Transcat (TRNS) 10-Q 2005 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 25, 2004

or

o 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
(State or other jurisdiction of incorporation or organization) 16-0874418
(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)

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. Yesþ   Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yeso   Noþ

The number of shares of Common Stock of the Registrant outstanding as of February 4, 2005 was 6,465,323.

1

Page(s)

PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Third Quarter and Nine Months Ended December 25, 2004 and December 27, 2003	3
Consolidated Balance Sheets as of December 25, 2004 and March 27, 2004	4
Consolidated Statements of Cash Flows for the Nine Months Ended December 25, 2004 and December 27, 2003	5
Consolidated Statements of Stockholders’ Equity	6
Notes to Consolidated Financial Statements	7-13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk	24-25
Item 4. Controls and Procedures	26
PART II. OTHER INFORMATION
Item 5. Other Information	26
Item 6. Exhibits	26
SIGNATURES	27
INDEX TO EXHIBITS	28
Exhibit 10.1 Notice of Incentive Stock Option
Exhibit 10.2 Notice of Restricted Stock Award
Exhibit 31.1 Certification of CEO
Exhibit 31.2 Certification of CFO
Exhibit 32.1 Section 1350 Certifications

2

PART 1. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In Thousands, Except Per Share Amounts)

	(Unaudited)					(Unaudited)
	Third Quarter Ended					Nine Months Ended
	December		December			December			December
	25, 2004		27, 2003			25, 2004			27, 2003
Product Sales	$	9,856	$	9,343		$	27,045		$	24,975
Service Sales		4,185		4,208			12,706			13,067
Net Sales		14,041		13,551			39,751			38,042
Cost of Products Sold		7,529		7,344			20,800			18,733
Cost of Services Sold		2,992		3,124			9,396			9,544
Total Cost of Products and Services Sold		10,521		10,468			30,196			28,277
Gross Profit		3,520		3,083			9,555			9,765
Selling, Marketing, and Warehouse Expenses		1,946		2,041			5,752			6,195
Administrative Expenses		1,162		1,223			3,580			3,345
Total Operating Expenses		3,108		3,264			9,332			9,540
Operating Income (Loss)		412		(181	)		223			225
Interest Expense		89		76			234			219
Other Expense (Income)		50		(52	)		237			(157	)
Total Other Expense		139		24			471			62
Income (Loss) Before Income Taxes		273		(205	)		(248	)		163
Provision (Benefit) for Income Taxes		—		15			—			(147	)
Net Income (Loss)		273		(220	)		(248	)		310
Other Comprehensive Income:
Currency Translation Adjustment		64		47			147			119
Comprehensive Income (Loss)	$	337	$	(173	)	$	(101	)	$	429
Basic Earnings (Loss) Per Share	$	0.04	$	(0.03	)	$	(0.04	)	$	0.05
Average Shares Outstanding (in thousands)		6,414		6,295			6,371			6,262
Diluted Earnings (Loss) Per Share	$	0.04	$	(0.03	)	$	(0.04	)	$	0.05
Average Shares Outstanding (in thousands)		6,979		6,295			6,371			6,837

See the notes to these financial statements.

3

TRANSCAT, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

	(Unaudited)
	December			March
	25, 2004			27, 2004
ASSETS
Current Assets:
Cash	$	131		$	547
Accounts Receivable, less allowance for doubtful accounts of $45 and $51 as of December 25, 2004 and March 27, 2004, respectively		6,661			8,044
Other Receivables		8			64
Finished Goods Inventory, net		5,488			3,736
Income Taxes Receivable		—			144
Prepaid Expenses and Deferred Charges		756			696
Total Current Assets		13,044			13,231
Property, Plant and Equipment, net		1,838			2,025
Capital Leases, net		131			181
Goodwill		2,524			2,524
Prepaid Expenses and Deferred Charges		239			171
Other Assets		260			253
Total Assets	$	18,036		$	18,385
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	4,501		$	4,139
Accrued Payrolls, Commissions and Other		1,089			1,620
Income Taxes Payable		100			100
Deposits		57			57
Current Portion of Term Loan		667			668
Current Portion of Capital Lease Obligations		66			49
Revolving Line of Credit		4,746			6,441
Total Current Liabilities		11,226			13,074
Term Loan, less current portion		1,278			—
Capital Lease Obligations, less current portion		73			134
Deferred Compensation		177			205
Deferred Gain on TPG Divestiture		1,544			1,544
Total Liabilities		14,298			14,957
Stockholders’ Equity:
Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 6,685,024 and 6,352,968 shares issued as of December 25, 2004 and March 27, 2004, respectively; 6,437,760 and 6,233,610 shares outstanding as of December 25, 2004 and March 27, 2004, respectively		3,313			3,176
Capital in Excess of Par Value		3,994			3,235
Warrants		430			518
Unearned Compensation		(35	)		(23	)
Accumulated Other Comprehensive Gain (Loss)		80			(67	)
Accumulated Deficit		(3,206	)		(2,958	)
Less: Treasury Stock, at cost, 247,264 and 119,358 shares as of December 25, 2004 and March 27, 2004, respectively		(838	)		(453	)
Total Stockholders’ Equity		3,738			3,428
Total Liabilities and Stockholders’ Equity	$	18,036		$	18,385

See the notes to these financial statements.

4

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW
(In Thousands)

	(Unaudited)
	Nine Months Ended
	December			December
	25, 2004			27, 2003
Cash Flows from Operating Activities:
Net (Loss) Income	$	(248	)	$	310
Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization		1,131			1,160
Provision for Doubtful Accounts Receivable and Returns		(6	)		(122	)
Provision for Slow Moving or Obsolete Inventory		(8	)		—
Common Stock Expense		170			77
Amortization of Unearned Compensation		117			—
Changes in Assets and Liabilities:
Accounts Receivable and Other Receivables		1,445			423
Inventories		(1,744	)		(2,088	)
Income Taxes Receivable / Payable		144			315
Prepaid Expenses, Deferred Charges, and Other		(517	)		(854	)
Accounts Payable		362			970
Accrued Payrolls, Commissions, and Other		(531	)		(687	)
Deposits		—			(2	)
Deferred Compensation		(28	)		8
Net Cash Provided by (Used in) Operating Activities		287			(490	)
Cash Flows from Investing Activities:
Purchase of Property, Plant and Equipment		(512	)		(254	)
Net Cash Used in Investing Activities		(512	)		(254	)
Cash Flows from Financing Activities:
Revolving Line of Credit, net		(1,695	)		1,352
Payments on Term Loan		(723	)		(500	)
Proceeds from Term Loan Borrowings		2,000			—
Payments on Capital Leases		(44	)		—
Issuance of Common Stock		124			—
Net Cash (Used in) Provided by Financing Activities		(338	)		852
Effect of Exchange Rate Changes on Cash		147			119
Net (Decrease) Increase in Cash		(416	)		227
Cash at Beginning of Period		547			114
Cash at End of Period	$	131		$	341
Supplemental Disclosure of Non-Cash Financing Activity:
Expiration of Warrants from Debt Retirement	$	88		$	—
Treasury Stock Acquired in Cashless Exercise of Stock Options	$	385		$	—

See the notes to these financial statements.

5

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)

													Accum-
													ulated
					Capital								Other
	Common Stock				In					Un-			Compre-						Treasury Stock
	Outstanding				Excess					earned			hensive			Accum-				Outstanding
	$0.50 Par Value				of Par		War-			Comp-			Gain			ulated			at Cost
	Shares		Amount		Value		rants			ensation			(Loss)			Deficit			Shares		Amount			Total
Balance as of March 27, 2004		6,234	$	3,176	$	3,235	$	518		$	(23	)	$	(67	)	$	(2,958	)		119	$	(453	)	$	3,428
Issuance of Common Stock		109		119		546														128		(385	)		280
Restricted Stock:																									—
Issuance of Restricted Stock		95		18		125					(129	)													14
Amortization of Unearned Compensation											117														117
Expired Warrants						88		(88	)																—
Comprehensive Income:																									—
Currency Translation Adjustment														147											147
Net Loss																	(248	)							(248	)
Balance as of December 25, 2004		6,438	$	3,313	$	3,994	$	430		$	(35	)	$	80		$	(3,206	)		247	$	(838	)	$	3,738

See the notes to these financial statements.

