UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________

FORM 10-Q

(Mark one)
☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: ~~June 26,~~September 25, 2021

or

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the transition period from __________ to __________

Commission File Number: 000-03905

TRANSCAT, INC.

(Exact name of registrant as specified in its charter)

Ohio		16-0874418
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.50 par value	TRNS	Nasdaq Global Market

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 growth company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer ☐			Accelerated filer ☒
	Non-accelerated filer ☐			Smaller reporting company ☒
	Emerging growth company ☐

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 ~~July 30,~~October 29, 2021 was ~~7,469,857.~~7,518,798.

Table of Contents

	Page(s)
PART I.FINANCIAL INFORMATION
Item 1.Consolidated Financial Statements:
Statements of Income for the ~~First~~Second Quarter and Six Months Ended ~~June 26,~~September 25, 2021 and ~~June 27,~~ September 26, 2020	1
Statements of Comprehensive Income for the ~~First~~Second Quarter and Six Months Ended ~~June~~September 25, 2021 and September 26, ~~2021 and June 27,~~ 2020	2
Balance Sheets as of ~~June 26,~~September 25, 2021 and March 27, 2021	3
Statements of Cash Flows for the ~~First Quarter~~Six Months Ended ~~June 26,~~September 25, 2021 and ~~June 27,~~September 26, 2020	4
Statements of Shareholders’ Equity for the ~~First~~Second Quarter and Six Months Ended ~~June 26,~~September 25, 2021 and ~~June 27,~~September 26, 2020	5
Notes to Consolidated Financial Statements	6

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

	(Unaudited)						(Unaudited)				(Unaudited)
	First Quarter Ended						Second Quarter Ended				Six Months Ended
	June 26,			June 27,			September 25,		September 26,		September 25,		September 26,
	2021			2020			2021		2020		2021		2020
Service Revenue	$	27,557		$	22,967		$	29,544	$	24,554	$	57,101	$	47,521
Distribution Sales		20,233			15,937			20,843		17,053		41,076		32,990
Total Revenue		47,790			38,904			50,387		41,607		98,177		80,511

Cost of Service Revenue		18,805			16,898			19,832		16,654		38,637		33,552
Cost of Distribution Sales		15,465			12,597			15,944		13,459		31,409		26,056
Total Cost of Revenue		34,270			29,495			35,776		30,113		70,046		59,608

Gross Profit		13,520			9,409			14,611		11,494		28,131		20,903

Selling, Marketing and Warehouse Expenses		4,997			4,074			4,974		4,291		9,971		8,365
General and Administrative Expenses		4,834			4,371			6,059		4,125		10,893		8,496
Total Operating Expenses		9,831			8,445			11,033		8,416		20,864		16,861

Operating Income		3,689			964			3,578		3,078		7,267		4,042

Interest and Other Expense, net		195			243			250		317		445		560

Income Before Income Taxes		3,494			721			3,328		2,761		6,822		3,482
Benefit from Income Taxes		(194	)		(77	)
Provision for Income Taxes								313		737		119		660

Net Income	$	3,688		$	798		$	3,015	$	2,024	$	6,703	$	2,822

Basic Earnings Per Share	$	0.49		$	0.11		$	0.40	$	0.27	$	0.90	$	0.38
Average Shares Outstanding		7,464			7,394			7,482		7,417		7,473		7,405

Diluted Earnings Per Share	$	0.49		$	0.11		$	0.40	$	0.27	$	0.88	$	0.38
Average Shares Outstanding		7,593			7,514			7,595		7,549		7,578		7,525

	(Unaudited) June 26,			(Audited) March 27,			(Unaudited) September 25,			(Audited) March 27,
	2021			2021			2021			2021
ASSETS
Current Assets:
Cash	$	254		$	560		$	2,551		$	560
Accounts Receivable, less allowance for doubtful accounts of $615 and $526 as of June 26, 2021 and March 27, 2021, respectively		33,324			33,950
Accounts Receivable, less allowance for doubtful accounts of $698 and $526 as of September 25, 2021 and March 27, 2021, respectively								36,464			33,950
Other Receivables		380			428			448			428
Inventory, net		11,642			11,636			10,205			11,636
Prepaid Expenses and Other Current Assets		3,139			2,354			4,105			2,354
Total Current Assets		48,739			48,928			53,773			48,928
Property and Equipment, net		22,172			22,203			23,034			22,203
Goodwill		43,904			43,272			59,441			43,272
Intangible Assets, net		6,901			7,513			12,753			7,513
Right To Use Assets, net		8,467			9,392
Right To Use Asset, net								8,393			9,392
Other Assets		956			808			919			808
Total Assets	$	131,139		$	132,116		$	158,313		$	132,116

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable	$	11,203		$	12,276		$	10,983		$	12,276
Accrued Compensation and Other Liabilities		7,312			10,417			8,455			10,417
Income Taxes Payable		0-			382			0-			382
Current Portion of Long-Term Debt		2,089			2,067			2,134			2,067
Total Current Liabilities		20,604			25,142			21,572			25,142
Long-Term Debt		20,107			17,494			40,917			17,494
Deferred Income Tax Liabilities		3,223			3,201
Deferred Tax Liabilities								4,914			3,201
Lease Liabilities		7,235			7,958			6,705			7,958
Other Liabilities		3,263			3,243			3,461			3,243
Total Liabilities		54,432			57,038			77,569			57,038

Shareholders' Equity:
Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,468,991 and 7,458,251 shares issued and outstanding as of June 26, 2021 and March 27, 2021, respectively		3,734			3,729
Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,518,159 and 7,458,251 shares issued and outstanding as of September 25, 2021 and March 27, 2021, respectively								3,759			3,729
Capital in Excess of Par Value		19,632			19,287			22,713			19,287
Accumulated Other Comprehensive Loss		(269	)		(451	)		(502	)		(451	)
Retained Earnings		53,610			52,513			54,774			52,513
Total Shareholders' Equity		76,707			75,078			80,744			75,078
Total Liabilities and Shareholders' Equity	$	131,139		$	132,116		$	158,313		$	132,116

	(Unaudited)
	First Quarter Ended						(Unaudited) Six Months Ended
	June 26,			June 27,			September 25,			September 26,
	2021			2020			2021			2020
Cash Flows from Operating Activities:
Net Income	$	3,688		$	798		$	6,703		$	2,822
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Loss (Gain) on Disposal of Property and Equipment		50			(1	)
Net Loss on Disposal of Property and Equipment								84			68
Deferred Income Taxes		22			24			7			47
Depreciation and Amortization		1,990			1,872			4,131			3,736
Provision for Accounts Receivable and Inventory Reserves		290			561			499			523
Stock-Based Compensation Expense		437			312			1,057			678
Changes in Assets and Liabilities:
Accounts Receivable and Other Receivables		805			2,948			(374	)		3,543
Inventory		33			5			1,739			623
Prepaid Expenses and Other Assets		(918	)		(251	)		(1,847	)		(625	)
Accounts Payable		(1,073	)		(2,621	)		(1,293	)		(892	)
Accrued Compensation and Other Liabilities		(2,880	)		494			(2,812	)		1,626
Income Taxes Payable		(389	)		(99	)		(392	)		327
Net Cash Provided by Operating Activities		2,055			4,042			7,502			12,476

Cash Flows from Investing Activities:
Purchases of Property and Equipment		(1,203	)		(1,261	)		(3,770	)		(3,116	)
Business Acquisitions, net of cash acquired		(931	)		0-			(20,910	)		0-
Net Cash Used in Investing Activities		(2,134	)		(1,261	)		(24,680	)		(3,116	)

Cash Flows from Financing Activities:
Proceeds from (Repayments of) Revolving Credit Facility, net		3,243			(1,330	)
Proceeds from (Repayment of) Revolving Credit Facility, net								24,511			(6,632	)
Repayment of Term Loan		(608	)		(487	)		(1,021	)		(979	)
Issuance of Common Stock		699			383			1,238			474
Repurchase of Common Stock		(3,377	)		(1,287	)		(5,649	)		(1,287	)
Net Cash Used in Financing Activities		(43	)		(2,721	)
Net Cash Provided by (Used in) Financing Activities								19,079			(8,424	)

Effect of Exchange Rate Changes on Cash		(184	)		(193	)		90			(473	)

Net Decrease in Cash		(306	)		(133	)
Net Increase in Cash								1,991			463
Cash at Beginning of Period		560			499			560			499
Cash at End of Period	$	254		$	366		$	2,551		$	962

Supplemental Disclosure of Cash Flow Activity:
Cash paid during the period for:
Interest	$	187		$	225		$	357		$	466
Income Taxes, net	$	250		$	61		$	1,531		$	332
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Common stock issued for NEXA acquisition							$	2,368		$	0-
Assets acquired and liabilities assumed in business combinations:
Fair value of assets acquired, net of cash acquired							$	24,885		$	0-
Fair value of liabilities assumed							$	2,159		$	0-
Accrued contingent consideration related to NEXA acquisition							$	153		$	0-
Accrued estimated working capital adjustment related to NEXA acquisition							$	226		$	0-

						Capital																	Capital
	Common Stock					In			Accumulated									Common Stock					In			Accumulated
	Issued					Excess			Other									Issued					Excess			Other
	$0.50 Par Value					of Par			Comprehensive			Retained						$0.50 Par Value					of Par			Comprehensive			Retained
	Shares		Amount			Value			Loss			Earnings			Total			Shares		Amount			Value			Income (Loss)			Earnings			Total
Balance as of March 28, 2020	7,381		$	3,691		$	17,929		$	(1,010	)	$	46,477		$	67,087		7,381		$	3,691		$	17,929		$	(1,010	)	$	46,477		$	67,087
Issuance of Common Stock	28			14			369			-			-			383		28			14			369			-			-			383
Repurchase of Common Stock	(48	)		(24	)		(579	)		-			(684	)		(1,287	)	(48	)		(24	)		(579	)		-			(684	)		(1,287	)
Stock-Based Compensation	50			25			287			-			-			312		50			25			287			-			-			312
Other Comprehensive Income	-			-			-			163			-			163		-			-			-			163			-			163
Net Income	-			-			-			-			798			798		-			-			-			-			798			798
Balance as of June 27, 2020	7,411		$	3,706		$	18,006		$	(847	)	$	46,591		$	67,456		7,411		$	3,706		$	18,006		$	(847	)	$	46,591		$	67,456

