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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________

FORM 10-Q

For the quarterly period ended: December 23, 2017

or

For the transition period from _________________________ to _________________________

Commission File Number: 000-03905

TRANSCAT, INC.
(Exact name of registrant as specified in its charter)

35 Vantage Point Drive, Rochester, New York 14624
(Address of principal executive offices) (Zip Code)

(585) 352-7777
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [✓] No [  ]

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

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

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

The number of shares of common stock, par value $0.50 per share, of the registrant outstanding as of February 1, 20182019 was 7,152,764.7,209,055.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.
CONSOLIDATED STATEMENTCONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY
(In Thousands, Except Par Value Amounts)
(Unaudited)

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share and Per Unit Amounts)
(Unaudited)

NOTE 1–GENERAL

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

Basis of Presentation:Transcat’s unaudited Consolidated Financial Statements have been preparedbeenprepared in accordance with accountingwithaccounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordanceinaccordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustmentsalladjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 25, 2017 (“31, 2018(“fiscal year 2017”2018”) contained in the Company’s 2017Company’s2018 Annual Report on Form 10-K filed with the SEC.

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

Revenue recognized from prior period performance obligations for the third quarter of fiscal year 2019 was immaterial. As of December 29, 2018, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606 (defined below), the Company applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of December 29, 2018 and March 31, 2018 were immaterial. Payment terms are generally 30 to 45 days. See Note 4 for disaggregated revenue information.

In 2014, the FinancialtheFinancial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which established principles to provide specific guidance on how entities should recognizereport useful information to financial statement users about the nature, timing and uncertainty of revenue derived from contracts with customers. ASU No. 2014-09 along withvarious related amendments comprise Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contractswith Customers (“Topic 606”), andprovides guidance that is applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Transcat is required to adopt ASU 2014-09 inadopted the new standard for its fiscal year ending March 30,March30, 2019 (“fiscal year 2019”). This new standard supercedes previous guidance, which began April 1, 2018 using the modified retrospective approach to each priorreporting period presented. Based on revenue recognition and requiresour analysis, the use of more estimates and judgments than the present standards. It also requires additional disclosures. We are continuing to evaluate certain contracts to determine their treatment under ASU 2014—09. The Company does not expectconcluded that the adoption of this ASU tothe amended guidance did not have a material impact on its net revenue recognition. The cumulative effect adjustment upon adoption of the Consolidated Financial Statements.ASU in the first quarter of fiscal year 2019 was immaterial.

Fair Value of Financial Instruments:Transcat has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels.threelevels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Company to develop its own assumptions. The carrying amount of debt on the Consolidated Balance Sheets approximates fair value due to variable interest rate pricing, and the carrying amounts for cash, accounts receivable and accounts payable approximate fair value due to their short-term nature.short-termnature. Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds and are valued based on Level 1 inputs. At December 23, 201729, 2018 and March 25, 2017,31, 2018, investment assets totaled $0.8$0.6 million and $0.7 million, respectively and are included as a component of other assets (non-current) on the Consolidated Balance Sheets.

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Stock-Based Compensation:The Company measures the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. The Company records compensation expense related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period of each award. In 2016, FASB issued ASU 2016-09 to simplify certain aspects of the accounting for share-based payment transactions to employees. The Company elected to early adopt this ASU in the fourth quarter of fiscal year 2017. Upon adoption, excessExcess tax benefits for share-based award activity are reflected in the statement of income as a component of the provision for income taxes. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. The Company did not capitalize any stock-based compensation costs as part of an asset. The Company estimates forfeiture rates based on its historical experience. During the first nine months of the fiscal year ending March 31, 2018 (“fiscal year 2018”)2019 and fiscal year 2017,2018, the Company recorded non-cash stock-based compensation expense of $1.1$0.8 million and $0.3$1.1 million, respectively, in the Consolidated Statements of Income.