6

TRANSCAT, INC.

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

NOTE 1 - NATURE OF BUSINESS AND BASIS OF PRESENTATION

Description of Business.Transcat, Inc. (“Transcat”, “we”, ‘us”, or “our”) is a leading distributor of professional grade test, measurement, and calibration instruments and a provider of calibration and repair services, primarily throughout the process, life science, and manufacturing industries.

Basis of Presentation.Our unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, our Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our 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 indicative of the results to be expected for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements as of and for the fiscal year ended March 27, 2004 contained in our 2004 Annual Report on Form 10-K filed with the SEC.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.The consolidated financial statements of Transcat include the accounts of Transcat, Inc. and all of our wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

Use of Estimates.The preparation of our Consolidated Financial Statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to, allowance for doubtful accounts and returns, inventory valuation, depreciable lives of assets, economic lives of leased assets, impairment of goodwill, estimated lives of our major catalogs (“Master Catalog”), and tax valuation allowances. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Actual results could differ from those estimates.

Changes in Estimates.In the ordinary course of accounting for items discussed above, we make changes in estimates as appropriate, and as we become aware of circumstances surrounding those estimates. Such changes and refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to our Consolidated Financial Statements.

Fiscal Year.We operate on a 52/53 week fiscal year, ending the last Saturday in March. In a 52-week fiscal year, each of our four quarters is a 13-week period, and the final month of each quarter is a 5-week period.

Revenue Recognition.Sales are recorded when products are shipped or services are rendered to customers, as we generally have no significant post delivery obligations. Our prices are fixed and determinable, collection of the resulting receivable is probable, and returns are reasonably estimated. Provisions for customer returns are provided for in the period the related sales are recorded based upon historical data. We recognize the majority of our service revenue based upon when the calibration or repair activity is performed then shipped and/or delivered to the customer. Some of our service revenue is generated from managing customers’ calibration programs in which we recognize revenue in equal amounts at fixed intervals. Our shipments are generally free on board shipping point and our customers are generally invoiced for freight, shipping, and handling charges.

Shipping and Handling Costs.Freight expense and direct shipping costs are included in cost of sales. Direct handling costs, which primarily represent direct compensation of employees who pick, pack, and otherwise prepare, if necessary, merchandise for shipment to our customers are reflected in selling, marketing, and warehouse expenses.

Rebates.Rebates are based on a specified cumulative level of purchases and are recorded as a reduction of cost of sales as the milestone is achieved.

7

Cooperative Advertising Income.We follow the provisions of the Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor” which provides that cash consideration received from a vendor by a reseller be reported as a reduction of cost of sales as the related inventory is sold.

Comprehensive Income.We report comprehensive income under Statement of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive Income”. Other comprehensive income is comprised of net income (loss) and currency translation adjustments.

Currency Translation Adjustment.The accounts of our Canadian subsidiary are maintained in local currency and have been translated to United States dollars in accordance with SFAS No. 52, “Foreign Currency Translation”. Accordingly, the amounts representing assets and liabilities, except for long-term intercompany and equity, have been translated at the period-end rates of exchange and related revenue and expense accounts have been translated at average rates of exchange during the period. Gains and losses arising from translation of our subsidiary balance sheets into United States dollars are recorded directly to the accumulated comprehensive income component of stockholders’ equity. Currency gains and losses on business transactions are included in other expense (income) on the Consolidated Statements of Operations.

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 dilutive stock options, warrants, and non-vested restricted stock awards. In computing the per share effect of assumed conversion, funds which would have been received from the exercise of options, warrants, and non-vested restricted stock are considered to have been used to purchase shares of Common Stock at the average market prices during the period, and the resulting net additional shares of Common Stock are included in the calculation of average shares of Common Stock outstanding.

For the third quarter ended December 25, 2004, the net additional Common Stock equivalents had no effect on the calculation of dilutive earnings per share. For the nine months ended December 25, 2004, there were no dilutive shares. For the third quarter ended December 27, 2003, there were no dilutive shares. For the nine months ended December 27, 2003, the net additional Common Stock equivalents had no effect on the calculation of dilutive earnings per share. The total number of dilutive and anti-dilutive Common Stock equivalents resulting from outstanding stock options, warrants, and non-vested restricted stock are summarized as follows (shares in thousands, except per share amounts):

	Third Quarter Ended				Nine Months Ended
	December		December		December		December
	25, 2004		27, 2003		25, 2004		27, 2003
Shares Outstanding:
Dilutive		565		—		—		575
Anti-dilutive		722		817		743		983
Total		1,287		817		743		1,558
Range of Exercise Prices per Share:
Options	$	0.80-$3.00	$	0.80-$4.75	$	0.80-$3.00	$	0.80-$4.75
Warrants	$	0.97-$2.91	$	0.97-$2.91	$	0.97-$2.91	$	0.97-$2.91

Accounts Receivable.Accounts receivable represent receivables from customers in the ordinary course of business. These amounts are recorded net of the allowance for doubtful accounts and returns in the Consolidated Balance Sheets. The allowance for doubtful accounts is based upon the expected collectibility of accounts receivable. We apply a specific formula to our accounts receivable aging, which may be adjusted on a specific account basis where the specific formula may not appropriately reserve for loss exposure. The returns reserve is calculated based upon the historical rate of returns applied to sales over a specific timeframe. The returns reserve will increase or decrease as a result of changes in the level of sales and/or the historical rate of returns.

Inventories.Inventories consist of finished goods and are valued at the lower of standard cost or market. Standard costs approximate the average cost method of inventory valuation. Inventories are reduced by a reserve for items not saleable at or above standard cost. We reserve specifically for certain items of our inventory and, for other items, we apply a specific loss factor, based on historical experience, to specific categories of our inventory. We evaluate the adequacy of the reserve on a regular basis.

8

Properties, Depreciation, and Amortization.Properties are stated at cost. Depreciation and amortization is computed primarily under the straight-line method with useful lives of 3 to 10 years for the following major classifications: machinery, equipment, software, and furniture and fixtures. Properties determined to have no value are written off at their then remaining net book value. We account for software costs in accordance with Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. Leasehold improvements are amortized under the straight-line method over the terms of the related leases. Maintenance and repairs are expensed as incurred.

Goodwill.We estimate the fair value of our reporting units, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, using the fair market value measurement requirement, rather than the undiscounted cash flows approach. We test our goodwill for impairment on an annual basis, or immediately if conditions indicate that such impairment could exist.

Deferred Catalog Costs.We amortize the cost of each Master Catalog mailed over such catalog’s estimated productive life. We review response results from catalog mailings on a continuous basis; and if warranted, modify the period over which costs are recognized. We amortize the cost of catalog supplements over a three month period.

Deferred Compensation.Previously, some of our directors had elected to defer receipt of their non-discretionary awards of shares of our Common Stock under our Amended and Restated Directors’ Stock Plan. Deferred shares were expensed at the market value of our Common Stock at the date of award, and the associated liability is adjusted quarterly based on the quarter end market price of our Common Stock. Directors voluntary elected to cease deferring shares effective as of April 1, 2003. In addition, we provide an annual benefit to a former president’s spouse and former executive under the terms of a deferred compensation agreement.