Issuance of Common Stock																		3			1			90			-			-			91
Stock-Based Compensation																		18			9			357			-			-			366
Other Comprehensive Income																		-			-			-			165			-			165
Net Income																		-			-			-			-			2,024			2,024
Balance as of September 26, 2020																		7,432		$	3,716		$	18,453		$	(682	)	$	48,615		$	70,102

						Capital																	Capital
	Common Stock					In			Accumulated									Common Stock					In			Accumulated
	Issued					Excess			Other									Issued					Excess			Other
	$0.50 Par Value					of Par			Comprehensive			Retained						$0.50 Par Value					of Par			Comprehensive			Retained
	Shares		Amount			Value			Loss			Earnings			Total			Shares		Amount			Value			Income (Loss)			Earnings			Total
Balance as of March 27, 2021	7,458		$	3,729		$	19,287		$	(451	)	$	52,513		$	75,078		7,458		$	3,729		$	19,287		$	(451	)	$	52,513		$	75,078
Issuance of Common Stock	52			26			673			-			-			699		52			26			673			-			-			699
Repurchase of Common Stock	(62	)		(31	)		(755	)		-			(2,591	)		(3,377	)	(62	)		(31	)		(755	)		-			(2,591	)		(3,377	)
Stock-Based Compensation	21			10			427			-			-			437		21			10			427			-			-			437
Other Comprehensive Income	-			-			-			182			-			182		-			-			-			182			-			182
Net Income	-			-			-			-			3,688			3,688		-			-			-			-			3,688			3,688
Balance as of June 26, 2021	7,469		$	3,734		$	19,632		$	(269	)	$	53,610		$	76,707		7,469		$	3,734		$	19,632		$	(269	)	$	53,610		$	76,707

Issuance of Common Stock																		72			36			2,871			-			-			2,907
Repurchase of Common Stock																		(35	)		(18	)		(403	)		-			(1,851	)		(2,272	)
Stock-Based Compensation																		12			7			613			-			-			620
Other Comprehensive Loss																		-			-			-			(233	)		-			(233	)
Net Income																		-			-			-			-			3,015			3,015
Balance as of September 25, 2021																		7,518		$	3,759		$	22,713		$	(502	)	$	54,774		$	80,744

Description of Business: Transcat, Inc. (“Transcat,” “we,” “us,” “our” 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 for which the risk of failure is very costly.

Basis of Presentation: Transcat’s unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 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 adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of 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 27, 2021 (“fiscal year 2021”) contained in the Company’s 2021 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. 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. The majority of the Company’s revenue generating activities 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 which the Company recognizes revenue over time using the output method-time elapsed as this portrays the transfer of control to the customer. Revenue is measured as the amount of consideration the Company expects to receive in 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 ~~first~~second quarter of the fiscal year ending March 26, 2022 (“fiscal year 2022”) was immaterial. As of ~~June 26,~~September 25, 2021, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, 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 ~~June 26,~~September 25, 2021 and March 27, 2021 were immaterial. Payment terms are generally 30 to 45 days. See Note 4 for disaggregated revenue information.

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. 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, other receivables, accounts payable and accrued compensation and other liabilities approximate fair value due to their short-term nature. 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 each of ~~June 26,~~September 25, 2021 and March 27, 2021, investment assets totaled $0.4 million and are included as a component of other assets on the Consolidated Balance Sheets.

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 cost 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. Excess tax benefits for share-based award activity are reflected in the Consolidated Statements 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~~During the first six months of fiscal year 2022 and fiscal year 2021, 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 ~~quarter~~six months of fiscal year 2022 and fiscal year 2021, the Company recorded non-cash stock-based compensation expense of ~~$0.4~~$1.1 million and ~~$0.3~~$0.7 million, respectively, in the Consolidated Statements of Income.

Foreign Currency Translation and Transactions: The accounts of Cal OpEx Limited (d/b/a NEXA Enterprise Asset Management), an Irish company, and Transcat Canada Inc., aboth of which are wholly-owned ~~subsidiary~~subsidiaries of the Company, are maintained in the local currency, the Euro and the Canadian dollar, respectively, 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 Cal OpEx Limited’s and Transcat Canada Inc.’s financial 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 Irish and Canadian business transactions. The net foreign currency ~~gain~~loss was less than $0.1 million in each of the first ~~quarter~~six months of fiscal year 2022 and fiscal year 2021. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its earnings denominated in Canadian dollars 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 gain of less than $0.1 million during the six months of fiscal year 2022 and a loss of $0.1 million during the first ~~quarter of each~~six months of fiscal ~~years 2022 and~~year 2021, 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 ~~June 26,~~September 25, 2021, the Company had a foreign exchange contract, which matured in ~~July~~October 2021, outstanding in the notional amount of ~~$4.0~~$3.1 million. The foreign exchange contract was renewed in ~~July~~October 2021 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 ~~both~~the second quarter of fiscal years 2022 and 2021, the net additional common stock equivalents had no effect on the calculation of diluted earnings per share. For the first ~~quarter~~six months of fiscal year 2022, ~~and~~the net additional common stock had a ($0.02) effect on the calculation of diluted earnings per share. For the first six months of fiscal year 2021, the net additional common stock ~~equivalents~~ had no0no 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 ~~(in~~(amounts in thousands):

Goodwill and Intangible Assets: Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value and whether it is necessary to perform the goodwill impairment process.

Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. The Company estimates the fair value of its reporting units using the fair market value measurement requirement. Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. A summary of changes in the Company’s goodwill and intangible assets is as follows (in thousands):

In June 2016, the Financial Accounting Standard Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU replaces the "incurred loss" model with an "expected credit loss" model that requires entities to estimate an expected lifetime credit loss on financial assets, including trade accounts receivable. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. As credit losses from the Company's trade receivables have not historically been significant, the Company anticipates that the adoption of the ASU will not have a material impact on its consolidated financial statements.

On July 7, 2021, we entered into the Second Amended and Restated Credit Facility Agreement (the “2021 Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), that amended and restated in its entirety the Company’s Amended and Restated Credit Facility Agreement dated as of October 30, 2017, as amended by Amended and Restated Credit Facility Agreement Amendment 1 dated December 10, 2018 and Amended and Restated Credit Facility Agreement Amendment 2 (“Amendment Two”) dated May 18, 2020 (as amended, the “Prior Credit Agreement”).

The 2021 Credit Agreement increased the revolving credit commitment (the “Revolving Credit Commitment”) from $40.0 million to $80.0 million, with a letter of credit subfacility increased from $2.0 million to $10.0 million, and extended the term of the Revolving Credit Commitment to June 2026. The 2021 Credit Agreement amended the definition of Applicable Margin (formerly Applicable Rate under the Prior Credit Agreement), which is based upon the Company’s then current leverage ratio and is used to determine interest charges on outstanding and unused borrowings under the revolving credit facility; the amendments reduced the Applicable Margins payable at the two highest leverage ratio levels. The 2021 Credit Agreement also amended the definition of Permitted Acquisitions, that is, acquisitions which are permitted under, and may be financed with proceeds of, the revolving credit facility, including increasing the aggregate purchase price for acquisitions consummated in any fiscal year from $1.0 million to ~~$65~~$65.0 million during the current fiscal year and ~~$50~~$50.0 million during any subsequent fiscal year, and adding an aggregate purchase price of $40.0 million for acquisitions consummated at any time during the term of the 2021 Credit Agreement related to businesses with a principal place of business located in the United Kingdom or the European Union.

In addition, the 2021 Credit Agreement provides that, assuming no event of default, restricted payments up to $25.0 million (increased from $10.0 million in the Prior Credit Agreement) in the aggregate and $10.0 million (increased from $3.0 million in the ~~First~~Prior Credit Agreement) in any single fiscal year may be used by us to repurchase our shares and pay dividends. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply. The 2021 Credit Agreement also reduced the London Interbank Offered Rate (“LIBOR”) floor from 1.0% to 0.25% and included a mechanism for adoption of a different benchmark rate in the event LIBOR is discontinued. Pursuant to the 2021 Credit Agreement, the fixed interest rate on our term loan (the “2018 Term Loan”) was reduced from 4.15% to 3.90%.

The 2021 Credit Agreement superseded in its entirety, the Prior Credit Agreement. Amendment Two to the Prior Credit Agreement had previously extended the term of the revolving credit facility to October 20, 2022 and increased the revolving credit commitment to $40 million.

Amendment Two had modified the definition of the applicable rate used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and it amended the definition of permitted acquisitions to amend borrowings available under the revolving credit facility for acquisitions. In addition, Amendment Two had amended the definition of restricted payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain employee tax obligations associated with share-based payment and stock option activity, and modified certain restrictions to the Company’s ability to repurchase its shares and pay dividends. Amendment Two also had modified the leverage ratio and fixed charge coverage ratio covenants with which the Company was required to comply and limited capital expenditures to $5.5 million for the fiscal year ending March 27, 2021. Amendment Two also had established a LIBOR floor of 1.0% and included a mechanism for adoption of a different benchmark rate in the event LIBOR was discontinued.

We have a term loan, the 2018 Term Loan, in the amount of $15.0 million. As of ~~June 26,~~September 25, 2021, ~~$10.0~~$9.6 million was outstanding on the 2018 Term Loan, of which $2.1 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.

As of ~~June 26,~~September 25, 2021, ~~$40.0~~$80.0 million was available under the revolving credit facility, of which ~~$12.1~~$33.4 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. During the first ~~quarter~~six months of fiscal year 2022, ~~$0.9~~$20.9 million was used for a business ~~acquisition.~~acquisitions.

The allowable leverage ratio under the Prior Credit Agreement for the second, third and fourth fiscal quarter of fiscal year 2021 and the first quarter of fiscal year 2022 was a maximum multiple of 5.0, 5.5, 7.0 and 4.0, respectively, of total debt outstanding compared to EBITDA and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. After the first quarter of fiscal 2022, pursuant to the ~~July~~ 2021 ~~Facility,~~Credit Agreement, the allowable leverage ratio is a maximum multiple of 3.0. The Prior Credit Agreement also had provided that the trailing twelve-month pro forma EBITDA of an acquired business was included in the allowable leverage calculation.