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

Transcat records foreign currency gains and losses on its Canadian business transactions. The net foreign currency loss was less than $0.1 million during the first nine months of each of fiscal years 20182019 and 2017.2018. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its earnings will be adversely affected by changes in currency exchange rates. The Company does not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a loss of $0.1 million during the first nine months of fiscal year 20182019 and a gain of $0.1 million during the first nine months of fiscal year 2017,2018, was recognized as a component of other expense in the Consolidated Statements of Income. The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated in Canadian dollars being hedged. On December 23, 2017,29, 2018, the Company had a foreign exchange contract, which matured in January 2018,2019, outstanding in the notional amount of $5.4$4.2 million. The foreign exchange contract was renewed in January 20182019 and continues to be in place. The Company does not use hedging arrangements for speculative purposes.

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

For the third quarter of each of the fiscal yearyears 2019 and 2018, the net additional common stock equivalents had a $0.01 effect on the calculation of diluted earnings per share. For the third quarterfirst nine months of fiscal year 2017,2019, the net additional common stock equivalents had noa $0.02 effect on the calculation of dilutivediluted earnings per share. For each of the first nine months of fiscal year 2018, and fiscal year 2017, the net additional common stock equivalents had a $0.01 effect on the calculation of diluted earnings per share. The average shares outstanding used to compute basic and diluted earnings per share are as follows:

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Recently Issued Accounting Pronouncements:In May 2017,February 2016, the FASB issued ASU 2017-09, ScopeNo. 2016-02, Leases (ASC Topic 842), which requires lessees to recognize substantially all leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right of Modification Accounting, Compensation—Stock Compensation (Topic 718). This ASU provides clarityuse ("ROU") model that requires a lessee to recognize a ROU asset and reduces both diversitylease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. This ASUincome statement.

The new standard is effective for annual reportingand interim periods beginning after December 15, 2017 and should be applied prospectively. Early adoption2018. ASU 2016-02 requires entities to adopt a modified retrospective transition method for leases existing at, or entered into after, the beginning of this ASU is permitted. the earliest comparative period presented in the consolidated financial statements.

The Company doescontinues to evaluate the impact that adopting ASU 2016-02 will have on its financial statements, but the most significant impact will be to add right to use lease assets and lease liabilities on the consolidated balance sheet by the present value of the Company’s leasing obligations, which are primarily related to facility and vehicle leases, as wellas additional disclosures required. The Company estimates that the value of the assets and liabilities added to the Consolidated Balance Sheets will be approximately $6 million to $8 million. Adopting the new standard will not expect adoption of this ASU to have a material impact on itsour Consolidated Financial Statements.Statement of Income or Consolidated Statement of Cash Flows.

In July 2018, FASB issued ASU 2018-11, Leases (ASC Topic 842), which provides entities with an additional transition method to adopt the new leases standard. Under this method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the prior comparative period's financials will remain the same as those previously presented. Entities that elect this optional transition method must provide the disclosures that were previously required. Adopting the new standard will not have a material impact on our Consolidated Statement of Income or Consolidated Statement of Cash Flows.

NOTE 2–LONG-TERM DEBT

Description:On December 10, 2018, the Company entered into an Amended and Restated Credit Agreement Amendment 1(the “2018 Agreement”), which replaced the previous term loan (the “2017 Term Loan”)which had an outstanding balance of $12.5 million as of such date. The 2018 Agreement has a term loan (the“2018Term Loan”) inthe amount of $15.0 million. As of December 29, 2018, $15.0 million was outstanding on the 2018 Term Loan, of which $1.9 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $0.2 million per month through December 2025. Interest on the 2018 Term Loan accrues at a fixed interest rate of 4.15% over the term of the agreement.

On October 30, 2017, the Company entered into an Amended and Restated Credit Agreement (the “2017 Agreement”(the“CreditAgreement”), which amended and restated our prior credit facility agreement. The 2017Credit Agreement extended the term of the Company’stheCompany’s $30.0 million revolvingmillionrevolving credit facility (the “Revolving Credit Facility”)to October 29, 2021. As of December 23, 2017,29, 2018, $30.0 million was available under the Revolving Credit Facility, of which $11.6$9.5 million was outstanding and included in long-term debt on the Consolidated Balance Sheet.Sheets. The 2017Credit Agreement also increased the amount of the Company’s outstanding term loan to $15.0 million (the “2017 Term Loan”), replacingreplaced the previous term loan. As of December 23, 2017, $14.6 million was outstanding onloan with the 2017 Term Loan of which $2.1 million was included in current liabilities on the Consolidated Balance Sheet with the remainder included in long-term debt.$15.0 million. The 2017 Term Loan requiresrequired principal repayments of $0.2 million per month plus interest through September 2022 with a $4.3 million repayment required on October 29, 2022. As stated above, the 2017 Term Loan was replaced by the 2018 Term Loan. Under the 2017Credit Agreement, borrowings that may be used for business acquisitions are limited to $20.0 million per fiscal year. During the first nine months of fiscal year 2018, no borrowings were2019, $3.6 million was used for a business acquisitions.