Deferred Gain on Sale of TPG.As a result of certain post divestiture commitments, according to GAAP, we are unable to recognize the gain of $1.5 million on the divestiture of Transmation Products Group (“TPG”), which took place in fiscal year 2002, until those commitments expire in fiscal year 2007.

Deferred Taxes.We account for certain income and expense items differently for financial reporting purposes than for income tax reporting purposes. Deferred taxes are provided in recognition of these temporary differences. A valuation allowance on deferred tax assets is provided for items for which it is more likely than not that the benefit of such items will not be realized, in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes”. SFAS No. 109 requires an assessment of both positive and negative evidence when measuring the need for a deferred tax valuation allowance.

Fair Value of Financial Instruments.The carrying amounts reported on our Consolidated Balance Sheets for cash, accounts receivables, and accounts payable approximate fair value due to their short-term nature.

9

Stock Options.We follow the provisions of Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees”, which does not require compensation costs related to stock options to be recorded in net income, as all options granted under the stock option plan had exercise prices equal to the market value of the underlying Common Stock at grant date.

The following table provides pro forma amounts, if we accounted for stock-based compensation under the fair value method (in thousands, except per share amounts):

	Third Quarter Ended						Nine Months Ended
	December			December			December			December
	25, 2004			27, 2003			25, 2004			27, 2003
Net Income (Loss), as reported	$	273		$	(220	)	$	(248	)	$	310
Add: Stock-based employee compensation expense
included in reported net income (loss), net of related
tax effects		116			-			214			-
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects		(174	)		(56	)		(387	)		(168	)
Pro Forma Net Income (Loss)	$	215		$	(276	)	$	(421	)	$	142
Earnings (Loss) Per Share:
Basic - as reported	$	0.04		$	(0.03	)	$	(0.04	)	$	0.05
Basic - pro forma	$	0.03		$	(0.03	)	$	(0.07	)	$	0.02
Average Shares Outstanding (in thousands)		6,414			6,295			6,371			6,262
Diluted - as reported	$	0.04		$	(0.03	)	$	(0.04	)	$	0.05
Diluted - pro forma	$	0.03		$	(0.03	)	$	(0.07	)	$	0.02
Average Shares Outstanding (in thousands)		6,979			6,295			6,371			6,837

In the third quarter of fiscal year 2005, we acquired treasury stock from a cashless stock option exercise, in which, a Board of Director immediately used shares acquired, by exercising a portion of an option, to exercise the remaining shares under the same option.
As a result, we recognized $0.1 million in compensation expense from the difference in the market value and exercise value of the immature shares in accordance with APB No. 25. This transaction resulted in an increase to Common Stock of 0.2 million shares, $0.1 million, an increase to Capital in Excess of Par Value of $0.5 million, and an increase in our Treasury Stock of 0.1 million shares, and $0.4 million.

Reclassification of Amounts.Certain reclassifications of prior fiscal periods’ financial information have been made to conform with current fiscal periods’ presentation.

NOTE 3 - DEBT

Description.On November 13, 2002, we entered into a Revolving Credit and Loan Agreement (the “Credit Agreement”) with GMAC Business Credit, LCC (“GMAC”). The Credit Agreement consisted of a term loan, a revolving line of credit (“LOC”), and certain material terms of which are as set forth below.

The Credit Agreement was amended on April 11, 2003 to address certain non-material post closing conditions.

The Credit Agreement was further amended on July 22, 2004 (“Second Amendment”) to waive compliance with our EBITDA (earnings before interest, income taxes, depreciation and amortization) covenant for the first quarter of fiscal year 2005, permanently waive a requirement relating to an inactive subsidiary that we had committed to dissolve by a specific date (that has been subsequently dissolved), and increase the Credit Agreement restriction on our Master Catalog spending.

We amended the Credit Agreement again on November 1, 2004 (“Third Amendment”). The Third Amendment consists of two term notes, a LOC, a capital expenditure loan if certain conditions are met, and certain material terms of which are as set forth below. The Third Amendment also waived compliance with our EBITDA (earnings before interest, income taxes, depreciation and amortization) covenant for the second quarter of fiscal year 2005 and extended the Credit Agreement expiration from November 13, 2005 to October 31, 2007.

10

Term Loans.As of March 27, 2004, we had a term loan balance in the amount of $0.7 million in favor of GMAC. This term loan required annual payments totaling $0.5 million, payable in equal monthly installments, commencing on December 1, 2002, and was repaid in full on November 1, 2004.

Under the Third Amendment, we made two term loans, Term Loan A and Term Loan B, in the amounts of $1.5 million and $0.5 million, respectively. These term notes require annual payments of $0.5 million and $0.2 million, respectively, payable over three years in equal monthly installments, commencing on December 1, 2004. The Third Amendment requires us to make the following principal payments on combined term loans (in thousands):

	Term Loan A		Term Loan B		Total
Fiscal Year 2005	$	167	$	55	$	222
Fiscal Year 2006		500		167		667
Fiscal Year 2007		500		167		667
Fiscal Year 2008		333		111		444
Total	$	1,500	$	500	$	2,000

We made a principal payment of $0.1 million in the third quarter of fiscal year 2005 in accordance with the above schedule, leaving a term loan balance of $1.9 million as of December 25, 2004.

In addition, under the Third Amendment, we are further required to reduce the term loans on an annual basis by a percentage of excess cash flow, as defined in the Third Amendment. Term Loan B will be reduced by the lesser of the balance owed on Term Loan B or 50% of our excess cash flow payable in three monthly installments. Once Term Loan B has been repaid, the excess cash flow payment required against Term Loan A is 20% of our excess cash flow, not to exceed $0.2 million, annually.

LOC.Under the Third Amendment, the maximum amount available under the LOC portion is $9.0 million. As of December 25, 2004, we were eligible to borrow up to $7.8 million based on our assets and borrowed $4.7 million. Availability under the LOC is determined by a formula based on eligible accounts receivable (85%) and inventory (50%).

The Credit Agreement requires both a subjective acceleration clause and a requirement to maintain a lock-box arrangement. These requirements resulted in a short-term classification of the LOC in accordance with EITF No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement.”

Interest.Under the Third Amendment, interest on the term loans and LOC is fixed at Tier 2 (see chart below) through March 2005. The prime rate and the 30-day London Interbank Offered Rate (“LIBOR”) as of December 25, 2004 were 5.25% and 2.42%, respectively. Interest on the term loans and LOC after March 2005, is adjusted on a quarterly basis based upon our calculated Fixed Charge Coverage Ratio, as defined in the Third Amendment, as follows:

	Fixed Charge
Tier	Coverage Ratio	Term Loan A	Term Loan B	LOC
1	1.249 or less	(a) Prime Rate plus .50% or	Prime Rate plus .75%	(a) Prime Rate plus 0% or
		(b) LIBOR plus 3.25%		(b) LIBOR plus 2.75%
2	1.25 to 1.49	(a) Prime Rate plus .25% or	Prime Rate plus .50%	(a) Prime Rate plus 0% or
		(b) LIBOR plus 3.00%		(b) LIBOR plus 2.50%
3	1.50 or greater	(a) Prime Rate plus 0% or	Prime Rate plus .25%	(a) Prime Rate plus 0% or
		(b) LIBOR plus 2.75%		(b) LIBOR plus 2.25%

Covenants.The Credit Agreement has certain covenants with which we had to comply, including a minimum EBITDA covenant, as well as restrictions on capital expenditures and Master Catalog spending. The Third Amendment includes a revised EBITDA covenant, a fixed charge coverage ratio covenant, as well as, revised restrictions on capital expenditures and Master Catalog spending. As previously indicated, the Third Amendment waived compliance with our EBITDA covenant for the second quarter of fiscal year 2005. We were in compliance with all loan covenants and requirements for the third quarter of fiscal year 2005.