Interest and Other Costs: Interest on outstanding borrowings under the revolving credit facility accrue, at Transcat’s election, at either the variable one-month LIBOR or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods), plus a margin. Interest on outstanding borrowings under the 2018 Term Loan ~~accrue~~accrued at a fixed rate of 4.15% over the term of the loan during the first quarter of fiscal year 2022 and 3.90% during the second quarter of fiscal year 2022 and over the term of the loan for subsequent periods. Unused fees accrue based on the average daily amount of unused credit available on the revolving credit facility. Interest rate margins and unused fees are determined on a quarterly basis based upon the Company’s calculated leverage ratio. The Company’s interest rate for the revolving credit facility for the first ~~quarter~~six months of fiscal year 2022 ranged from ~~1.8%~~1.0% to 2.2%.

Covenants: ~~Pursuant to the Prior~~The 2021 Credit Agreement ~~we were required to~~has certain covenants with which the Company must comply with, including a fixed charge ratio covenant and a leverage ratio covenant. ~~M&T waived the requirement for the fixed charge ratio for the first fiscal quarter ending June 26, 2021. We were~~The Company was in compliance with all ~~other~~ loan covenants and requirements during the ~~first~~second quarter of fiscal year 2022. Our leverage ratio, as defined in the ~~Prior~~2021 Credit Agreement, was ~~0.96~~1.54 at ~~June 26,~~September 25, 2021, compared with 0.94 at March 27, 2021. ~~The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply.~~

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.

In September 2021, the Transcat, Inc. 2021 Stock Incentive Plan (the “2021 Plan”) was approved by shareholders and became effective. The ~~Company has a share-based incentive plan~~2021 Plan replaced the Transcat, Inc. 2003 Incentive Plan (the “2003 Plan”). Shares available for grant under the 2021 Plan include any shares remaining available for issuance under the 2003 Plan and any shares that are subject to outstanding awards under the 2003 Plan that are subsequently canceled, expired, forfeited, or otherwise not issued or are settled in cash. The 2021 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 ~~June 26,~~September 25, 2021, ~~0.9~~0.7 million shares of common stock were available for future grant under the ~~2003~~2021 Plan.

The Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete tax benefits related to share-based compensation and stock option activity during the first ~~quarter~~six months of fiscal year 2022 and 2021 were ~~$1.1~~$1.7 million and $0.3 million, respectively.

Restricted Stock Units: The Company grants time-based and performance-based restricted stock units as a component of executive and key employee compensation. Expense for restricted stock unit grants is recognized on a straight-line basis for the service period of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock unit grants is the quoted market price for the Company’s common stock on the date of grant. These restricted stock units are either time vested, or vest following the third fiscal year from the date of grant subject to cumulative diluted earnings per share targets over the eligible period.

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 64% of the target level for the performance-based restricted stock units granted in the fiscal year ended March 30, 2019 and as a result, issued 19 thousand shares of common stock to executive officers and certain key employees during the first quarter of fiscal year 2022. The following table summarizes the non-vested restricted stock units outstanding as of ~~June 26,~~September 25, 2021 (in thousands, except per unit data):

		Total	Grant Date
October 2018	October 2018 – September 2027	8	$	20.81	Time Vested
March 2019	April 2019 – March 2022	21	$	23.50	70% of target level
March 2019	April 2019 – March 2022	21	$	23.50	Time Vested
August 2019	August 2019 – July 2020	1	$	23.00	Time Vested
March 2020	April 2020 – March 2023	2	$	26.25	Time Vested
July 2020	July 2020 – July 2023	38	$	27.08	Time Vested
September 2020	September 2020 – September 2021	12	$	28.52	Time Vested
September 2020	September 2020 – July 2023	4	$	28.54	Time Vested
September 2020	September 2020 – July 2023	5	$	29.76	Time Vested
September 2020	September 2020 – September 2023	3	$	29.76	Time Vested
January 2021	January 2021 – January 2024	2	$	34.62	Time Vested
May 2021	May 2021 – January 2024	1	$	54.21	Time Vested
June 2021	June 2021 – May 2024	13	$	53.17	100% of target level
June 2021	June 2021 – May 2024	13	$	53.17	Time Vested

Total
Grant Date
Estimated
Number
Fair
Level of
Date
Measurement
of Units
Value
Achievement at
Granted
Period
Outstanding
Per Unit
June 26, 2021
October 2018
October 2018 – September 2027
8
$
20.81
Time Vested
March 2019
April 2019 – March 2022
21
$
23.50
70% of target level
March 2019
April 2019 – March 2022
21
$
23.50
Time Vested
August 2019
August 2019 – July 2020
1
$
23.00
Time Vested
March 2020
April 2020 – March 2023
2
$
26.25
Time Vested
July 2020
July 2020 – July 2023
38
$
27.08
Time Vested
September 2020
September 2020 – September 2021
12
$
28.52
Time Vested
September 2020
September 2020 – July 2023
4
$
28.54
Time Vested
September 2020
September 2020 – July 2023
5
$
29.76
Time Vested
September 2020
September 2020 – September 2023
3
$
29.76
Time Vested
January 2021
January 2021 – January 2024
2
$
34.62
Time Vested
May 2021
May 2021 – January 2024
1
$
54.21
Time Vested
June 2021
June 2021 – May 2024
13
$
53.17
100% of target level
June 2021
June 2021 – May 2024
13
$
53.17
Time Vested

		Total	Grant Date		Estimated
		Number	Fair		Level of
Date	Measurement	of Units	Value		Achievement at
Granted	Period	Outstanding	Per Unit		September 25, 2021
October 2018	October 2018 – September 2027	8	$	20.81	Time Vested
March 2019	April 2019 – March 2022	21	$	23.50	80% of target level
March 2019	April 2019 – March 2022	21	$	23.50	Time Vested
March 2020	April 2020 – March 2023	2	$	26.25	Time Vested
July 2020	July 2020 – March 2023	38	$	27.08	Time Vested
September 2020	September 2020 –July 2023	4	$	28.54	Time Vested
September 2020	September 2020 –July 2023	5	$	28.54	Time Vested
September 2020	September 2020 – September 2023	3	$	29.76	Time Vested
January 2021	January 2021 – January 2024	2	$	34.62	Time Vested
May 2021	May 2021 – May 2024	1	$	54.21	Time Vested
June 2021	June 2021 – May 2024	14	$	53.17	100% of target level
June 2021	June 2021 – May 2024	14	$	53.17	Time Vested
September 2021	September 2021 – August 2024	4	$	67.76	Time Vested
September 2021	September 2021 – September 2022	7	$	66.09	Time Vested

Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was ~~$0.4~~$0.9 million and ~~$0.3~~$0.6 million in the first ~~quarter~~six months of fiscal year 2022 and fiscal year 2021, respectively. As of ~~June 26,~~September 25, 2021, unearned compensation, to be recognized over the grants’ respective service periods, totaled ~~$2.7~~$3.0 million.

Stock Options: The Company grants stock options to employees and directors with an exercise price equal to the quoted market price of the Company’s stock at the date of the grant. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Expense for stock options is recognized on a straight-line basis over the requisite service period for each award. Options vest either immediately or over a period of up to five years using a straight-line basis and expire either five years or ten years from the date of grant.

The following table summarizes the Company’s options as of and for the first ~~quarter ended June 26, 2021 (in thousands, except per share data and years):~~six months of fiscal year 2022:

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the ~~first~~second quarter of fiscal year 2022 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all holders exercised their options on ~~June 26,~~September 25, 2021. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

Total expense related to stock options was ~~less than $0.1~~$0.2 million ~~in both~~during the first ~~quarter~~six months of fiscal year ~~2022 and~~2022. Total expense related to stock options was $0.1 million during the first ~~quarter~~six months of fiscal year 2021. Total unrecognized compensation cost related to non-vested stock options as of ~~June 26,~~September 25, 2021 was ~~$0.4~~$2.3 million, which is expected to be recognized over a period of five years. The aggregate intrinsic value of stock options exercised ~~during~~in the first ~~quarter~~six months of fiscal ~~year~~years 2022 and ~~fiscal year~~ 2021 was ~~$2.3~~$4.5 million and $0.3 million, respectively. Cash received from the exercise of options in the first ~~quarter~~six months of fiscal ~~year~~years 2022 and ~~fiscal year~~ 2021 was ~~$0.6~~$1.0 million and $0.3 million, respectively. ~~During the first quarter of fiscal year 2022, the Company repurchased the stock options exercised by the Chief Executive Officer for $2.8 million.~~

Transcat has 2 reportable segments: Service and Distribution. The Company has no inter-segment sales. The following table presents segment information for the second quarter and first ~~quarter~~six months of fiscal ~~year~~years 2022 and ~~fiscal year~~ 2021 (dollars in thousands):

	First Quarter Ended						Second Quarter Ended				Six Months Ended
	June 26,			June 27,			September 25,		September 26,		September 25,		September 26,
	2021			2020			2021		2020		2021		2020
Revenue:
Service Revenue	$	27,557		$	22,967
Distribution Sales		20,233			15,937
Service							$	29,544	$	24,554	$	57,101	$	47,521
Distribution								20,843		17,053		41,076		32,990
Total		47,790			38,904			50,387		41,607		98,177		80,511

Gross Profit:
Service		8,752			6,069			9,712		7,900		18,464		13,969
Distribution		4,768			3,340			4,899		3,594		9,667		6,934
Total		13,520			9,409			14,611		11,494		28,131		20,903

Operating Expenses:
Service ⁽¹⁾		5,778			4,940			7,065		4,923		12,843		9,863
Distribution ⁽¹⁾		4,053			3,505			3,968		3,493		8,021		6,998
Total		9,831			8,445			11,033		8,416		20,864		16,861

Operating Income:
Operating Income (Loss):
Service ⁽¹⁾		2,974			1,129			2,647		2,977		5,621		4,106
Distribution ⁽¹⁾		715			(165	)		931		101		1,646		(64	)
Total		3,689			964			3,578		3,078		7,267		4,042

Unallocated Amounts:
Interest and Other Expense, net		195			243			250		317		445		560
Benefit from Income Taxes		(194	)		(77	)
Provision for Income Taxes								313		737		119		660
Total		1			166			563		1,054		564		1,220

Net Income	$	3,688		$	798		$	3,015	$	2,024	$	6,703	$	2,822

NEXA:Effective August 31, 2021, Transcat purchased all of the outstanding capital stock of Cal OpEx Limited (d/b/a NEXA Enterprise Asset Management), a private Irish company, which owns all of the issued and outstanding capital stock of its U.S.-based subsidiary, Cal OpEx Inc., a Delaware corporation (collectively, “NEXA”). NEXA provides calibration optimization and other technical solutions to improve asset and reliability management programs to pharmaceutical, biotechnology, and medical device companies worldwide. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities.

