Transcat (TRNS) 10-Q 2006 Q2 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: September 24, 2005

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 Exchange Act). Yeso Noþ

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

The number of shares of Common Stock of the registrant outstanding as of October 31, 2005 was 6,670,421.

	Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Second Quarter and Six Months Ended September 24, 2005 and September 25, 2004		3
Consolidated Balance Sheets as of September 24, 2005 and March 26, 2005		4
Consolidated Statements of Cash Flows for the Six Months Ended September 24, 2005 and September 25, 2004		5
Consolidated Statements of Stockholders’ Equity for the Six Months Ended September 24, 2005		6
Notes to Consolidated Financial Statements		7-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk		27-28
Item 4. Controls and Procedures		29
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders		29
Item 6. Exhibits		29
SIGNATURES		30
INDEX TO EXHIBITS		31
Exhibit 10.1
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Section 1350 Certifications

2

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

	(Unaudited)					(Unaudited)
	Second Quarter Ended					Six Months Ended
	September		September			September		September
	24, 2005		25, 2004			24, 2005		25, 2004
Product Sales	$	9,412	$	8,308		$	18,797	$	17,172
Service Sales		4,707		4,180			9,387		8,538
Net Sales		14,119		12,488			28,184		25,710
Cost of Products Sold		7,087		6,467			14,213		13,291
Cost of Services Sold		3,423		3,112			6,757		6,384
Total Cost of Products and Services Sold		10,510		9,579			20,970		19,675
Gross Profit		3,609		2,909			7,214		6,035
Selling, Marketing, and Warehouse Expenses		1,850		1,702			3,943		3,806
Administrative Expenses		1,247		1,124			2,429		2,418
Total Operating Expenses		3,097		2,826			6,372		6,224
Operating Income (Loss)		512		83			842		(189	)
Interest Expense		109		73			223		145
Other Expense		54		103			96		186
Total Other Expense		163		176			319		331
Income (Loss) Before Income Taxes		349		(93	)		523		(520	)
Provision for Income Taxes		—		—			—		—
Net Income (Loss)		349		(93	)		523		(520	)
Other Comprehensive Income:
Currency Translation Adjustment		99		111			80		84
Comprehensive Income (Loss)	$	448	$	18		$	603	$	(436	)
Basic Earnings (Loss) Per Share	$	0.05	$	(0.01	)	$	0.08	$	(0.08	)
Average Shares Outstanding (in thousands)		6,618		6,372			6,574		6,349
Diluted Earnings (Loss) Per Share	$	0.05	$	(0.01	)	$	0.07	$	(0.08	)
Average Shares Outstanding (in thousands)		7,315		6,372			7,269		6,349

See accompanying notes to consolidated financial statements.

3

TRANSCAT, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)

	(Unaudited)
	September			March
	24, 2005			26, 2005
ASSETS
Current Assets:
Cash	$	95		$	106
Accounts Receivable, less allowance for doubtful accounts of $69 and $56 as of September 24, 2005 and March 26, 2005, respectively		6,279			8,089
Other Receivables		639			313
Finished Goods Inventory, net		5,440			5,902
Prepaid Expenses and Deferred Charges		859			630
Total Current Assets		13,312			15,040
Property, Plant and Equipment, net		1,985			1,984
Capital Leases, net		82			115
Goodwill		2,524			2,524
Prepaid Expenses and Deferred Charges		157			188
Other Assets		268			261
Total Assets	$	18,328		$	20,112
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	4,130		$	4,544
Accrued Payrolls, Commissions, and Other		1,716			1,993
Income Taxes Payable		100			100
Deposits		1			38
Current Portion of Term Loan		758			758
Current Portion of Capital Lease Obligations		69			66
Revolving Line of Credit		4,004			5,498
Total Current Liabilities		10,778			12,997
Term Loan, less current portion		596			1,020
Capital Lease Obligations, less current portion		21			56
Deferred Compensation		175			181
Deferred Gain on TPG Divestiture		1,544			1,544
Total Liabilities		13,114			15,798
Stockholders’ Equity:
Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 6,851,197 and 6,700,505 shares issued as of September 24, 2005 and March 26, 2005, respectively; 6,603,933 and 6,453,241 shares outstanding as of September 24, 2005 and March 26, 2005, respectively		3,426			3,350
Capital in Excess of Par Value		4,236			3,995
Warrants		430			430
Unearned Compensation		(37	)		(17	)
Accumulated Other Comprehensive Gain		176			96
Accumulated Deficit		(2,179	)		(2,702	)
Less: Treasury Stock, at cost, 247,264 shares as of September 24, 2005 and March 26, 2005, respectively		(838	)		(838	)
Total Stockholders’ Equity		5,214			4,314
Total Liabilities and Stockholders’ Equity	$	18,328		$	20,112