11

Loan Costs.In accordance with EITF 98-14, “Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements,” any fees paid to GMAC, third party costs associated with the LOC of the Third Amendment, and unamortized costs remaining under the Credit Agreement, will be amortized over the term of the Third Amendment.

Other Terms.The Credit Agreement requires an increase in our borrowing rate of two percentage points should an event of default occur and a termination premium of 1% of the maximum available borrowing under the revolving line of credit plus the then outstanding balance owed under the term note if the Credit Agreement was terminated after November 13, 2003 and prior to November 13, 2005. Under the Third Amendment, if the agreement is terminated prior to its expiration date of October 31, 2007, a termination premium of 2% in year one, 1% in year two, and 0.5% in the third year of the advance limit, as defined in the agreement, will be incurred. The Third Amendment also reduced other certain recurring loan costs and fees.

Additionally, we have pledged certain property and fixtures in favor of GMAC, including inventory, equipment, and accounts receivable as collateral security for the loans made under the Credit Agreement.

The Third Amendment also provides for a capital expenditure loan (“Cap-x Loan”). If prior to September 30, 2005, we have achieved an EBITDA, as defined in the agreement, of $2.4 million on a trailing twelve months basis, we may make a Cap-x Loan of up to $1.0 million for qualifying capital expenditures. As of December 25, 2004, we have not made this milestone. The Cap-x Loan would be payable in equal monthly payments over a 36 month period with any residual balance resulting in a balloon payment at October 31, 2007. Interest is adjusted on a quarterly basis based upon our calculated Fixed Charge Coverage Ratio with the same terms as Term Loan A (see chart above).

12

NOTE 4 - SEGMENT DATA

We have two reportable segments: Distribution Products (“Product”) and Calibration Services (“Service”). The accounting policies of the reportable segments are the same as those described above in Note 2 of the Consolidated Financial Statements. We have no inter-segment sales. The following table presents our segment data for the third quarter and nine months ended December 25, 2004 and December 27, 2003 (in thousands):

	Third Quarter Ended					Nine Months Ended
	December		December			December			December
	25, 2004		27, 2003			25, 2004			27, 2003
Net Sales:
Product	$	9,856	$	9,343		$	27,045		$	24,975
Service		4,185		4,208			12,706			13,067
Total		14,041		13,551			39,751			38,042
Gross Profit:
Product		2,327		1,999			6,245			6,242
Service		1,193		1,084			3,310			3,523
Total		3,520		3,083			9,555			9,765
Operating Expenses:
Product		2,003		1,930			5,851			5,382
Service		1,105		1,334			3,481			4,158
Total		3,108		3,264			9,332			9,540
Operating Income (Loss):
Product		324		69			394			860
Service		88		(250	)		(171	)		(635	)
Total		412		(181	)		223			225
Unallocated Amounts:
Other Expense		139		24			471			62
Provision (Benefit) for Income Taxes		—		15			—			(147	)
Total		139		39			471			(85	)
Net Income (Loss)	$	273	$	(220	)	$	(248	)	$	310

NOTE 5 - COMMITMENTS

Unconditional Purchase Obligation.On October 31, 2002, with an effective date of September 1, 2002, we entered into a new distribution agreement (the “New Agreement”) with Fluke Electronics Corporation (“Fluke”), which replaced a previous distribution agreement with Fluke. The New Agreement continues to allow us to be the exclusive worldwide distributor of TPG products, until December 25, 2006. We also agreed, among other items, to purchase a pre-determined amount of inventory across a broad array of products and brands during each calendar year. Our purchases for calendar years 2003 and 2004 exceeded our commitment under the New Agreement. We believe that this commitment to future purchases is consistent with our business needs and plans. The New Agreement extends through December 31, 2006.

NOTE 6 - VENDOR CONCENTRATION

Approximately 30% of our product purchases on an annual basis are from Fluke, which is not believed to be inconsistent with Fluke’s share of the markets we service.

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

Forward-Looking Statements.This report and, in particular, the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this report, contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These include statements concerning expectations, estimates, and projections about the industry, management beliefs and assumptions of Transcat, Inc. (“Transcat”, “we”, “us”, or “our”). Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast. Therefore, our actual results may materially differ from those expressed or forecast in any such forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Reclassification of Amounts.Certain reclassifications of prior fiscal periods’ financial information have been made to conform with current fiscal periods’ presentation.

Rounding.Certain percentages may vary depending on the basis used for the calculation, such as dollars in thousands and dollars in millions.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Use of Estimates.The preparation of our Consolidated Financial Statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to, allowance for doubtful accounts and returns, inventory valuation, depreciable lives of assets, economic lives of leased assets, impairment of goodwill, estimated lives of our major catalogs (“Master Catalog”), and tax valuation allowances. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Actual results could differ from those estimates.

Revenue Recognition.Sales are recorded when products are shipped or services are rendered to customers, as we generally have no significant post delivery obligations. Our prices are fixed and determinable, collection of the resulting receivable is probable, and returns are reasonably estimated. Provisions for customer returns are provided for in the period the related sales are recorded based upon historical data. We recognize the majority of our service revenue based upon when the calibration or repair activity is performed then shipped and/or delivered to the customer. Some of our service revenue is generated from managing customers’ calibration programs in which we recognize revenue based on the agreed upon terms. Our shipments are generally free on board shipping point and our customers are generally invoiced for freight, shipping, and handling charges.

Accounts Receivable.Accounts receivable represent receivables from customers in the ordinary course of business. These amounts are recorded net of the allowance for doubtful accounts and returns in the Consolidated Balance Sheets. The allowance for doubtful accounts is based upon the expected collectibility of accounts receivable. We apply a specific formula to our accounts receivable aging, which may be adjusted on a specific account basis where the specific formula may not appropriately reserve for loss exposure. The returns reserve is calculated based upon the historical rate of returns applied to sales over a specific timeframe. The returns reserve will increase or decrease as a result of changes in the level of sales and/or the historical rate of returns.

Inventories.Inventories consist of finished goods and are valued at the lower of standard cost or market. Standard costs approximate the average cost method of inventory valuation. Inventories are reduced by a reserve for items not saleable at or above standard cost. We reserve specifically for certain items of our inventory and, for other items, we apply a specific loss factor, based on historical experience, to specific categories of our inventory. We evaluate the adequacy of the reserve on a regular basis.

14

RESULTS OF OPERATIONS

The following table sets forth, for the third quarter and first nine months of fiscal years 2005 and 2004, the components of our Consolidated Statements of Operations (calculated on dollars in thousands):

	(Unaudited)						(Unaudited)
	Third Quarter Ended						Nine Months Ended
	December			December			December			December
	25, 2004			27, 2003			25, 2004			27, 2003
As a Percentage of Net Sales:
Product Sales		70.2	%		68.9	%		68.0	%		65.7	%
Service Sales		29.8	%		31.1	%		32.0	%		34.3	%
Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Product Gross Profit		23.6	%		21.4	%		23.1	%		25.0	%
Service Gross Profit		28.5	%		25.8	%		26.1	%		27.0	%
Total Gross Profit		25.1	%		22.8	%		24.0	%		25.7	%
Selling, Marketing, and Warehouse Expenses		13.9	%		15.1	%		14.5	%		16.3	%
Administrative Expenses		8.3	%		9.0	%		9.0	%		8.8	%
Total Operating Expenses		22.2	%		24.1	%		23.5	%		25.1	%
Operating Income (Loss)		2.9	%		(1.3	)%		0.5	%		0.6	%
Interest Expense		0.6	%		0.6	%		0.6	%		0.6	%
Other Expense (Income)		0.4	%		(0.4	)%		0.6	%		(0.4	)%
Total Other Expense		1.0	%		0.2	%		1.2	%		0.2	%
Income (Loss) Before Income Taxes		1.9	%		(1.5	)%		(0.7	)%		0.4	%
Provision (Benefit) for Income Taxes		—	%		0.1	%		—	%		(0.4	)%
Net Income (Loss)		1.9	%		(1.6	)%		(0.7	)%		0.8	%

15

THIRD QUARTER ENDED DECEMBER 25, 2004 COMPARED TO THIRD QUARTER ENDED DECEMBER 25, 2003 (DOLLARS IN MILLIONS):

Sales:

	Third Quarter Ended
	December		December
	25, 2004		27, 2003
Net Sales:
Product	$	9.9	$	9.3
Service		4.2		4.2
Total	$	14.1	$	13.5

Net sales increased $0.6 million, or 4.4%, from the third quarter of fiscal year 2004 to the third quarter of fiscal year 2005.

Our product sales, which accounted for 70.2% of our sales in the third quarter of fiscal year 2005 and 68.9% of our sales in the third quarter of fiscal year 2004, have continued to reflect improved year over year economic comparisons and customer response to our marketing activities. Our product sales have improved in relation to the prior fiscal year quarter comparisons, as follows (calculated on dollars in millions):

	FY 2005									FY 2004
	Q3			Q2			Q1			Q4			Q3			Q2			Q1
Product Growth		6.5	%		9.2	%		11.3	%		15.6	%		(7.0	%)		(22.4	%)		(15.8	%)

The following table provides the percent of net sales and approximate gross profit percentage for significant product distribution channels (calculated on dollars in thousands):

	FY 2005						FY 2004
	Percent of			Gross			Percent of			Gross
	Net Sales			Profit % (1)			Net Sales			Profit % (1)
Core		95.1	%		24.1	%		91.9	%		22.1	%
Government		2.0	%		3.7	%		4.6	%		0.0	%
Other		2.9	%		12.5	%		3.5	%		8.6	%
Total		100.0	%		24.0	%		100.0	%		21.4	%

(1) Calculated at net sales less purchase cost.

Customer product orders include orders for products that we routinely stock in our inventory, as well as customized products and other products ordered less frequently, which we do not stock. Unshippable product orders are primarily backorders, but also include products that are requested to be calibrated in our calibration laboratories prior to shipment, orders required to be shipped complete, orders required to be shipped at a future date, and orders on credit hold and/or awaiting letters of credit. Our total unshippable orders decreased by approximately $0.3 million, or 18.8% from the third quarter of fiscal year 2004 to the third quarter of fiscal year 2005. We believe that the decrease is primarily attributed to vendors shipping inventory to us on a more timely basis and improvement in inventory demand planning. The following table reflects our historical trend of product orders that are unshippable at the end of each fiscal quarter and the percentage of these orders that are backorders (calculated on dollars in millions):

	FY 2005									FY 2004
	Q3			Q2			Q1			Q4			Q3			Q2			Q1
Total Unshippable Orders	$	1.3		$	1.5		$	1.5		$	1.7		$	1.6		$	1.4		$	1.0
% of Unshippable Orders that are Backorders		76.9	%		80.0	%		80.2	%		85.7	%		82.5	%		83.6	%		83.8	%

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Calibration services sales for the third quarter of fiscal year 2005 were unchanged when compared to the prior year third quarter. Within any quarter, there is always a netting of new customers against existing customers whose calibrations may not repeat for any number of factors. Therefore our calibration services sales can be impacted by a number of factors that can impact quarterly and annual comparisons, both within and outside of our control. Among those factors are the timing of customer periodic calibrations on equipment as well as repair services, customer capital expenditure budgets, and customer outsourcing decisions. The rate of change in our calibration services sales in relation to the prior fiscal year quarter is as follows (calculated on dollars in millions):

	FY 2005									FY 2004
	Q3			Q2			Q1			Q4			Q3			Q2			Q1
Service Sales Growth		0.0	%		(2.3	%)		(6.5	%)		(2.0	%)		(7.3	%)		(7.3	%)		(3.2	%)

Gross Profit:

	Third Quarter Ended
	December		December
	25, 2004		27, 2003
Gross Profit:
Product	$	2.3	$	2.0
Service		1.2		1.1
Total	$	3.5	$	3.1

Gross profit increased as a percent of net sales from 22.8% in the third quarter of fiscal year 2004 to 25.1% in the third quarter of fiscal year 2005.

Product gross profit increased $0.3 million, 1.7 points as a percent of net product sales from the third quarter of fiscal year 2004 to the third quarter of fiscal year 2005. Contributing factors to this increased ratio are less aggressive discounting of sales in our core business channel and reduced sales in lower margin sales channels (see above). Our product gross profit ratio can be impacted by a number of factors that can impact quarterly and annual comparisons. Among those factors are changes in sales levels to certain channels that do not support the margins of our core customer base, periodic rebates on purchases and cooperative advertising received from suppliers and reported as a reduction of cost of sales in accordance with Emerging Issues Task Force Issue No. 02-16 (see Note 2 to our Consolidated Financial Statements). Neither earned rebates on purchases nor cooperative advertising had a material effect on the comparison of product gross profit ratios between the third quarters of fiscal years 2004 and 2005. The following table reflects the quarterly historical trend of our product gross profit as a percent of net sales (calculated on dollars in millions):

	FY 2005									FY 2004
	Q3			Q2			Q1			Q4			Q3			Q2			Q1
Product Gross Profit		23.2	%		21.7	%		23.6	%		21.2	%		21.5	%		28.9	%		26.3	%

Calibration services gross profit increased $0.1 million, or 2.4 points as a percent of net calibration services sales from the third quarter of fiscal year 2004 to the third quarter of fiscal year 2005. This increase is attributable to lower costs as calibration services revenue has remained constant with the prior year third quarter. The following table reflects the quarterly historical trend of our calibration services gross profit as a percent of net sales (calculated on dollars in millions):

	FY 2005									FY 2004
	Q3			Q2			Q1			Q4			Q3			Q2			Q1
Service Gross Profit		28.6	%		26.2	%		23.3	%		29.2	%		26.2	%		30.2	%		25.6	%

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Operating Expenses:

	Third Quarter Ended
	December		December
	25, 2004		27, 2003
Operating Expenses:
Selling, Marketing, and Warehouse	$	1.9	$	2.0
Administrative		1.2		1.2
Total	$	3.1	$	3.2

Operating expenses decreased $0.1 million, or 3.1%, from the third quarter of fiscal year 2004 to the third quarter of fiscal year 2005. This decrease is primarily attributed to a reduction in selling expenses resulting from lower payroll and related costs. Administrative expenses were relatively flat from the third quarter of fiscal year 2004 to the third quarter of fiscal year 2005; however, there were some significant offsetting charges. In the third quarter of fiscal year 2004 we incurred a $0.2 million charge to settle, rather than further litigate, a lawsuit brought against us by our former chief financial officer and $0.1 million of severance costs. In the third quarter of fiscal year 2005, we incurred $0.1 million of expense from a cashless exercise of stock options and other insignificant increases in stock grant expenses, deferred compensation costs, recruiting costs, and payroll related costs that offset fiscal year 2004 third quarter total charges.

Other Expense:

	Third Quarter Ended
	December		December
	25, 2004		27, 2003
Other Expense:
Interest Expense	$	0.1	$	0.1
Other Expense (Income)		0.1		(0.1	)
Total	$	0.2	$	—

Interest expense was relatively flat from the third quarter of fiscal year 2004 to the third quarter of fiscal year 2005 resulting from slightly higher interest rates applied to lower average debt. Other expenses recorded in the third quarter of fiscal year 2005 resulted primarily from foreign currency transaction losses as compared with foreign currency transaction gains in the third quarter of fiscal year 2004.

Taxes:

	Third Quarter Ended
	December		December
	25, 2004		27, 2003
Provision (Benefit) for Income Taxes	$	—	$	—

We have not recognized any provision in the third quarter of fiscal year 2005 as pretax income was offset by a reduction in our deferred tax asset valuation reserve. We did not recognize any tax benefit for the loss in the third quarter of fiscal year 2004 as any benefit required on the pretax loss was offset by an increase in our deferred tax asset valuation reserve.

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NINE MONTHS ENDED DECEMBER 25, 2004 COMPARED TO NINE MONTHS ENDED DECEMBER 27, 2003 (DOLLARS IN MILLIONS):

Sales:

	Nine Months Ended
	December		December
	25, 2004		27, 2003
Net Sales:
Product	$	27.0	$	25.0
Service		12.7		13.1
Total	$	39.7	$	38.1

Net sales increased $1.6 million, or 4.2%, from the first nine months of fiscal year 2004 to the first nine months of fiscal year 2005.

Our product sales, which accounted for 68.0% of our sales in the first nine months of fiscal year 2005 and 65.7% of our sales in the first nine months of fiscal year 2004, have improved due to customer response to our enhanced marketing programs, targeted sales efforts in new distribution channels and improved economic conditions over the first nine months of fiscal year 2004.

The following table provides the percent of net sales and approximate gross profit percentage for significant product distribution channels (calculated on dollars in thousands):

	FY 2005						FY 2004
	Percent of			Gross			Percent of			Gross
	Net Sales			Profit % (1)			Net Sales			Profit % (1)
Core		93.8	%		23.8	%		95.2	%		24.3	%
Government		2.8	%		2.3	%		2.1	%		0.0	%
Other		3.4	%		12.2	%		2.7	%		11.3	%
Total		100.0	%		23.0	%		100.0	%		25.0	%

Calibration services sales declined $0.4 million, or 3.1%, in the first nine months of fiscal year 2005 when compared to the first nine months of fiscal year 2004. Within any quarter, there is always netting of new customers against existing customers whose calibrations may not repeat for any number of factors. Therefore our calibration services sales can be impacted by a number of factors that can impact quarterly and annual comparisons, both within and outside of our control. Among those factors are the timing of customer periodic calibrations on equipment as well as repair services, customer capital expenditure budgets, and customer outsourcing decisions.

Gross Profit:

	Nine Months Ended
	December		December
	25, 2004		27, 2003
Gross Profit:
Product	$	6.2	$	6.2
Service		3.3		3.5
Total	$	9.5	$	9.7

Gross profit decreased as a percent of sales from 25.7% in the first nine months of fiscal year 2004 to 24.0% in the first nine months of fiscal year 2005.

19

Gross profit on product sales for the first nine month of fiscal year 2005 was relatively flat (in dollars) compared to the first nine months of fiscal year 2004 but declined 1.8 points as a percent of net product sales from the first nine months of fiscal year 2004 to the first nine months of fiscal year 2005. Contributing factors to this decrease on a higher sales base include increased sales in new channels of distribution that typically do not support the margins of our core customer base (see above) and an increased level of allowances to stimulate sales growth that we experienced in the first nine months (and first six months in particular) of fiscal year 2004. In addition, periodic rebates on purchases and cooperative advertising income received from suppliers and reported as a reduction of cost sales do not necessarily repeat in the same fiscal quarters. The first nine months of fiscal year 2004 included $0.1 million dollars more of such income than in the first nine months of fiscal year 2005, accounting for 0.3 points as a percent of sales of the margin ratio decline.

Calibration services gross profit declined $0.2 million in the first nine months of fiscal year 2005 when compared to the first nine months of fiscal year 2004, and declined 0.7 points as a percent of net calibration services sales when comparing the same periods. The primary reason behind this decrease was the decrease in calibration services sales where our cost structure has a significant fixed component.

Operating Expenses:

	Nine Months Ended
	December		December
	25, 2004		27, 2003
Operating Expenses:
Selling, Marketing, and Warehouse	$	5.8	$	6.2
Administrative		3.6		3.3
Total	$	9.4	$	9.5

Operating expenses decreased $0.1 million, or 1.1%, in the first nine months of fiscal year 2005 when compared to the first nine months of fiscal year 2004, and decreased 1.2 points as a percent of net sales on an increased sales base. The reduction in selling, marketing, and warehouse expense is primarily the result of reduced sales payroll and related expenses ($0.4 million) and overall ongoing expense control. The increase in administrative expenses is primarily attributable to a $0.2 million increase in expenses associated with executive stock grants, $0.1 million of expense from a cashless exercise of stock options in fiscal year 2005, a $0.1 million reduction in the bad debt reserve in fiscal year 2004, and a $0.1 million increase in other insignificant areas, offset by, a $0.2 million charge to settle, rather than further litigate, a lawsuit brought against us by our former chief financial officer we incurred in fiscal year 2004.

Other Expense:

	Nine Months Ended
	December		December
	25, 2004		27, 2003
Other Expense:
Interest Expense	$	0.2	$	0.2
Other Expense (Income)		0.2		(0.2	)
Total	$	0.4	$	—

Consistent with our level of debt, interest expense has remained relatively flat when comparing the first nine months of fiscal year 2005 to that of fiscal year 2004. Other expense recorded in the first nine months of fiscal year 2005 resulted from foreign currency transaction losses as compared with foreign currency transaction gains in the first nine months of fiscal year 2004.

20

Taxes:

	Nine Months Ended
	December		December
	25, 2004		27, 2003
Provision (Benefit) for Income Taxes	$	—	$	(0.1	)

We did not recognize any tax benefit for the loss in the first nine months of fiscal year 2005 as any benefit on the pretax loss was offset by an increase in our deferred tax asset valuation reserve. We have not recognized any provision in the first nine months of fiscal year 2004 as pretax income was offset by a reduction in our deferred tax asset valuation reserve. We did record a net $0.1 million benefit for losses in the first nine months of fiscal year 2004 primarily from a non-recurring election allowing a carry back of certain tax liabilities, previously subject to a valuation allowance. We received the refund in the second quarter of fiscal year 2005.

LIQUIDITY AND CAPITAL RESOURCES

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

	Nine Months Ended
	December			December
	25, 2004			27, 2003
Cash Provided by (Used in):
Operating Activities	$	287		$	(490	)
Investing Activities		(512	)		(254	)
Financing Activities		(338	)		852

Operating Activities. Cash provided by operating activities of $0.3 million for the first nine months of fiscal year 2005 increased by $0.8 million when compared to the $0.5 million of cash used for operating activities in the first nine months of fiscal year 2004. This $0.8 million change is comprised of: a $1.1 million increase in cash provided from working capital, a $0.3 million increase in non-cash charges, offset by, a $0.6 million decrease in net income. Significant working capital fluctuations were as follows:

•   Inventories / Accounts Payable: Our inventories decreased $0.3 million less in the first nine months of fiscal year 2005 compared with the first nine months of fiscal year 2004. This decrease was anticipated as our inventories at March 2003 were at depressed levels relative to those at March 2004 in response to economic conditions. The increase in inventories from March to December for fiscal year 2005, in advance of what is historically our strongest product sales quarter, did not result in as large an increase in accounts payable from March to December for fiscal year 2004. The following table illustrates the ratio of our accounts payable as a percent of inventory (dollars in millions):

	December		March		December		March
	25, 2004		27, 2004		27, 2003		31, 2003
Inventory, net	$	5.5	$	3.7	$	4.9	$	2.8
Accounts Payable	$	4.5	$	4.1	$	4.7	$	3.7
Payables/Inventory Ratio		0.82		1.11		0.96		1.32

21

•   Receivables: Our accounts receivable decreased $1.0 million more in the first nine months of fiscal year 2005 when compared to the decrease in the first nine months of fiscal year 2004. This change is the result of higher sales and receivables in our fiscal year 2004 fourth quarter when compared to the similar period for fiscal year 2003. We have continued to maintain strong collections on our accounts receivable, reflected in our days sales outstanding, as the following table illustrates (dollars in millions):

	December		March		December		March
	25, 2004		27, 2004		27, 2003		31, 2003
Net Sales, for the last two fiscal months	$	9.9	$	11.9	$	9.7	$	9.3
Accounts Receivable, net	$	6.7	$	8.0	$	6.5	$	6.9
Days Sales Outstanding (based on 60 days)		41		40		40		45

Investing Activities. The $0.5 million and $0.3 million of cash used for investing activities in the first nine months of fiscal years 2005 and 2004, respectively, resulted from capital expenditures, primarily for our calibration laboratories.

Financing Activities. We have reduced our debt from $7.3 million at March 27, 2004 to $6.7 million at December 25, 2004. This reduction is the net result of liquidating typically higher year end receivables following our strongest sales quarter and third quarter inventory acquisition in preparation for the following year fourth quarter.

	December		March		December		March
	25, 2004		27, 2004		27, 2003		31, 2003
Term Debt	$	1.9	$	0.7	$	0.8	$	1.3
Revolving Line of Credit	$	4.7	$	6.4	$	6.6	$	5.2
Capital Lease Obligations	$	0.1	$	0.2	$	—	$	—
Total Debt	$	6.7	$	7.3	$	7.4	$	6.5

We believe that we have the financial resources needed to meet our business requirements for the next twelve months; however, the risk factors identified later in Item 3 of this report should be evaluated.

Debt.On November 1, 2004, we amended our Revolving Credit and Loan Agreement (“Credit Agreement”) with GMAC Business Credit, LCC (“Third Amendment”). The Third Amendment consists of two term notes, a revolving line of credit, a capital expenditure loan if certain conditions are met, and certain material terms of which are disclosed in Note 3 of our Consolidated Financial Statements. The Third Amendment also waived compliance with our EBITDA (earnings before interest, income taxes, depreciation and amortization) covenant for the third quarter of fiscal year 2005 and extended the Credit Agreement expiration from November 13, 2005 to October 31, 2007. See Note 3 of our Consolidated Financial Statements for more information on our debt.

The table below indicates our excess (shortage) EBITDA percentage for the periods indicated. The second and third amendments to the Credit Agreement waived compliance with the EBITDA covenant for the first and second quarters of fiscal year 2005, respectively. The Third Amendment also reduced the EBITDA requirement for the third and fourth quarters of fiscal year 2005. We met our EBITDA covenant for the third quarter of fiscal year 2005 and expect to meet the covenant on an on-going basis.

	FY 2005									FY 2004
	Q3			Q2			Q1			Q4			Q3			Q2			Q1
Excess (Shortage) EBITDA		17	%		(20	%)		(16	%)		3	%		12	%		12	%		23	%

Unconditional Purchase Obligation.On October 31, 2002, with an effective date of September 1, 2002, we entered into a new distribution agreement (the “New Agreement”) with Fluke Electronics Corporation (“Fluke”), which replaced a previous distribution agreement with Fluke. The New Agreement continues to allow us to be the exclusive worldwide distributor of Transmation Products Group (“TPG”) products, until December 25, 2006. We also agreed, among other items, to purchase a pre-determined amount of inventory across a broad array of products and brands during each calendar year. Our purchases for calendar years 2003 and 2004 exceeded our commitment under the New Agreement. We believe that this commitment to future purchases is consistent with our business needs and plans. The New Agreement extends through December 31, 2006.

In addition, in accordance with accounting principles generally accepted in the United States of America, we will be unable to recognize a gain of $1.5 million on the sale of TPG until the distribution agreement expires on December 31, 2006.

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OUTLOOK

Distribution Products.The high single-digit growth in product sales in the first nine months of fiscal year 2005 was anticipated and resulted principally from improved economic conditions in comparison to the prior year period, as customers resumed previously delayed equipment acquisition and purchasing programs. We have and will continue to make investments in targeting new channels of distribution and promotional activities with our existing customer base by prospecting to add new catalog customers, cross-selling to our calibration customers, and expanding our presence in additional market segments in the process calibrator market. We expect growth for product sales to continue to be in the single-digit range.

Calibration Services.Our calibration services results for the first nine months of fiscal year 2005 did not meet our expectations. Our calibration services sales can be impacted by a number of factors that can impact quarterly and annual comparisons, both within and outside of our control. Among those factors are the timing of customer periodic calibrations on equipment as well as repair services, customer capital expenditure budgets, and customer in-house capabilities. Calibration is a strategic core competency of our Company and we are making investments in marketing and sales to drive growth. In particular, we are working with our customers in existing and new industry segments to develop on-going calibration programs that aligned with customer production planning. Our goal is to have our calibration services become an integral component of a customer’s strategic supplier network that supports and enhances their manufacturing, quality, and productivity programs. Because this is a strategic initiative for each of our current and targeted customers, we anticipate considerable variation in time-to-adoption. We continue to believe that these investments in our calibration services will result in sustained growth over time.

Overall.We expect to deliver profitable results for our shareholders for fiscal year 2005. We expect to increase revenues in fiscal year 2006 in both the distribution products and calibration services businesses. We continue to expect growth overall in the low to mid single digits and overall gross margin improvements. We will strive to continue to improve performance, provide quality service to our customers, and increase shareholder value. We believe we are well positioned to achieve these goals.

Valuation Allowance.We have had a valuation allowance on our deferred assets providing for items for which it is more likely than not that the benefit of such items will not be realized, in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”. SFAS No. 109 requires an assessment of both positive and negative evidence when measuring the need for a deferred tax valuation allowance. The existence of cumulative losses in the most recent three-year fiscal period ending December 25, 2004 is sufficient negative evidence to maintain the valuation allowance under the provisions of SFAS No. 109. Our results over the most recent three-year period were heavily affected by such charges as: divestitures, goodwill, severance, restructuring, and litigation. Although we believe that the Company today is much stronger, more profitable, and focused on operating a sound, profitable business model, we must maintain a valuation allowance until sufficient positive evidence exists to support its reduction or reversal.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATES

Our exposure to changes in interest rates results from borrowing activities. In the event interest rates were to move by 1%, our yearly interest expense would increase or decrease by less than $0.1 million assuming our average-borrowing levels remained constant. On December 25, 2004 and December 27, 2003, we had no hedging arrangements in place to limit our exposure to upward movements in interest rates.

Under the Third Amendment described in Note 3 of our Consolidated Financial Statements, interest on the term loans and revolving line of credit (“LOC”) is fixed at Tier 2 (see chart below) through March 2005. The prime rate and the 30-day London Interbank Offered Rate (“LIBOR”) as of December 25, 2004 were 5.25% and 2.42%, respectively. Interest on the term loans and LOC after March 2005, is adjusted on a quarterly basis based upon our calculated Fixed Charge Coverage Ratio, as defined in the Third Amendment, as follows:

	Fixed Charge
Tier	Coverage Ratio	Term Loan A	Term Loan B	LOC
1	1.249 or less	(a) Prime Rate plus .50% or	Prime Rate plus .75%	(a) Prime Rate plus 0% or
		(b) LIBOR plus 3.25%		(b) LIBOR plus 2.75%
2	1.25 to 1.49	(a) Prime Rate plus .25% or	Prime Rate plus .50%	(a) Prime Rate plus 0% or
		(b) LIBOR plus 3.00%		(b) LIBOR plus 2.50%
3	1.50 or greater	(a) Prime Rate plus 0% or	Prime Rate plus .25%	(a) Prime Rate plus 0% or
		(b) LIBOR plus 2.75%		(b) LIBOR plus 2.25%

FOREIGN CURRENCY

Approximately 91% of our sales were denominated in United States dollars with the remainder denominated in Canadian dollars for the third quarter and nine months ended December 25, 2004 and December 27, 2003. A 10% change in the value of the Canadian dollar to the United States dollar would impact our revenues by less than 1%. We monitor the relationship between the United States and Canadian currencies on a continuous basis and adjust sales prices for products and services sold in Canadian dollars as we believe to be appropriate. On December 25, 2004 and December 27, 2003, we had no hedging arrangements in place to limit our exposure to foreign currency fluctuations.

RISK FACTORS

You should consider carefully the following risks and all other information included in this Form 10-Q. The risks and uncertainties described below and elsewhere in this Form 10-Q are not the only ones facing our business. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our Common Stock could fall and you could lose all or part of your investment.

General Economic Conditions.The electronic instrumentation distribution industry is affected by changes in economic conditions, which are outside our control. We cannot assure you that economic slowdowns, adverse economic conditions or cyclical trends in certain customer markets will not have a material adverse effect on our operating results, financial condition, or our ability to meet our commitments.

Dependence on Manufacturers.Like other distributors in our industry, if we are unable to enter into and maintain satisfactory distribution arrangements with leading manufacturers, if we are unable to maintain an adequate supply of products, or if manufacturers do not regularly invest in, introduce to us, and/or make available to us for distribution new products, our sales could suffer considerably. We could occasionally experience supply shortages or otherwise be unable to purchase our desired volume of products. We cannot provide any assurance that particular products, or product lines, will be available to us in quantities to meet customer demand. Lastly, as customers generally purchase their product requirements from a number of distributors, there always exists potential for customers to consolidate their purchases through one distributor that could result in revenue loss.

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Customer Retention.Our calibration services business is comprised of both long standing customers and customers who required only a one-time calibration. Our business can be readily impacted by customers’ decisions not to re-calibrate an instrument, to extend a calibration cycle reducing the timing of future calibrations, to bring previously outsourced calibrations in- house, or to consolidate calibration services with one and/or a reduced number of service providers.

Indebtedness.As of December 25, 2004, we owed $6.7 million to our secured creditor. We are required to meet financial tests on a quarterly basis and comply with other covenants customary in secured financings. If we do not remain in compliance with such covenants, our lenders may demand immediate repayment of amounts outstanding. The second and third amendments to the Credit Agreement waived compliance with the EBITDA covenant for the first and second quarters of fiscal year 2005, respectively. The Third Amendment also reduced the EBITDA requirement for the third and fourth quarters of fiscal year 2005. We met our EBITDA covenant for the third quarter of fiscal year 2005 and expect to meet the covenant on an on-going basis. Changes in interest rates may have a significant effect on our monthly payment obligations and operating results. Furthermore, we are dependent on credit from manufacturers of our products to fund our inventory purchases. If our debt burden increases to high levels, such manufacturers may restrict our credit. Our cash requirements will depend on numerous factors, including the rate of growth of our sales, the timing and levels of products purchased, payment terms, and credit limits from manufacturers, the timing and level of our accounts receivable collections and our ability to manage our business profitably. Our ability to satisfy our existing obligations, whether or not under our secured credit facility, will depend upon our future operating performance, which may be impacted by prevailing economic conditions and financial, business, and other factors described in this Form 10-Q, many of which are beyond our control.

If Existing Shareholders Sell Large Numbers Of Shares Of Our Common Stock, Our Stock Price Could Decline.The market price of our Common Stock could decline as a result of sales by our existing shareholders or holders of stock options of a large number of shares of our Common Stock in the public market or the perception that these sales could occur.

Our Stock Price Has Been, And May Continue To Be, Volatile.The stock market from time to time, has experienced significant price and volume fluctuations that are both related and unrelated to the operating performance of companies. As our stock may be affected by market volatility, as well as by our own performance, the following factors, among others, may have a significant effect on the market price of our Common Stock:

•   Developments in our relationships with current or future manufacturers of products we distribute;

•   Announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

•   Litigation or governmental proceedings or announcements involving us or our industry;

•   Economic and other external factors, such as disasters or other crisises;

•   Sales of our Common Stock or other securities in the open market;

•   Period-to-period fluctuations in our operating results; and

•   Our ability to satisfy our debt obligations.

We Expect That Our Quarterly Results Of Operations Will Fluctuate, Which Could Cause Our Stock Price To Decline.A large portion of our expenses for calibration services, including expenses for facilities, equipment and personnel, are relatively fixed, as is our commitment to purchase a predetermined amount of inventory. Accordingly, if revenues decline or do not grow as we anticipate, we may not be able to correspondingly reduce our operating expenses in any particular quarter. Our quarterly revenue and operating results have fluctuated in the past and are likely to do so in the future. If our operating results in some quarters fail to meet the expectations of stock market analysts and investors, our stock price would likely decline. Some of the factors that could cause our revenue and operating results to fluctuate include:

•   Fluctuations in industrial demand for products we sell and/or services we provide; and

•   Fluctuations in geographic conditions, including currency and other economic conditions.

If We Fail To Attract And Retain Qualified Personnel, We May Not Be Able To Achieve Our Stated Corporate Objectives.Our ability to manage our anticipated growth, if realized, effectively depends on our ability to attract and retain highly qualified executive officers and technical personnel. If we fail to attract and retain qualified individuals, we will not be able to achieve our stated corporate objectives.

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ITEM 4. CONTROLS AND PROCEDURES

(a)Evaluation of Disclosure Controls and Procedures.Our Chairman, President, and Chief Executive Officer (our principal executive officer) and our Chief Operating Officer, Vice President of Finance, and Chief Financial Officer (our principal financial officer) evaluated our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based on this evaluation, our Chairman, President, and Chief Executive Officer and our Chief Operating Officer, Vice President of Finance, and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date.

(b)Changes in Internal Controls 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 third fiscal quarter) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 5. Other Information.

On October 18, 2004, our Board of Directors granted Charles P. Hadeed, our Chief Operating Officer, Vice President of Finance and Chief Financial Officer, an incentive stock option to purchase 20,000 shares of our common stock at a price of $2.89 per share and 10,000 shares of restricted stock. The option, which was granted under the Transcat, Inc. 2003 Incentive Plan (the “2003 Incentive Plan”) vests pro-rata with respect to one-third of the shares subject to the option on the first, second and third anniversaries of the date of grant. Fifty percent of the restricted stock award, which was also granted under the 2003 Incentive Plan, vests immediately and the remaining fifty percent vests on the first anniversary of the date of grant.

The form of Award Notice for Incentive Stock Options granted under the 2003 Incentive Plan and the form of Award Notice for Restricted Stock granted under 2003 Incentive Plan are included as Exhibits 10.1 and 10.2 to this Form 10-Q.

ITEM 6. EXHIBITS

See Index to Exhibits.

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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: February 8, 2005	/s/ Carl E. Sassano
	Carl E. Sassano
	Chairman, President, and Chief Executive Officer
Date: February 8, 2005	/s/ Charles P. Hadeed
	Charles P. Hadeed
	Chief Operating Officer, Vice President of Finance, and
	Chief Financial Officer

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INDEX TO EXHIBITS

(10)	10.1	Form of Award Notice for Incentive Stock Options granted under the Transcat, Inc. 2003 Incentive Plan
	10.2	Form of Award Notice for Restricted Stock granted under the Transcat, Inc. 2003 Incentive Plan
(31)	Rule 13a-14(a)/15d-14(a) Certifications
	31.1	Certification of Chief Executive Officer
	31.2	Certification of Chief Financial Officer
(32)	Section 1350 Certifications
	32.1	Section 1350 Certifications

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