The NEXA goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All of the goodwill and intangible assets relating to the NEXA acquisition has been allocated to the Service segment. Intangible assets related to the NEXA acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to five years and are deductible for tax purposes. Amortization of goodwill related to the NEXA acquisition is not deductible for tax purposes.

The total purchase price for NEXA was approximately $26.5 million and was paid with $24.1 million in cash and the issuance of 34,943 shares of our common stock valued at $2.4 million. Additionally, there are potential earn-out payments of up to $7.5 million over the next four years based upon NEXA achieving certain annual revenue and EBITDA goals. If achieved, the earn-out payments will also be made in shares of common stock unless certain criteria is met for cash payment. As of September 25, 2021, the estimated fair value for the contingent earn-out payments is $0.2 million and included in the preliminary purchase price allocation below. $0.1 million of the purchase price has been put into escrow as a holdback for indemnification claims, if any.

The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, working capital adjustments and true-up of the fair value of the contingent consideration, assets acquired and liabilities assumed. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of NEXA’s assets and liabilities acquired on August 31, 2021 (in thousands):

From the date of acquisition, NEXA has contributed revenue of $0.6 million and operating loss of l $0.1 million for the second quarter and for the first six months of fiscal year 2022.

Upstate Metrology:Effective April 29, 2021, Transcat acquired substantially all of the assets of Upstate Metrology Inc. (“Upstate Metrology”), a New York based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s ~~service~~Service capabilities.

~~100%~~All of the goodwill related to the Upstate Metrology acquisition has been allocated to the Service segment. Amortization of goodwill related to the Upstate Metrology acquisition is deductible for tax purposes.

The total purchase price ~~paid~~ for the assets of Upstate Metrology was approximately $0.9 million. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Upstate Metrology’s assets and liabilities acquired ~~during the period presented~~on April 29, 2021 (in thousands):

BioTek: Effective December 16, 2020, Transcat acquired substantially all of the assets of BioTek Services, Inc. (“BioTek”), a Virginia based provider of pipette calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s ~~service~~Service capabilities. BioTek’s focus on pipettes complements the current offerings Transcat provides to the life science sector.

~~100%~~All of the goodwill and intangible assets relating to the BioTek acquisition has been allocated to the Service segment. Intangible assets related to the BioTek acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to 10 years and are deductible for tax purposes. Amortization of goodwill related to the BioTek acquisition is deductible for tax purposes.

The total purchase price ~~paid~~ for the assets of BioTek was approximately $3.5 million. $0.4 million of the purchase price has been put into escrow as a holdback for indemnification claims, if any. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of BioTek’s assets and liabilities acquired during the period presented (in thousands):

The results of acquired businesses are included in Transcat’s consolidated operating results as of the dates the businesses were acquired. The following unaudited pro forma information presents the Company’s results of operations as if the acquisitions of NEXA, Upstate Metrology and BioTek had occurred at the beginning of fiscal year 2021. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transactions had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods.

Certain of the Company’s acquisition agreements include provisions for contingent consideration and other holdback amounts. The Company accrues for contingent consideration and holdback provisions based on their estimated fair value at the date of acquisition. As of ~~June 26,~~September 25, 2021, ~~there was no~~$0.2 million of contingent consideration orand $0.1 million of other holdback amounts were unpaid and reflected in current liabilities on the Consolidated Balance Sheets. During the first ~~quarter~~six months of fiscal year 2022 and fiscal year 2021, ~~0no~~no contingent consideration or other holdback amounts were paid.

During the first ~~quarter~~six months of fiscal ~~years~~year 2022, acquisition costs of $0.8 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income. During the first six months of fiscal year 2021, acquisition costs of less than $0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, estimates, beliefs, assumptions and predictions of future events and are identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “projects,” “seek,” “strategy,” “target,” “intends,” “could,” “may,” “will,” “would,” and other similar words. Forward-looking statements are not statements of historical fact and thus are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or those expressed in such forward-looking statements. You should evaluate forward-looking statements in light of important risk factors and uncertainties that may affect our operating and financial results and our ability to achieve our financial objectives. These factors include, but are not limited to, the impact of and our response to the COVID-19 pandemic, the highly competitive nature of the industries in which we compete and in the nature of our two business segments, cybersecurity risks, the risk of significant disruptions in our information technology systems, our inability to recruit, train and retain quality employees, skilled technicians and senior management, fluctuations in our operating results, competition in the rental market, the volatility of our stock price, our ability to adapt our technology, reliance on our enterprise resource planning system, technology updates, risks related to our acquisition strategy and the integration of the businesses we acquire, volatility in our customers’ industries, changes in vendor rebate programs, our vendors’ abilities to provide desired inventory, the risks related to current and future indebtedness, the relatively low trading volume of our common stock, foreign currency rate fluctuations and the impact of general economic conditions on our business. These risk factors and uncertainties are more fully described by us under the heading “Risk Factors” in our reports filed with the Securities and Exchange

Commission, including this quarterly report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended March 27, 2021. You should not place undue reliance on our forward-looking statements, which speak only as of the date they are made. Except as required by law, we

undertake no obligation to update or publicly announce any revisions to any of the forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

There have been no material changes to our critical accounting policies and estimates from the information provided in our Annual Report on Form 10-K for the fiscal year ended March 27, 2021.

During our ~~first~~second quarter of fiscal year 2022, we ~~had~~achieved consolidated revenue of ~~$47.8~~$50.4 million. This represented an increase of ~~$8.9~~$8.8 million or ~~22.8%~~21.1% versus the ~~first~~second quarter of fiscal year 2021. This increase was primarily due to the economic rebound in the second quarter of fiscal year 2022 and the lower customer demand in the prior year ~~first~~second quarter due to the COVID-19 pandemic, especially in the Distribution segment.

~~Our first~~Second quarter of fiscal year 2022 gross profit was ~~$13.5 million. This was~~$14.6 million, an increase of ~~$4.1~~$3.1 million or ~~43.7%~~27.1% versus the ~~first~~second quarter of fiscal year 2021. In addition, consolidated gross margin ~~was 28.3%, an increase of 410~~expanded by 140 basis points ~~versus the first quarter of fiscal year 2021.~~from 27.6% to 29.0%. This increase was largely the result of operating leverage on our fixed costs ~~and continued productivity improvements in the Service segment,~~ and a favorable mix of products sold in the Distribution segment.

Total operating expenses were ~~$9.8~~$11.0 million, inan increase of $2.6 million or 31.1% as compared to the ~~first~~second quarter of fiscal year ~~2022, an increase of $1.4 million when compared to the prior year first quarter.~~2021. Included in operating expenses during the ~~first~~second quarter of fiscal year 2022 were incremental operating expenses related to ~~the acquisition of Upstate Metrology,~~acquired businesses, investments in technology, ~~and~~ higher incentive-based employee costs due to higher ~~sales.~~sales and $0.8 million of one-time transaction expenses related to the acquisition of NEXA. As a percentage of total revenue, operating expenses were ~~20.6%~~21.9% in the ~~first~~second quarter of fiscal year 2022, ~~down 110~~up 170 basis points from ~~21.7%~~20.2% in the ~~first~~second quarter of fiscal year 2021. Operating income increased by ~~$2.7~~$0.5 million and operating margin ~~increased~~decreased by ~~520~~30 basis points in the ~~first~~second quarter of fiscal year 2022.

Net income was ~~$3.7~~$3.0 million ~~for~~in the ~~first~~second quarter of fiscal year 2022, up ~~from $0.8~~49.0% as compared to $2.0 million in the ~~first~~second quarter of fiscal year ~~2021 primarily~~2021. The increase in net income was due to higher operating income and ~~a higher benefit from~~lower provision for income taxes.

The following table presents, for the second quarter and first ~~quarter~~six months of fiscal ~~year~~years 2022 and ~~fiscal year~~ 2021, the components of our Consolidated Statements of Income:

~~FIRST~~SECOND QUARTER ENDED ~~JUNE 26,~~SEPTEMBER 25, 2021 COMPARED TO ~~FIRST~~SECOND QUARTER ENDED ~~JUNE 27,~~SEPTEMBER 26, 2020
~~(dollars in thousands)~~:

Total revenue increased ~~$8.9~~$8.8 million, or ~~22.8%~~21.1%, in our second quarter of fiscal year 2022 ~~first quarter~~ compared to the prior fiscal year ~~first~~second quarter.

Service revenue, which accounted for ~~57.7%~~58.6% and 59.0% of our total revenue in the ~~first~~second quarter of fiscal years 2022 and 2021, respectively, increased ~~20.0%~~20.3% from the ~~first~~second quarter of fiscal year 2021 to the ~~first~~second quarter of fiscal year 2022. This year-over-year increase included ~~$0.6~~$1.6 million in revenue from acquisitions and organic revenue growth of ~~16.6%~~14.0% and was driven by improvement in end market conditions, continued market share gains and an easier comparison versus the ~~first~~second quarter of fiscal year 2021 which was ~~the quarter most significantly~~adversely impacted by the COVID-19 pandemic.

Our fiscal years 2022 and 2021 quarterly Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows:

The growth in Service segment revenue during the first quarter of fiscal year 2022 versus the first quarter of fiscal year 2021 reflected both organic growth and acquisitions, and the growth in the first quarter of fiscal year 2021 versus the first quarter of fiscal year 2020 was also both organic and from acquisitions.

Within any fiscal year, while we add new customers, we also have customers from the prior fiscal year whose service orders may not repeat for any number of factors. Among those factors are variations in the timing of periodic calibrations and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of Service segment orders can vary on a quarter-to-quarter basis, we believe trailing twelve-month information provides ~~a better~~an indication of the progress of this segment. The following table presents the trailing twelve-month Service segment revenue for each quarter in fiscal years ~~2021~~2022 and ~~2020~~2021, as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year ~~period:~~period (dollars in thousands):

The growth in Service segment revenue during the second quarter of fiscal year 2022 was due both to organic growth and acquisitions, while the growth in the second quarter of fiscal year 2021 reflected acquisitions.

Our strategy has been to focus our investments in the core electrical, temperature, pressure, physical/dimensional and radio frequency/microwave calibration disciplines. We expect to subcontract approximately 13% to 15% of our Service revenue to third-party vendors for calibration beyond our chosen scope of capabilities. We continually evaluate our outsourcing needs and make capital investments, as deemed necessary, to add more in-house capabilities and reduce the need for third-party vendors. Capability expansion through business acquisitions is another way that we seek to reduce the need for outsourcing. The following table presents the source of our Service

revenue and the percentage of Service revenue derived from each source for each quarter during fiscal years 2022 and 2021:

Our Distribution sales accounted for ~~42.3%~~41.4% of our total revenue in the ~~first~~second quarter of fiscal year 2022 and 41.0% of our total revenue in the ~~first~~second quarter of fiscal year 2021. During the ~~first~~second quarter of fiscal year 2022, Distribution segment sales showed an increase of ~~27.0%~~22.2% to ~~$20.2~~$20.8 million. This increase was due to increased orders in the ~~first~~second quarter of fiscal year 2022 and an easier comparison to the ~~first~~second quarter of fiscal year 2021, which was ~~the quarter most significantly~~adversely impacted by the COVID-19 pandemic. ~~In addition, rental revenue increased by 61.3% to $1.6 million.~~

Our fiscal years 2022 and 2021 Distribution sales (decline) growth, ~~(decline),~~ in relation to prior fiscal year quarter comparisons, was as follows:

The change in the first quarter of fiscal year 2022 versus the first quarter of fiscal year 2021 for the Distribution segment reflected just organic growth and the change in the first quarter of fiscal year 2021 versus the first quarter of fiscal year 2020 for the Distribution segment reflected both organic growth and acquisitions.

Distribution sales orders include orders for instruments that we routinely stock in our inventory, customized products, and other products ordered less frequently, which we do not stock. Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in our service centers prior to shipment, orders required by the customer to be shipped complete or at a future date, and other orders awaiting final credit or management review prior to shipment. We believe pending product shipments is an important measure of trends in demand in the Distribution segment.

Our total pending product shipments at the end of the ~~first~~second quarter of fiscal year 2022 were ~~$8.2~~$7.6 million, an increase of ~~$4.3~~$3.4 million versus the end of the ~~first~~second quarter of fiscal year 2021 and an increase of ~~$1.9~~$1.3 million since March 27, 2021. The year-over-year increase in pending product shipments ~~and backorders~~ was a result of the COVID-19 pandemic and its ~~disruption~~disruptive impact to the supply of products in the second quarter of fiscal year 2022 as well as overall increased ~~orders for the wind power generation market.~~ demand.

The following table presents our total pending product shipments and the percentage of total pending product shipments that were backorders at the end of each quarter of fiscal years 2022 and 2021:

~~Gross Profit:~~

First Quarter Ended Change
June 26, June 27,
2021 2020 $ %
Gross Profit:
Service $ 8,752 $ 6,069 $ 2,683 44.2%
Distribution 4,768 3,340 1,428 42.8%
Total $ 13,520 $ 9,409 $ 4,111 43.7%

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Gross Profit:

	Second Quarter Ended				Change
(dollars in thousands)	September 26,		September 26,
	2021		2020		$		%
Gross Profit:
Service		9,712	$	7,900	$	1,812		22.9	%
Distribution		4,899		3,594		1,305		36.3	%
Total	$	14,611	$	11,494	$	3,117		27.1	%

Total gross profit for the ~~first~~second quarter of fiscal year 2022 was ~~$13.5~~$14.6 million, an increase of ~~$4.1~~$3.1 million or ~~43.7%~~27.1% versus the ~~first~~second quarter of fiscal year 2021. Total gross margin was ~~28.3%~~29.0% in the ~~first~~second quarter of fiscal year 2022, up from ~~24.2%~~27.6% in the ~~first~~second quarter of fiscal year 2021, a ~~410~~140 basis point ~~increase.~~expansion.

Service gross profit in the ~~first~~second quarter of fiscal year 2022 increased ~~$2.7~~$1.8 million, or ~~44.2%~~22.9%, from the ~~first~~second quarter of fiscal year 2021. Service gross margin was ~~31.8%~~32.9% in the ~~first~~second quarter of fiscal year 2022 ~~a 540 basis point increase~~ versus 32.2% in the ~~first~~second quarter of fiscal year ~~2021.~~2021, a 700 basis point increase. This increase in gross margin was primarily due to operating leverage on our fixed cost ~~base and continued strong technician productivity.~~base.

The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:

FY 2022 FY 2021
Q1 Q4 Q3 Q2 Q1
Service Gross Margin 31.8% 33.9% 27.9% 32.2% 26.4%

	FY 2022		FY 2021
	Q2	Q1	Q4	Q3	Q2	Q1
Service Gross Margin	32.9%	31.8%	33.9%	27.9%	32.2%	26.4%

Our Distribution gross margin includes net sales less the direct cost of inventory sold and the direct costs of equipment rental revenues, primarily depreciation expense for the fixed assets in our rental equipment pool, as well as the impact of rebates and cooperative advertising income we receive from vendors, freight billed to customers, freight expenses and direct shipping costs. In general, our Distribution gross margin can vary based upon the mix of products sold, price discounting, and the timing of periodic vendor rebates offered and cooperative advertising programs from suppliers.

The following table reflects the quarterly historical trend of our Distribution gross margin as a percent of Distribution sales:

FY 2022 FY 2021
Q1 Q4 Q3 Q2 Q1
Distribution Gross Margin 23.6% 21.0% 22.5% 21.1% 21.0%

	FY 2022		FY 2021
	Q2	Q1	Q4	Q3	Q2	Q1
Distribution Gross Margin	23.5%	23.6%	21.0%	22.5%	21.1%	21.0%

Distribution segment gross margin was ~~23.6%~~23.5% in the ~~first~~second quarter of fiscal year 2022 versus ~~21.0%~~21.1% in the ~~first~~second quarter of fiscal year 2021, a ~~260~~240 basis point increase. The increase in segment gross margin was primarily due to a favorable mix of higher margin products sold and ~~rented.~~increases in rental revenue.

Operating Expenses:

First Quarter Ended Change
June 26, June 27,
2021 2020 $ %
Operating Expenses:
Selling, Marketing and Warehouse $ 4,997 $ 4,074 $ 923 22.7%
General and Administrative 4,834 4,371 463 10.6%
Total $ 9,831 $ 8,445 $ 1,386 16.4%

	Second Quarter Ended				Change
(dollars in thousands)	September 25,		September 26,
	2021		2020		$		%
Operating Expenses:
Selling, Marketing and Warehouse	$	4,974	$	4,291	$	683		15.9	%
General and Administrative		6,059		4,125		1,934		46.9	%
Total	$	11,033	$	8,416	$	2,617		31.1	%

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Total operating expenses were ~~$9.8~~$11.0 million in the ~~first~~second quarter of fiscal year 2022 versus $8.4 million during the ~~first~~second quarter of fiscal year 2021. The year-over-year increase in selling, marketing and warehouse expenses is due to higher performance-based sales incentives and direct marketing costs. The increase in general and administrative expenses includes $0.8 million in one-time transaction related expenses related to the NEXA acquisition, incremental expenses related to acquired companies, increased payroll costs from new employees and continued investments in technology.

As a percentage of total revenue, operating expenses were ~~20.6%~~21.9% in the ~~first~~second quarter of fiscal year 2022 and ~~21.7%~~20.2% in the ~~first~~second quarter of fiscal year 2021, ~~a decrease~~an increase of ~~110~~170 basis points.

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Income Taxes:

First Quarter Ended Change
June 26, June 27,
2021 2020 $ %
Benefit from Income Taxes $ (194 ) $ (77 ) $ (117 ) (151.9%)

	Second Quarter Ended				Change
(dollars in thousands)	September 25,		September 26,
	2021		2020		$			%
Provision for Income Taxes	$	313	$	737	$	(424	)		(57.5	%)

Our effective tax rates for the ~~first~~second quarter of fiscal years 2022 and 2021 were ~~(5.6%)~~9.4% and ~~(10.7%)~~26.7%, respectively. The ~~increase~~decrease in the tax ~~benefit~~provision is due to the increased amount of discrete tax benefit from share-based compensation activity. Our quarterly provision for income taxes is affected by discrete items that may occur in any given year but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the ~~first~~second quarter of fiscal years 2022 and 2021 was ~~$1.1~~$0.6 million and ~~$0.3~~less than $0.1 million, respectively.

We continue to evaluate our tax provision on a quarterly basis and adjust, as deemed necessary, our effective tax rate given changes in facts and circumstances expected for the entire fiscal year. We expect our total fiscal year 2022 effective tax rate to be approximately ~~16%~~14% to ~~18%~~15%.

Net Income:

First Quarter Ended Change
June 26, June 27,
2021 2020 $ %
Net Income $ 3,688 $ 798 $ 2,890 362.2%

	Second Quarter Ended				Change
(dollars in thousands)	September 25,		September 26,
	2021		2020		$		%
Net Income	$	3,015	$	2,024	$	991		49.0	%

Net income for the ~~first~~second quarter of fiscal year 2022 increased ~~$2.9~~$1.0 million from the ~~first~~second quarter of fiscal year 2021 primarily due to the increased operating income and a ~~higher benefit from~~lower provision for income taxes.

Adjusted EBITDA:

In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, non-cash stock compensation expense,acquisition related transaction expenses, non-cash loss on sale of building, and restructuring expense), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, stock-based compensation expense and other items, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.

Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

First Quarter Ended
June 26, June 27,
2021 2020
Net Income $ 3,688 $ 798
+ Interest Expense 189 224
+ Other Expense / (Income) 6 19
+ Tax Provision (194) (77)
Operating Income $ 3,689 $ 964
+ Depreciation & Amortization 1,990 1,871
+ Restructuring Expense - 360
+ Other (Expense) / Income (6) (19)
+ Noncash Stock Compensation 437 312
Adjusted EBITDA $ 6,110 $ 3,488

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	Second Quarter Ended
(dollars in thousands)	September 25,			September 26,
	2021			2020
Net Income	$	3,015		$	2,024
+ Interest Expense		169			233
+ Other Expense		81			84
+ Tax Provision		313			737
Operating Income		3,578			3,078
+ Depreciation & Amortization		2,141			1,863
+ Transaction Expense		821			-
+ Other Expense		(81	)		(84	)
+ Noncash Stock Compensation		620			366
Adjusted EBITDA	$	7,079		$	5,223

Total Adjusted EBITDA for the ~~first~~second quarter of fiscal year 2022 was ~~$6.1~~$7.1 million, an increase of ~~$2.6~~$1.9 million or ~~75.2%~~35.5% versus the ~~first~~second quarter of fiscal year 2021. As a percentage of revenue, Adjusted EBITDA increased to

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~~12.8%~~ 14.0% for the ~~first~~second quarter of fiscal year 2022 ~~from 9.0%~~versus 12.6% for the ~~first~~second quarter of fiscal year 2021. The increase in Adjusted EBITDA during the ~~first~~second quarter of fiscal year 2022 was primarily driven by the increase in net income.

SIX MONTHS ENDED SEPTEMBER 25, 2021 COMPARED TO SIX MONTHS ENDED SEPTEMBER 26, 2020:

Revenue:

	Six Months Ended				Change
(dollars in thousands)	September 25,		September 26,
	2021		2020		$		%
Revenue:
Service	$	57,101	$	47,521	$	9,580		20.2	%
Distribution		41,076		32,990		8,086		24.5	%
Total	$	98,177	$	80,511	$	17,666		21.9	%

Service revenue, which accounted for 58.2% of our total revenue during the first six months of fiscal year 2022 and 59.0% of our total revenue during the first six months of fiscal year 2021, increased $9.6 million, or 20.2%, from the first six months of fiscal year 2021 compared to the first six months of fiscal year 2022. This year-over-year increase reflected increased demand from the life sciences and other highly-regulated end markets and included $2.3 million of incremental revenue from acquisitions.

Our Distribution sales accounted for 41.8% and 41.0% of our total revenue in the first six months of fiscal years 2022 and 2021, respectively. For the first six months of fiscal year 2022, Distribution sales increased $8.1 million, or 24.5%, compared to the first six months of fiscal year 2021. This increase in revenue was due to increased orders in the first six months of fiscal year 2022 and an easier comparison to the first six months of fiscal year 2021, which was adversely impacted by the COVID-19 pandemic.

Gross Profit:

	Six Months Ended				Change
(dollars in thousands)	September 25,		September 26,
	2021		2020		$		%
Gross Profit:
Service	$	18,464	$	13,969	$	4,495		32.2	%
Distribution		9,667		6,934		2,733		39.4	%
Total	$	28,131	$	20,903	$	7,228		34.6	%

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Total gross profit for the first six months of fiscal year 2022 was $28.1 million, an increase of $7.2 million or 34.6% versus the first six months of fiscal year 2021. Total gross margin was 28.7%, a 270 basis points increase compared to 26.0% in the first six months of fiscal year 2021. This increase in gross margin was primarily due to operating leverage on our fixed cost base and continued strong technician productivity in the Service segment and a favorable mix of products sold in the Distribution segment.

Operating Expenses:

	Six Months Ended				Change
(dollars in thousands)	September 25,		September 26,
	2021		2020		$		%
Operating Expenses:
Selling, Marketing and Warehouse	$	9,971	$	8,365	$	1,606		19.2	%
General and Administrative		10,893		8,496		2,397		28.2	%
Total	$	20,864	$	16,861	$	4,003		23.7	%

Total operating expenses for the first six months of fiscal year 2022 were $20.9 million, an increase of $4.0 million or 23.7% versus the first six months of fiscal year 2021. The year-over-year increase in selling, marketing and warehouse expenses was due to higher performance-based sales incentives and direct marketing costs. The increase in general and administrative expenses includes $0.8 million of one-time transaction related expenses related to the NEXA acquisition, incremental expenses related to acquired companies, increased payroll costs from new employees and continued investments in technology. As a percentage of total revenue, operating expenses during the first six months of fiscal year 2022 were 21.3%, compared to 20.9% in the first six months of fiscal year 2021, an increase of 40 basis points.

Provision for Income Taxes:

	Six Months Ended				Change
(dollars in thousands)	September 25,		September 26,
	2021		2020		$			%
Provision for Income Taxes	$	119	$	660	$	(541	)		(82.0	%)

Our effective tax rates for the first six months of fiscal years 2022 and 2021 were 1.7% and 19.0%, respectively. The decrease in our tax rate is due to the increased discrete tax benefits from share-based compensation activity. Our provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the first six months of fiscal years 2022 and 2021 were $1.7 million and $0.3 million, respectively.

Net Income:

	Six Months Ended				Change
	September 25,		September 26,
	2021		2020		$		%
Net Income	$	6,703	$	2,822	$	3,881		137.5	%

Net income for the first six months of fiscal year 2022 was $6.7 million, an increase of $3.9 million versus the first six months of fiscal year 2021. The year over year increase in net income was due to the higher operating income and lower provision for income taxes.

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Adjusted EBITDA:

In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, non-cash stock compensation expense, acquisition related transaction expenses, non-cash loss on sale of building, and restructuring expense), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, stock-based compensation expense and other items, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.

	Six Months Ended
(dollars in thousands)	September 25,			September 26,
	2021			2020
Net Income	$	6,703		$	2,822
+ Interest Expense		358			457
+ Other Expense		87			103
+ Tax Provision		119			660
Operating Income		7,267			4,042
+ Depreciation & Amortization		4,131			3,734
+ Restructuring Expense		-			360
+ Transaction Expense		821			-
+ Other (Expense) Income		(87	)		(103	)
+ Noncash Stock Compensation		1,057			679
Adjusted EBITDA	$	13,189		$	8,712

During the first six months of fiscal year 2022, Adjusted EBITDA was $13.2 million, an increase of $4.5 million or 51.4% versus the first six months of fiscal year 2021. As a percentage of revenue, Adjusted EBITDA was 13.4% for the first six months of fiscal year 2022 and 10.8% for the first six months of fiscal year 2021. The increase in Adjusted EBITDA during the first six months of fiscal year 2022 was primarily driven by the increase in net income and acquisition transaction expenses.

LIQUIDITY AND CAPITAL RESOURCES

We expect that foreseeable liquidity and capital resource requirements will be met through anticipated cash flows from operations and borrowings from our revolving credit facility. We believe that these sources of financing will be adequate to meet our future requirements.

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the definition of Applicable Margin (formerly Applicable Rate under the Prior Credit Agreement), which is based upon the Company’s then current leverage ratio and is used to determine interest charges on outstanding and unused borrowings under the revolving credit facility; the amendments reduced the Applicable Margins payable at the two highest leverage ratio levels. The 2021 Credit Agreement also amended the definition of Permitted Acquisitions, that is, acquisitions which are permitted under, and may be financed with proceeds of, the revolving credit facility, including increasing the aggregate purchase price for acquisitions consummated in any fiscal year from $1.0 million to $65 million during the current fiscal year and $50 million during any subsequent fiscal year, and adding an aggregate purchase price of $40.0 million for acquisitions consummated at any time during the term of the 2021 Credit Agreement related to businesses with a principal place of business located in the United Kingdom or the European Union.

In addition, the 2021 Credit Agreement provides that, assuming no event of default, restricted payments up to $25.0 million (increased from $10.0 million in the Prior Credit Agreement) in the aggregate and $10.0 million (increased from $3.0 million in the Prior Credit Agreement) in any single fiscal year may be used by us to repurchase our shares and pay dividends. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply. The 2021 Credit Agreement also reduced the LIBOR floor from 1.0% to 0.25% and included a mechanism for adoption of a different benchmark rate in the event LIBOR is discontinued. Pursuant to the 2021 Credit Agreement, the fixed interest rate on our term loan (the “2018 Term Loan”) was reduced from 4.15% to 3.90%.

Amendment Two also had modified the definition of the applicable rate used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and it amended the definition of permitted acquisitions to amend borrowings available under the revolving credit facility for acquisitions. In addition, Amendment Two had amended the definition of restricted payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain employee tax obligations associated with share-based payment and stock option activity, and modified certain restrictions to the Company’s ability to repurchase its shares and pay dividends. Amendment Two also had modified the leverage ratio and fixed charge coverage ratio covenants with which the Company was required to comply and limited capital expenditures to $5.5 million for the fiscal year ending March 27, 2021. Amendment Two also had established a LIBOR floor of 1.0% and included a mechanism for adoption of a different benchmark rate in the event LIBOR was discontinued.

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During the first ~~quarter~~six months of fiscal year ~~2021,~~2022, we used ~~$0.9~~$20.9 million for a business ~~acquisition.~~acquisitions.

Pursuant to the Prior Credit Agreement, we were required to comply with a fixed charge ratio covenant and a leverage ratio covenant. M&T waived the requirement for the fixed charge ratio for the first fiscal quarter ending June 26, 2021. We were in compliance with all ~~other~~ loan covenants and requirements during the ~~first~~second quarter of fiscal year 2022. Our leverage ratio, as defined in the Prior Credit Agreement, was ~~0.96~~1.54 at ~~June 26,~~September 25, 2021, compared with 0.94 at March 27, 2021. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply.

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Interest on the revolving credit facility continues to accrue, at our election, at either the variable one-month LIBOR (subject to a 1% floor during the first quarter of fiscal year 2022) 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 of the 2018 Term Loan ~~accrues~~accrued at a fixed rate of ~~4.15%~~3.90% over the term of the loan during the ~~first~~second quarter of fiscal year 2022 with principal and interest payments made monthly. Unused fees accrued based on the average daily amount of unused credit available under the ~~Prior Credit Agreement.~~revolving credit facility. Interest rate margins and unused fees were determined on a quarterly basis based upon our calculated leverage ratio.

Cash Flows: The following table is a summary of our Consolidated Statements of Cash Flows ~~(dollars in~~(in thousands):

	First Quarter Ended						Six Months Ended
	June 26,			June 27,			September 25,			September 26,
	2021			2020			2021			2020
Cash Provided by (Used in):
Operating Activities	$	2,055		$	4,042		$	7,502		$	12,476
Investing Activities	$	(2,134	)	$	(1,261	)	$	(24,680	)	$	(3,116	)
Financing Activities	$	(43	)	$	(2,721	)	$	19,079		$	(8,424	)

Operating Activities: Net cash provided by ~~operations~~operating activities was ~~$2.1~~$7.5 million during the first ~~quarter~~six months of fiscal year 2022 compared to ~~$4.0~~$12.5 million ~~of net cash provided by operating activities~~ during the first ~~quarter~~six months of fiscal year 2021. The year-over-year ~~decrease~~increase in cash provided by operations ~~was~~is primarily the result of changes in net working capital (defined as current assets less current liabilities). The significant working capital fluctuations were as follows:

·Receivables: Accounts receivable decreased by a net amount of $0.6 million during the first quarter of fiscal year 2022 inclusive of $0.2 million of accounts receivable acquired as part of the Upstate Metrology acquisition completed during the period. During the first quarter of fiscal year 2021, accounts receivable decreased by a net amount of $3.1 million. The year-over-year variation reflects changes in the timing of collections. The following table illustrates our “days sales outstanding” as of June 26, 2021 and June 27, 2020 (dollars in thousands):

Accounts Receivable: Accounts receivable increased by a net amount of $3.3 million during the first six months of fiscal year 2022 inclusive of $2.6 million of accounts receivable acquired during the period. During the first six months of fiscal year 2021, accounts receivable decreased by $3.3 million. The year-over-year variation primarily reflects changes in the timing of collections. The following table illustrates our days sales outstanding as of September 25, 2021 and September 26, 2020 (dollars in thousands):

June 26, June 27,
2021 2020
Net Sales, for the last two fiscal months $ 33,502 $ 27,464
Accounts Receivable, net $ 33,324 $ 27,849
Days Sales Outstanding 60 61

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	September 25,		September 26,
	2021		2020
Net Sales, for the last two fiscal months	$	35,394	$	30,036
Accounts Receivable, net	$	36,464	$	27,647
Days Sales Outstanding		64		55

Inventory: Our inventory strategy includes making appropriate large quantity, high dollar purchases with key manufacturers for various reasons, including maximizing on-hand availability of key products, expanding the number of SKU’s stocked in anticipation of customer demand, reducing backorders for products with long lead times and optimizing vendor volume discounts. As a result, inventory levels may vary from quarter-to-quarter based on the timing of these large orders in relation to our quarter end. Our inventory balance ~~remained flat~~decreased $1.4 million during ~~both~~ the first ~~quarter~~six months of fiscal year ~~2022 and~~2022. Inventory decreased $0.5 million during the first six months of fiscal year 2021.

Accounts Payable: Changes in accounts payable may or may not correlate with changes in inventory balances at any given quarter end due to the timing of vendor payments for inventory, as well as the timing of payments for outsourced Service vendors and capital expenditures. Accounts payable decreased ~~$1.1~~$1.3 million and $0.9 million during the first ~~quarter~~six months of fiscal year ~~2022. Accounts payable decreased $2.6 million during the first quarter of~~2022 and fiscal year ~~2021.~~2021, respectively. The decreases are largely due to the timing of inventory and other payments in the respective periods.

Accrued Compensation and Other Liabilities: Accrued compensation and other liabilities include, among other things, amounts to be paid to employees for non-equity performance-based compensation. At the end of any particular period, the amounts accrued for such compensation may vary due to many factors including, but not limited to, changes in expected performance levels, the performance measurement period, and timing of payments to employees. During the first ~~quarter~~six months of fiscal year 2022, accrued compensation and other liabilities decreased by ~~$3.1 million. During~~$2.2 million compared to a $0.2 million increase in the first ~~quarter~~six months of fiscal year ~~2021, accrued compensation and other liabilities decreased by $0.3 million.~~2021. The change in fiscal year 2022 was largely due to the one-time annual payments of incentive based compensation accruals.

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Income Taxes Payable: In any given period, net working capital may be affected by the timing and amount of income tax payments. During the first ~~quarter~~six months of fiscal year 2022, ~~and~~income taxes payable decreased by $0.4 million whereas in the first six months of fiscal year 2021, income taxes payable ~~decreased~~increased by ~~$0.3 million and $0.1 million, respectively.~~$0.2 million. The year-over-year difference is due to timing of income tax payments.

Investing Activities: During the first ~~quarter~~six months of fiscal year 2022, we invested ~~$1.2~~$3.8 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and the Company’s rental business.

During the first ~~quarter~~six months of fiscal year 2021, we invested ~~$1.3~~$3.1 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and the Company’s rental business.

During the first six months of fiscal year 2022, we used $20.9 million for business acquisitions. During the first six months of fiscal year 2021, we did not use any funds for business acquisitions.

Financing Activities: During the first ~~quarter~~six months of fiscal year 2022, ~~$3.2~~$24.5 million was borrowed from our revolving line of credit and ~~$0.7~~$1.2 million in cash was generated from the issuance of common stock. In addition, we used ~~$0.6~~$1.0 million for scheduled repayments of our term loan and ~~$3.4~~$5.6 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in the second quarter of fiscal year 2022, which are shown as a repurchase of shares of our common stock.

During the first ~~quarter~~six months of fiscal year 2021, $0.4 million in cash was generated from the issuance of common stock. In addition, we used ~~$1.3~~$6.6 million to reduce the balance on our revolving line of credit, ~~$0.5~~$1.0 million for scheduled repayments of our term loan and $1.3 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in the second quarter of fiscal year 2021, which are shown as a repurchase of shares of our common stock.

OUTLOOK

The results of the first quarter of fiscal year 2022 were strong and we are pleased with the continued strong performance of our Service segment and improving trends in our Distribution segment. We have a strong balance sheet, sustainable Service segment gross margins and an active M&A pipeline. We are confident that the strength of our unique value proposition and our new customer pipeline positions us well for continued strong organic growth.

For the ~~second~~third quarter of fiscal year 2022, we expect Service ~~organic~~total revenue growth to be similar to ~~what we~~that achieved in the first quarter of fiscal year 2022. We expect more modest improvement in Service gross margin than we have experienced over the last several quarters, largely due to a more difficult technician productivity comparison versus

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~~the second quarter of fiscal year 2021. Distribution sales are expected to achieve high teens growth~~ in the second quarter of fiscal year 2022, with approximately half of the expected growth to be generated organically and half from acquisitions. We expect Service gross margin to expand over the prior fiscal year third quarter, similar to the level of year-over-year expansion we achieved in the second quarter of fiscal year 2022. Distribution revenue is expected to grow in the low teens in the third quarter of fiscal year 2022 based on ~~improved~~expected improvement in order trends and a prior-year comparison that includes lower levels of demand due to the COVID-19 pandemic.

WeTranscat revised ~~our~~its fiscal year 2022 income tax rate to a range between ~~16%~~14% and ~~18%~~15% from the previous estimated range of ~~20%~~16% to ~~22%~~18%. This estimate includes Federal, various state, Canadian and ~~Canadian~~Irish income taxes and reflects the discrete tax benefit associated with share-based payment ~~awards~~ and stock option activity.

We anticipate total capital expenditures to be approximately $7.5 million to $8.5 million in fiscal year 2022, with the majority of the capital expenditures planned for technology and growth-oriented opportunities within both of our operating segments.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATES

Our exposure to changes in interest rates results from our borrowing activities. In the event interest rates were to move by 1%, our yearly interest expense would increase or decrease by approximately ~~$0.1~~$0.2 million assuming our average borrowing levels remained constant. As of ~~June 26,~~September 25, 2021, ~~$40.0~~$80.0 million was available under our revolving credit facility, of which ~~$12.1~~$33.4 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. As described above under “Liquidity and Capital Resources,” we also have a $15.0 million (original principal) term loan. The 2018 Term Loan is considered a fixed interest rate loan. As of ~~June 26,~~September 25, 2021, ~~$10.0~~$9.6 million was outstanding on the 2018 Term Loan and was included in long-term debt and current portion of long-term debt on the Consolidated Balance Sheets. The 2018 Term Loan requires total (principal and interest) repayments of $0.2 million per month.

At our option, we borrow from our revolving credit facility at the variable one-month LIBOR or at a fixed rate for a designated period at the LIBOR (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods) corresponding to such period, in each case, plus a margin. Our interest rate margin is determined on a quarterly basis based upon our calculated leverage ratio. Our interest rate during the first ~~quarter~~six

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months of fiscal year 2022 for our revolving credit facility ranged from ~~1.8%~~1.0% to 2.2%. Interest on outstanding borrowings ofon the 2018 Term Loan accrued at a fixed rate of 4.15% over the term of the loan during the first quarter of fiscal year 2022 and 3.90% over the term of the loan for subsequent periods. On ~~June 26,~~September 25, 2021, we had no hedging arrangements in place for our revolving credit facility to limit our exposure to upward movements in interest rates.

FOREIGN CURRENCY

Approximately 90% of our total revenues for each of the first ~~quarters~~six months of fiscal ~~year~~years 2022 and 2021 were denominated in U.S. dollars, with the remainder denominated in Canadian ~~dollars.~~dollars and Euros. A 10% change in the value of the Canadian dollar to the U.S. dollar and the Euro to the U.S. dollar would impact our revenue by approximately 1%. We monitor the relationship between the U.S. and Canadian currencies and the U.S. and Euro currencies on a monthly basis and adjust sales prices for products and services sold in Canadian dollars or Euros as we believe to be appropriate.

We continually utilize short-term foreign exchange forward contracts to reduce the risk that future earnings would be adversely affected by changes in currency exchange rates. We do not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a gain of less than $0.1 million during the first six months of fiscal year 2022 and a loss of $0.1 million during the first ~~quarter~~six months of ~~each of the~~ fiscal ~~years 2022 and~~year 2021, 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 ~~June 26,~~September 25, 2021, we had a foreign exchange contract, which matured in ~~July~~October 2021, outstanding in the notional amount of ~~$4.0~~$3.1 million. The foreign exchange contract was renewed in ~~July~~October 2021 and continues to be in place. We do not use hedging arrangements for speculative purposes.

ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Our principal executive officer and our principal financial officer evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are designed to ensure that information

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required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of such date.

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this quarterly report (our ~~first~~second fiscal quarter of fiscal year 2022) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

Except as stated below, there have been no material changes from the risk factors previously disclosed in Part I – Item 1A of the Company’s Form 10-K for the fiscal year ended March 27, 2021.

Potential government imposed COVID-19 vaccine mandates could have a material adverse impact on our business and results of operations. On September 9, 2021, President Biden directed the Department of Labor’s Occupational Safety and Health Administration (“OSHA”) to issue an Emergency Temporary Standard requiring that all employers with at least 100 employees ensure that their employees are fully vaccinated for COVID-19 or require employees to obtain a negative COVID-19 test at least once a week. OSHA is drafting an emergency regulation to carry out this mandate, although the timeline remains uncertain. It is unclear, among other things, if the vaccine mandate will apply to all employees and how compliance will be documented. As a company with more than 100 employees, we may be required to mandate COVID-19 vaccination of our workforce or have our unvaccinated employees undergo required weekly

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COVID-19 testing, which could be difficult and costly. Further, additional vaccine and testing mandates may be announced in jurisdictions in which we operate our business, and there could be potential conflict with actions by certain states that are in conflict with the federal mandate, the impacts of which remain uncertain. Any requirement to mandate COVID-19 vaccination of our workforce or require our unvaccinated employees to be tested weekly could result in employee attrition and difficulty securing future labor needs, and could have a material adverse effect on our revenues, costs, and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

(a) (b) (c) (d)
Period Total
Number of
Shares
Purchased
Average
Price Paid
per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs ⁽¹⁾ Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet Be
Purchased Under the Plans
or Programs ⁽¹⁾

03/28/21 - 04/24/21 279⁽²⁾ $49.08⁽²⁾ - -

04/25/21 - 05/22/21 61,912⁽²⁾ $54.35⁽²⁾ - -

05/23/21 - 06/26/21 - - - -

Total 62,191 $54.33 - -

	(a)	(b)	(c)	(d)
Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs ⁽¹⁾

06/27/21 - 07/24/21	-	-	-	-

07/25/21 - 08/21/21	35,000⁽²⁾	$64.86⁽²⁾	-	-

08/22/21 - 09/25/21	-	-	-	-

Total	35,000	$64.86	-	-

(1)

We have a Share Repurchase Plan (the “Plan”), announced on October 31, 2011, which allows us to repurchase shares of our common stock from certain of our executive officers, directors and key employees, subject to certain conditions and limitations. The purchase price is determined by the weighted average closing price per share of our common stock on The NASDAQ Global Market over the twenty (20) trading days following our acceptance of the repurchase request and may not be more than 15% higher than the closing price on the last day of the twenty (20) trading day period. We may purchase shares of our common stock pursuant to the Plan on a continuous basis, but we may not expend more than $1.0 million in any fiscal year to repurchase the shares. Our board of directors may terminate the Plan at any time. No shares were repurchased under the Plan during the ~~first~~second quarter of fiscal year 2022.

(2)

Shares of common stock withheld pursuant to the Transcat, Inc. 2003 Incentive Plan, as Amended and Restated, to cover employee tax-withholding obligations upon vesting of restricted stock unit awards that vested and stock option exercises in the ~~first~~second quarter of fiscal year 2022. Amounts in column (b) reflect the weighted average price for shares withheld in satisfaction of these tax-withholding obligations.

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ITEM 6. EXHIBITS

INDEX TO EXHIBITS

Exhibit No.		Description
10.1		Second Amended and Restated Credit Facility Agreement, dated as of July 7, 2021, by and between Transcat, Inc. and Manufacturers and Traders Trust Company, incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 12, 2021

10.2*	Share Purchase Agreement, dated August 31, 2021, by and among Transcat, Inc., John Cummins and Ross Lane

10.3*	Registration Rights Agreement, dated August 31, 2021, by and among Transcat, Inc., John Cummins and Ross Lane

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10.4#	Transcat, Inc. 2021 Stock Incentive Plan is incorporated herein by reference from Exhibit 99.3 to the Company’s Post-Effective Amendment No. 1 to Form S-8 (Registration No. 333-191631) filed on October 13, 2021

10.5#*	Form of Award Agreement of Director Long-Term Compensation Award Granted Pursuant to the Transcat, Inc. 2021 Stock Incentive Plan

(31)	Rule 13a-14(a)/15d-14(a) Certifications

	31.1*	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2*	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(32)	Section 1350 Certifications

	32.1**	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(101)	Interactive Data File

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

~~(104)~~104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*	Filed herewith
**	Furnished herewith
#	Management contract or compensatory plan or arrangement

* Exhibit filed with this report.

24 28

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TRANSCAT, INC.




Date: ~~August~~November 3, 2021	/s/ Lee D. Rudow
	Lee D. Rudow
	President and Chief Executive Officer (Principal Executive Officer)


Date: ~~August~~November 3, 2021	/s/ Mark A. Doheny
	Mark A. Doheny
	Vice President of Finance and Chief Financial Officer (Principal Financial Officer)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations	1314
Item 33..Quantitative and Qualitative Disclosures about Market Risk	2225
Item 4.Controls and Procedures	2226
PART II.OTHER INFORMATION
Item 1A.Risk Factors	26
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds	2327
Item 6.Exhibits	2427
SIGNATURES	2529

					Weighted							Weighted
			Weighted Average		Average Remaining					Weighted Average		Average Remaining
	Number		Exercise		Contractual	Aggregate		Number		Exercise		Contractual	Aggregate
	of		Price Per		Term (in	Intrinsic		of		Price Per		Term (in	Intrinsic
	Shares		Share		years)	Value		Shares		Share		years)	Value
Outstanding as of March 27, 2021	125		$	15.47				125		$	15.47
Granted	25		$	42.57				125		$	59.87
Exercised	(50	)	$	12.00				(85	)	$	12.00
Forfeited	5			24.30				(5	)	$	24.30
Outstanding as of June 26, 2021	95		$	23.96	4	$	3,196
Exercisable as of June 26, 2021	37		$	11.35	1	$	1,659
Outstanding as of September 25, 2021								160		$	51.72	9	$	2,045
Exercisable as of September 25, 2021								2		$	26.27	8	$	76

Goodwill		$	15,723
Intangible Assets – Customer Base & Contracts			5,600
Intangible Assets – Backlog			490
Intangible Assets – Covenant Not to Compete			600
			22,413
Plus:	Cash		3,732
	Accounts Receivable		2,434
	Non-Current Assets		38
Less:	Current Liabilities		(453	)
	Deferred Tax Liability		(1,706	)
Total Purchase Price		$	26,458

Goodwill		$	1,063
Intangible Assets – Customer Base & Contracts			1,930
Intangible Assets – Covenant Not to Compete			100
			3,093
Plus:	Current Assets		406
	Non-Current Assets		8
Total Purchase Price		$	3,507

	(Unaudited)				(Unaudited)				(Unaudited)
	Quarter Ended				Quarter Ended				Six Months Ended
(in thousands except per share information)	June 26, 2021		June 27, 2020		September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020
Total Revenue	$	47,889	$	39,622	$	51,989	$	43,821	$	102,109	$	84,060
Net Income	$	3,659	$	816	$	3,342	$	2,891	$	7,360	$	3,237
Basic Earnings Per Share	$	0.49	$	0.11	$	0.45	$	0.39	$	0.98	$	0.44
Diluted Earnings Per Share	$	0.48	$	0.11	$	0.44	$	0.38	$	0.97	$	0.43

	Goodwill						Intangible Assets									Goodwill								Intangible Assets
	Distribution		Service		Total		Distribution			Service			Total			Distribution		Service			Total			Distribution			Service			Total

Net Book Value as of March 27, 2021	$	11,458	$	31,814	$	43,272	$	920		$	6,593			$ 7,513		$	11,458	$	31,814		$	43,272		$	920		$	6,593		$	7,513
Additions		0-		483		483		0-			0-			0-			0-		16,206			16,206			0-			6,690			6,690
Amortization		-		-		-		(70	)		(550	)		(620	)		-		-			-			(136	)		(1,213	)		(1,349	)
Currency Translation Adjustment		0-		149		149		0-			8			8			0-		(37	)		(37	)		0-			(101	)		(101	)
Net Book Value as of June 26, 2021	$	11,458	$	32,446	$	43,904	$	850		$	6,051			$ 6,901
Net Book Value as of September 25, 2021																$	11,458	$	47,983		$	59,441		$	784		$	11,969		$	12,753

	FY 2022	FY 2021
	Q1	Q4	Q3	Q2	Q1
Service Revenue Growth	20.0%	15.8%	12.2%	4.5%	2.5%

		FY 2022	FY 2021
		Q1	Q4	Q3	Q2	Q1
Trailing Twelve-Month:
	Service Revenue	$105,864	$101,274	$97,225	$94,624	$93,572
	Service Revenue Growth	13.1%	8.9%	5.4%	4.3%	7.4%

		FY 2022	FY 2021
		Q1	Q4	Q3	Q2	Q1
Percent of Service Revenue:
	In-House	83.1%	83.6%	83.1%	83.7%	82.9%
	Outsourced	15.4%	14.9%	15.3%	14.7%	15.6%
	Freight Billed to Customers	1.5%	1.5%	1.6%	1.6%	1.5%
		100.0%	100.0%	100.0%	100.0%	100.0%

	FY 2022	FY 2021
	Q1	Q4	Q3	Q2	Q1
Distribution Sales Growth (Decline)	27.0%	(4.6%)	(8.6%)	(6.6%)	(20.3%)

	FY 2022	FY 2021
	Q1	Q4	Q3	Q2	Q1
Total Pending Product Shipments	$8,173	$6,287	$5,533	$4,251	$3,890
% of Pending Product
Shipments that were Backorders	78.4%	77.6%	79.3%	76.6%	75.8%