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The allowable leverage ratio under the 2017Credit Agreement remains at a maximum multiple of 3.0 of total debt outstanding compared to earnings before income taxes, depreciation and amortization, and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. The excess funds of the 2018 Term Loan and 2017 Term Loan over the previous term loanloans were used to repaypay down amounts outstanding under the Revolving Credit Facility.

Previously, on March 31, 2016, the Company entered into Amendment 3 (“Amendment 3”) to the prior credit agreement. Under Amendment 3, borrowings that could be used for business acquisitions were limited to $15.0 million in fiscal years 2018 and 2019. Amendment 3 also provided the Company with a $10.0 million term loan. The term loan required principal repayments of $0.1 million per month plus interest. Total annual repayment amounts of $1.4 million were required in fiscal years 2017 through 2021 with a $3.0 million repayment required in fiscal year 2022. Amendment 3 also increased the allowable leverage ratio to a maximum of 3.0 from 2.75. As described above, in the third quarter of fiscal year 2018, we entered into the 2017 Agreement that amended and restated the prior credit agreement, including Amendment 3.

Interest and Other Costs:Interest on outstanding borrowings of theunderthe Revolving Credit Facility and term loan accrue, at Transcat’s election,Transcat’selection, at either the variable one-month London Interbank Offered Rate (“LIBOR”)or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case, plus a margin. Interest on outstanding borrowings under the 2018 Term Loan accrue at a fixed rate of 4.15% over the term of the loan. Commitment fees accrue based on the average daily amount of unused credit available on the Revolving Credit Facility. Interest rate margins and commitment fees are determined on a quarterly basis based upon the Company’s calculated leverage ratio, as defined in the 2017Credit Agreement. The one-month LIBOR at December 23, 201729, 2018 was 1.6%2.5%. The Company’s interest rate for the Revolving Credit Facility during the first nine months of fiscal year 20182019 ranged from 3.2% to 3.4%3.8%.

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Covenants:The 2017Credit Agreement has certain covenants with which the Company has to comply, including a fixed charge coverage ratio covenant and a leverage ratio covenant. The Company was in compliance with all loan covenants and requirements during the third quarter of fiscal year 2018.2019.

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

NOTE 3–STOCK-BASED COMPENSATION

The Transcat, Inc. 2003 Incentive Plan, as Amended and Restated (the “2003 Plan”), provides for, among other awards,grants of restricted stock units and stock options to directors, officers and key employees at the fair market value at the date of grant. At December 23, 2017,29, 2018, 1.1 million shares were available for future grant under the 2003 Plan.

Restricted Stock Units:The Company generally grants performance-based restricted stock units as a primary component of executive compensation. TheIn previous years, the units generally vestvested following the third fiscal year from the date of grant subject to certain cumulative diluted earnings per share growth targets over the eligible period. Beginning with the restricted stock units granted in May 2018, 50% of the units will vest subject to certain cumulative diluted earnings per share growth targets over the eligible period and 50% of the restricted units will be time vested over a three-year period. The restricted stock units granted in June 2017, April 2018 and October 2018 were time vested. Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the unit that coincides with the actual outcome of the performance conditions. On an interim basis, the Company records compensation cost based on the estimated level of achievement of the performance conditions. The expense relating to the time vested restricted stock units is recognized on a straight-line basis over the requisite service period for the entire award.

The Company achieved 50% of the target level for the performance-based restricted stock units granted in the fiscal year ended March 28, 201526, 2016 and as a result, issued 2532 shares of common stock to executive officers and certain key employees during the first quarter of fiscal year 2018.2019. The following table summarizes the non-vested performance-based restricted stock units outstanding as of December 23, 2017:29, 2018: