REVENUE BY TYPE
(Amounts in thousands)
(Unaudited)

FY 2010
Q1 Q2 FY 2010 % of
YTD Total Total
Depot/On-site $ 4,710 $ 5,045 $ 9,755 78.3 %
Outsourced 1,079 1,319 2,398 19.2 %
Freight Billed to Customers 151 161 312 2.5 %
Total Service Revenue $ 5,940 $ 6,525 $ 12,465

FY 2009
Q1 Q2 Q3 Q4 FY 2009 % of
Total Total
Depot/On-site $ 4,478 $ 4,441 $ 4,705 $ 5,482 $ 19,106 79.8 %
Outsourced 911 1,065 1,093 1,064 4,133 17.3 %
Freight Billed to Customers 153 145 199 203 700 2.9 %
Total Service Revenue $ 5,542 $ 5,651 $ 5,997 $ 6,749 $ 23,939

Transcat, Inc.
John Zimmer, 585-352-7777
Chief Financial Officer
jzimmer@transcat.com
or
For Transcat, Inc.
Deborah Pawlowski, 716-843-3908
Investor Relations
dpawlowski@keiadvisors.com

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