See accompanying notes to consolidated financial statements.

4

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

	(Unaudited)
	Six Months Ended
	September			September
	24, 2005			25, 2004
Cash Flows from Operating Activities:
Net Income (Loss)	$	523		$	(520	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
Depreciation and Amortization		610			727
Provision for Doubtful Accounts Receivable		13			(9	)
Provision for Returns		(3	)		—
Provision for Slow Moving or Obsolete Inventory		6			—
Common Stock Expense		44			27
Amortization of Unearned Compensation		24			98
Changes in Assets and Liabilities:
Accounts Receivable and Other Receivables		1,474			2,200
Inventories		456			(900	)
Income Taxes Receivable / Payable		—			144
Prepaid Expenses, Deferred Charges, and Other		(421	)		(473	)
Accounts Payable		(414	)		696
Accrued Payrolls, Commissions, and Other		(277	)		(419	)
Deposits		(37	)		—
Deferred Compensation		(6	)		(7	)
Net Cash Provided by Operating Activities		1,992			1,564
Cash Flows from Investing Activities:
Purchase of Property, Plant and Equipment		(362	)		(414	)
Net Cash Used in Investing Activities		(362	)		(414	)
Cash Flows from Financing Activities:
Revolving Line of Credit, net		(1,494	)		(1,162	)
Payments on Term Loans		(424	)		(418	)
Payments on Capital Leases		(32	)		(31	)
Issuance of Common Stock		229			16
Net Cash Used in Financing Activities		(1,721	)		(1,595	)
Effect of Exchange Rate Changes on Cash		80			83
Net Decrease in Cash		(11	)		(362	)
Cash at Beginning of Period		106			547
Cash at End of Period	$	95		$	185
Supplemental Disclosure of Non-Cash Financing Activity:
Disposal of Fully Reserved Obsolete Inventory	$	93		$	—

See accompanying notes to consolidated financial statements.

5

TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In Thousands)

												Accum-
					Capital				Un-			ulated
	Common Stock				In				earned			Other					Treasury Stock
	Outstanding				Excess				Comp-			Compre-		Accum-			Outstanding
	$0.50 Par Value				of Par		War-		ensa-			hensive		ulated			at Cost
	Shares		Amount		Value		rants		tion			Gain		Deficit			Shares		Amount			Total
Balance as of March 26, 2005		6,453	$	3,350	$	3,995	$	430	$	(17	)	$	96	$	(2,702	)		247	$	(838	)	$	4,314
Issuance of Common Stock		121		61		168																	229
Restricted Stock:
Issuance of Restricted Stock		30		15		73				(44	)												44
Amortization of Unearned Compensation										24													24
Comprehensive Income:
Currency Translation Adjustment													80										80
Net Income															523								523
Balance as of September 24, 2005		6,604	$	3,426	$	4,236	$	430	$	(37	)	$	176	$	(2,179	)		247	$	(838	)	$	5,214

See accompanying notes to consolidated financial statements.

6

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

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

Description of Business:Transcat, Inc. (“Transcat” or “the Company”) 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:Transcat’s 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, 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 the results to be expected 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 26, 2005 (“fiscal year 2005”) contained in the Company’s 2005 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 the Company’s wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

Use of Estimates:The preparation of Transcat’s Consolidated Financial Statements in accordance with GAAP requires that the Company make estimates and assumptions that affect the reported amounts of assets and liabilities, and 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, depreciable lives of assets, estimated lives of major catalogs (“Master Catalog”), and tax valuation allowances. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment changes. Actual results could differ from those estimates.

Changes in Estimates:In the ordinary course of accounting for items discussed above, Transcat makes changes in estimates as appropriate, and as the Company becomes aware of changed 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 the 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 the Company generally has no significant post delivery obligations. The Company’s 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. The Company recognizes the majority of service revenue based upon when the calibration or repair activity is performed then shipped and/or delivered to the customer. Some of the service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue in equal amounts at fixed intervals. Shipments are generally free on board shipping point and 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 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:Transcat follows 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:Transcat reports 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 Transcat’s Canadian subsidiary are maintained in the 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 accounts 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 the Company’s subsidiary balance sheets into United States dollars are recorded directly to the accumulated other comprehensive income component of stockholders’ equity.

Currency gains and losses on business transactions are included in other expense 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 second quarter of the fiscal year ended March 25, 2006 (“fiscal year 2006”), the net additional Common Stock equivalents had no effect on the calculation of dilutive earnings per share. For the first six months of fiscal year 2006, the net additional Common Stock equivalents had a $0.01 per share effect on the calculation of dilutive earnings per share. For the second quarter and first six months of fiscal year 2005, there were no dilutive shares. The total number of dilutive and anti-dilutive Common Stock equivalents resulting from stock options, warrants, and non-vested restricted stock are summarized as follows:

	Second Quarter Ended				Six Months Ended
	September		September		September		September
	24, 2005		25, 2004		24, 2005		25, 2004
Shares Outstanding:
Dilutive		697		—		695		—
Anti-dilutive		501		1,513		503		1,513
Total		1,198		1,513		1,198		1,513
Range of Exercise Prices per Share:
Options	$	0.80-$4.26	$	0.80-$3.00	$	0.80-$4.26	$	0.80-$3.00
Warrants	$	0.97-$4.26	$	0.97-$2.91	$	0.97-$4.26	$	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. Transcat applies a specific formula to its accounts receivable aging, which may be adjusted on a specific account basis where the specific formula may not appropriately reserve for loss exposure. After all attempts to collect a receivable have failed, the receivable is written-off against the allowance for doubtful accounts. 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.

Inventory:Inventory consists of finished goods and is valued at the lower of cost or market. Costs are determined using the average cost method of inventory valuation. Inventory is reduced by a reserve for items not saleable at or above standard cost. Transcat reserves specifically for certain items of inventory and, for other items, the Company applies a specific loss factor, based on historical experience, to specific categories of inventory. The Company evaluates 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. Transcat accounts 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 estimated useful life or the lease term, whichever is shorter. Maintenance and repairs are expensed as incurred.

Goodwill:Transcat estimates the fair value of the Company’s 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. The Company tests goodwill for impairment on an annual basis, or immediately if conditions indicate that such impairment could exist.

Deferred Catalog Costs:Transcat amortizes the cost of each Master Catalog mailed over such catalog’s estimated productive life. The Company reviews response results from catalog mailings on a continuous basis, and if warranted, modifies the period over which costs are recognized. The Company amortizes the cost of each Master Catalog over an eighteen month period and amortizes the cost of each catalog supplement over a three month period.

Deferred Compensation:Previously, some of Transcat’s directors had elected to defer receipt of their non-discretionary awards of shares of Common Stock under the Amended and Restated Directors’ Stock Plan. Deferred shares were expensed at the market value of Common Stock at the date of award, and the associated liability is adjusted quarterly based on the quarter end market price of Common Stock. Directors voluntarily elected to cease deferring shares as of April 1, 2003.

In addition, the Company provides an annual benefit to a former president’s spouse and former executive under the terms of a deferred compensation agreement.

Deferred Gain on TPG:As a result of certain post divestiture commitments, Transcat is unable to recognize the gain of $1.5 million on the divestiture of Transmation Products Group (“TPG”), which took place in the fiscal year ended March 31, 2002, until those commitments expire on December 31, 2006. See Note 5 of the Consolidated Financial Statements for further disclosure.

Deferred Taxes:Transcat accounts 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 net 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:Transcat has determined the fair value of debt and other financial instruments using available market information and appropriate valuation methodologies as follows:

• Cash, Accounts Receivables, and Accounts Payables: The carrying amounts reported on the Consolidated Balance Sheets for cash, accounts receivables, and accounts payables approximate fair value, due to their short-term nature.

• Debt: The carrying amount of debt under the Credit Agreement, as such term is defined in Note 3 to the Consolidated Financial Statements, approximates fair value due to variable interest rate pricing.

9

Stock Options:Transcat follows the provisions of Accounting Practice Board 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 Transcat, Inc. 2003 Incentive Plan had exercise prices equal to the market value of the underlying Common Stock at grant date.

Pro forma amounts are as follows:

	Second Quarter Ended						Six Months Ended
	September			September			September			September
	24, 2005			25, 2004			24, 2005			25, 2004
Net Income (Loss), as reported	$	349		$	(93	)	$	523		$	(520	)
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects		11			21			24			98
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(59	)		(48	)		(120	)		(152	)
Pro Forma Net Income (Loss)	$	301		$	(120	)	$	427		$	(574	)
Earnings (Loss) Per Share:
Basic — as reported	$	0.05		$	(0.01	)	$	0.08		$	(0.08	)
Basic — pro forma	$	0.05		$	(0.02	)	$	0.06		$	(0.09	)
Average Shares Outstanding		6,618			6,372			6,574			6,349
Diluted — as reported	$	0.05		$	(0.01	)	$	0.07		$	(0.08	)
Diluted — pro forma	$	0.04		$	(0.02	)	$	0.06		$	(0.09	)
Average Shares Outstanding		7,315			6,372			7,269			6,349

10

NOTE 3 — DEBT

Description.On November 13, 2002, Transcat entered into a Revolving Credit and Loan Agreement (the “Credit Agreement”) with GMAC Business Credit, LLC (“GMAC”). The Credit Agreement consisted of a term loan, a revolving line of credit (“LOC”), and certain material terms 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 to waive compliance with an 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 the Company had committed to dissolve by a specific date (that has been subsequently dissolved), and increase the Credit Agreement restriction on Master Catalog spending.

Transcat 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 option if certain conditions are met, and certain material terms which are as set forth below. The Third Amendment also waived compliance with the Company’s EBITDA covenant for the second quarter of fiscal year 2005 and extended the Credit Agreement expiration from November 13, 2005 to October 31, 2007.

Term Loans.Under the Third Amendment, the Company entered into two term loans, Term Loan A and Term Loan B, in the amounts of $1.5 million and $0.5 million, respectively. The notes representing the term loans 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 Company is 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 the Company’s 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 the Company’s excess cash flow, not to exceed $0.2 million, annually. As of September 24, 2005, the Third Amendment requires the Company to make the following principal payments on combined term loans, after giving effect to any excess cash flow payments to be made:

	Principal Payments After Giving
	Effect to Excess Cash Flow Payments
	Term Loan A		Term Loan B		Total
Fiscal Year 2006 (1)		250		174		424
Fiscal Year 2007		500		97		597
Fiscal Year 2008		333		—		333
Total	$	1,083	$	271	$	1,354

(1) On the Consolidated Balance Sheets as of September 24, 2005, the $0.8 million current portion of term loan consists of $0.7 million from principal term loan payments for the remaining six months of fiscal year 2006 and for the first six months of fiscal year 2007; and, $0.1 million from estimated excess cash flow payments.

LOC.Under the Third Amendment, the maximum amount available under the LOC portion is $9.0 million. As of September 24, 2005, the Company was eligible to borrow up to $7.3 million based on assets and borrowed $4.0 million. Availability under the LOC is determined by a formula based on eligible accounts receivable (85%) and inventory (50%).

The Credit Agreement contains both a subjective acceleration clause and a requirement to maintain a lock-box arrangement. These conditions 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.”

11

Interest.Interest on the term loans and LOC is adjusted on a quarterly basis based upon the Company’s calculated Fixed Charge Coverage Ratio, as defined in the Third Amendment (see chart below). The prime rate and the 30-day London Interbank Offered Rate (“LIBOR”) as of September 24, 2005 were 6.75% and 3.86%, respectively. Our interest rate for the first and second quarters of fiscal year 2006 was at Tier 3, as described in the following chart:

	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 the Company has to comply, including a minimum EBITDA covenant, and restrictions on capital expenditures and Master Catalog spending. The Third Amendment includes a revised EBITDA covenant, a fixed charge coverage ratio covenant and revised restrictions on capital expenditures and Master Catalog spending. The Company was in compliance with all loan covenants and requirements for the second quarter of fiscal year 2006.

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, are amortized over the term of the Third Amendment.

Other Terms.The Third Amendment requires an increase in the Company’s borrowing rate of two percentage points should an event of default occur. A termination premium of 2% of the advance limit in year one, 1% in year two, and 0.5% in year three, as defined in the Credit Agreement, will be incurred if the Credit Agreement is terminated prior to its expiration date of October 31, 2007.

Additionally, the Company has 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”). The Company has achieved an EBITDA, as defined in the Credit Agreement, of $2.4 million on a trailing twelve months basis in the required time frame specified in the Credit Agreement and therefore may make a Cap-x Loan of up to $1.0 million for qualifying capital expenditures. As of September 24, 2005, the Company has not borrowed any additional monies. 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 the Company’s calculated Fixed Charge Coverage Ratio with the same terms as Term Loan A (see chart above).

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NOTE 4 — SEGMENT AND GEOGRAPHIC DATA

Transcat has 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. The Company has no inter-segment sales. The following table presents segment and geographic data for the second quarter and six months ended September 24, 2005 and September 25, 2004:

	Second Quarter Ended						Six Months Ended
	September			September			September			September
	24, 2005			25, 2004			24, 2005			25, 2004
Net Sales:
Product	$	9,412		$	8,308		$	18,797		$	17,172
Service		4,707			4,180			9,387			8,538
Total		14,119			12,488			28,184			25,710
Gross Profit:
Product		2,325			1,841			4,584			3,881
Service		1,284			1,068			2,630			2,154
Total		3,609			2,909			7,214			6,035
Operating Expenses:
Product		1,793			1,728			3,699			3,8498
Service		1,304			1,098			2,673			2,376
Total		3,097			2,826			6,372			6,224
Operating Income (Loss):
Product		532			113			885			33
Service		(20	)		(30	)		(43	)		(222	)
Total		512			83			842			(189	)
Unallocated Amounts:
Other Expense (including interest)		163			176			319			331
Provision for Income Taxes		—			—			—			—
Total		163			176			319			331
Net Income (Loss)	$	349		$	(93	)	$	523		$	(520	)

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NOTE 5 — COMMITMENTS

Unconditional Purchase Obligation:In fiscal year 2002, the Company entered into a distribution agreement (the “Distribution Agreement”) with Fluke Electronics Corporation (“Fluke”) to be the exclusive worldwide distributor of TPG products until December 31, 2006. Under the Distribution Agreement, the Company also agreed to purchase a pre-determined amount of inventory from Fluke.

On October 31, 2002, with an effective date of September 1, 2002, the Company entered into a new distribution agreement (the “New Agreement”) with Fluke, which replaced the Distribution Agreement. The New Agreement ends on December 31, 2006. Under the terms of the New Agreement, among other items, the Company agreed to purchase a larger, pre-determined amount of inventory across a broader array of products and brands during each calendar year. The Company’s purchases for calendar years 2004 and 2003 exceeded the commitment under the New Agreement. The Company believes that this commitment to make future purchases is consistent with Transcat’s business needs and plans.

NOTE 6 — VENDOR CONCENTRATION

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

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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.

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 accounting principles generally accepted in the United States (“GAAP”) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, and 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, depreciable lives of assets, 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 changed 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.

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.

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. After all attempts to collect a receivable have failed, the receivable is written-off against the allowance for doubtful accounts. 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.

Inventory:Inventory consists of finished goods and is valued at the lower of cost or market. Costs are determined using the average cost method of inventory valuation. Inventory is 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.

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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 estimated useful life or the lease term, whichever is shorter. Maintenance and repairs are expensed as incurred.

Goodwill:We estimate the fair value of our reporting units in accordance with Statement of Financial Accounting Standards (“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 each Master Catalog over an eighteen month period and amortize the cost of each catalog supplement over a three month period.

Deferred Gain on TPG:As a result of certain post divestiture commitments, we are unable to recognize the gain of $1.5 million on the divestiture of Transmation Products Group (“TPG”), which took place in the fiscal year ended March 31, 2002, until those commitments expire on December 31, 2006. See Note 5 of our Consolidated Financial Statements for further disclosure.

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 net 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.

Stock Options:We follow the provisions of Accounting Practice Board 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 Transcat, Inc. 2003 Incentive Plan had exercise prices equal to the market value of the underlying Common Stock at grant date.

Off-Balance Sheet Arrangements:We do not maintain any off-balance sheet arrangements.

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RESULTS OF OPERATIONS

The following table sets forth, for the second quarter and first six months of the fiscal year ending March 25, 2006 (“fiscal year 2006”) and the second quarter and first six months of the fiscal year ended March 26, 2005 (“fiscal year 2005”), the components of our Consolidated Statements of Operations (calculated on dollars in thousands).

	(Unaudited)						(Unaudited)
	Second Quarter Ended						Six Months Ended
	September			September			September			September
	24, 2005			25, 2004			24, 2005			25, 2004
As a Percentage of Net Sales:
Product Sales		66.7	%		66.5	%		66.7	%		66.8	%
Service Sales		33.3	%		33.5	%		33.3	%		33.2	%
Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Product Gross Profit		24.7	%		22.2	%		24.4	%		22.6	%
Service Gross Profit		27.3	%		25.6	%		28.0	%		25.2	%
Total Gross Profit		25.6	%		23.3	%		25.6	%		23.5	%
Selling, Marketing, and Warehouse Expenses		13.1	%		13.6	%		14.0	%		14.8	%
Administrative Expenses		8.8	%		9.0	%		8.6	%		9.4	%
Total Operating Expenses		21.9	%		22.6	%		22.6	%		24.2	%
Operating Income (Loss)		3.7	%		0.7	%		3.0	%		(0.7	)%
Interest Expense		0.8	%		0.6	%		0.8	%		0.6	%
Other Expense		0.4	%		0.8	%		0.3	%		0.7	%
Total Other Expense		1.2	%		1.4	%		1.1	%		1.3	%
Income (Loss) Before Income Taxes		2.5	%		(0.7	)%		1.9	%		(2.0	)%
Provision for Income Taxes		—	%		—	%		—	%		—	%
Net Income (Loss)		2.5	%		(0.7	)%		1.9	%		(2.0	)%

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SECOND QUARTER ENDED SEPTEMBER 24, 2005 COMPARED TO SECOND QUARTER ENDED SEPTEMBER 25, 2004 (dollars in millions):

Sales:

	Second Quarter Ended
	September		September
	24, 2005		25, 2004
Net Sales:
Product	$	9.4	$	8.3
Service		4.7		4.2
Total	$	14.1	$	12.5

Net sales increased $1.6 million, or 12.8% (calculated on dollars in millions) from the second quarter of fiscal year 2005 to the second quarter of fiscal year 2006.

Our distribution products net sales results, which accounted for 66.7% of our sales in the second quarter of fiscal year 2006 and 66.5% of our sales in the second quarter of fiscal year 2005 (calculated on dollars in thousands), reflect improved year over year customer response to our sales and marketing activities. Our second quarter of fiscal years 2006 and 2005 product sales in relation to prior fiscal year quarter comparisons, is as follows (calculated on dollars in millions):

	FY 2006						FY 2005
	Q2			Q1			Q4			Q3			Q2			Q1
Product Sales Growth (Decline)		13.3	%		5.6	%		(2.9	%)		6.5	%		9.2	%		11.3	%

The majority of our distribution products net sales growth in the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005 was primarily in our core distribution channels. In addition, we experienced product net sales growth in our other distribution channels, primarily from high-volume electrical and instrumentation wholesalers, which caused a shift in our mix by distribution channel. The following table provides the percent of net sales and the approximate gross profit percentage for significant product distribution channels for the second quarter of fiscal years 2006 and 2005 (calculated on dollars in thousands):

	FY 2006 Second Quarter						FY 2005 Second Quarter (1)
	Percent of			Gross			Percent of			Gross
	Net Sales			Profit % (2)			Net Sales			Profit % (2)
Core		84.7	%		24.9	%		86.1	%		24.3	%
Government		1.6	%		2.1	%		3.9	%		3.2	%
Other		13.7	%		13.9	%		10.0	%		14.4	%
Total		100.0	%		23.0	%		100.0	%		22.5	%

(1)	Certain prior year customer reclassifications have been made to conform with current channel definitions.
(2)	Calculated at net sales less purchase costs.

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Customer product orders include orders for products that we routinely stock in our inventory, 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, and orders required to be shipped at a future date. Our total unshippable product orders for the second quarter of fiscal year 2006 were relatively consistent with the second quarter of fiscal year 2005. We experienced an increase in the number of product orders that were awaiting calibration in our laboratories prior to shipment in the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005, as we intensified our efforts to cross sell calibration services to product customers. This increase was offset by a decrease in the number of backorders in the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005. The following table reflects this decline in the percentage of total unshippable product orders that are backorders at the end of each fiscal quarter and our historical trend of total unshippable product orders (calculated on dollars in millions):

	FY 2006						FY 2005
	Q2			Q1			Q4			Q3			Q2			Q1
Total Unshippable Product Orders	$	1.5		$	1.3		$	1.3		$	1.3		$	1.5		$	1.5
% of Unshippable Product Orders that are Backorders		72.1	%		78.7	%		76.9	%		76.9	%		80.0	%		80.2	%

Calibration services net sales increased $0.5 million, or 11.9% (calculated on dollars in millions), from the second quarter of fiscal year 2005 to the second quarter of fiscal year 2006. This increase is attributable to both customer acquisition in our regulated industry markets and customer service efforts to retain existing customers. In addition, within any quarter, there is typically a netting of new customers against existing customers whose calibrations may not repeat for any number of factors. Among those factors are the timing of customer periodic calibrations on equipment and repair services, customer capital expenditure budgets, and customer outsourcing decisions. Our second quarter of fiscal years 2006 and 2005 calibration service sales, respectively, in relation to prior fiscal year quarter comparisons, is as follows (calculated on dollars in millions):

	FY 2006						FY 2005
	Q2			Q1			Q4			Q3			Q2			Q1
Service Sales Growth (Decline)		11.9	%		6.8	%		14.6	%		0.0	%		(2.3	%)		(4.3	%)

Gross Profit:

	Second Quarter Ended
	September		September
	24, 2005		25, 2004
Gross Profit:
Product	$	2.3	$	1.8
Service		1.3		1.1
Total	$	3.6	$	2.9

Gross profit increased as a percent of net sales from 23.3% in the second quarter of fiscal year 2005 to 25.6% in the second quarter of fiscal year 2006 (calculated on dollars in thousands).

Product gross profit increased $0.5 million, or 27.8% (calculated on dollars in millions) from the second quarter of fiscal year 2005 to the second quarter of fiscal year 2006, primarily attributable to the 13.3% (calculated on dollars in millions) increase in product sales. As a percent of net product sales, product gross profit increased 2.5 points (calculated on dollars in thousands) from the second quarter of fiscal year 2005 to the second quarter of fiscal year 2006. 1.7 points of this increase is a result of the timing of certain product purchase rebates earned during the second quarter of fiscal year 2006. The other 0.8 points of the increase is primarily attributable to the mix of products being sold within our core distribution channels.

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Our product gross profit can be impacted by a number of factors that can impact quarterly comparisons. Among those factors are sales to certain channels that do not support the margins of our core customer base, periodic rebates on purchases discussed above, and cooperative advertising received from suppliers 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). 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 2006						FY 2005
	Q2			Q1			Q4			Q3			Q2			Q1
Product Gross Profit % (1)		22.6	%		22.8	%		22.2	%		23.7	%		22.0	%		21.8	%
Other Income (Expense) % (2)		1.9	%		1.7	%		3.5	%		(0.5	%)		(0.3	%)		0.7	%
Product Gross Profit %		24.5	%		24.5	%		25.7	%		23.2	%		21.7	%		22.5	%

(1)	Calculated at net sales less purchase costs.
(2)	Includes vendor rebates, cooperative advertising income, freight billed to customers, freight expenses, and direct shipping costs.

Calibration service gross profit increased $0.2 million, or 1.7 points (calculated on dollars in thousands) from the second quarter of fiscal year 2005 to the second quarter of fiscal year 2006. This increase is a result of an 11.9% (calculated on dollars in millions) increase in service sales and improving laboratory efficiency in a segment of our business where fixed costs are more effectively leveraged by an increase in sales. The following table reflects the quarterly historical trend of our calibration service gross profit as a percent of net sales (calculated on dollars in millions):

	FY 2006						FY 2005
	Q2			Q1			Q4			Q3			Q2			Q1
Service Gross Profit %		27.7	%		27.7	%		32.7	%		28.6	%		26.2	%		25.0	%

Operating Expenses:

	Second Quarter Ended
	September		September
	24, 2005		25, 2004
Operating Expenses:
Selling, Marketing, and Warehouse	$	1.9	$	1.7
Administrative		1.2		1.1
Total	$	3.1	$	2.8

Operating expenses increased $0.3 million, or 10.7% (calculated on dollars in millions), from the second quarter of fiscal year 2005 to the second quarter of fiscal year 2006. Selling, marketing, and warehouse expenses increased $0.2 million primarily as a result of an increase in agent commissions paid on product sales ($0.1 million) and an increase in payroll and related costs ($0.1 million). Administrative expenses increased $0.1 million primarily as a result of an increase in payroll and related costs.

Other Expense:

	Second Quarter Ended
	September		September
	24, 2005		25, 2004
Other Expense:
Interest Expense	$	0.1	$	0.1
Other Expense		0.1		0.1
Total	$	0.2	$	0.2

Interest expense was consistent from the second quarter of fiscal year 2005 to the second quarter of fiscal year 2006. Other expense, primarily attributable to net losses in Canadian currency transactions, was also consistent from the second quarter of fiscal year 2005 to the second quarter of fiscal year 2006.

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Taxes:

	Second Quarter Ended
	September		September
	24, 2005		25, 2004
Provision for Income Taxes	$	—	$	—

We have not recognized any provision (benefit) for income taxes in the second quarter of fiscal years 2006 and 2005 as pretax income (loss) was offset by a reduction (increase) in our deferred tax asset valuation reserve. When calculating income tax expense or benefit, we recognize valuation allowances for deferred tax assets, which may not be realized using a “more likely than not” approach, as is more fully described in Note 2 to our Consolidated Financial Statements.

SIX MONTHS ENDED SEPTEMBER 24, 2005 COMPARED TO SIX MONTHS ENDED SEPTEMBER 25, 2004 (DOLLARS IN MILLIONS):

Sales:

	Six Months Ended
	September		September
	24, 2005		25, 2004
Net Sales:
Product	$	18.8	$	17.2
Service		9.4		8.5
Total	$	28.2	$	25.7

Net sales increased $2.5 million, or 9.7%, from the first six months of fiscal year 2005 to the first six months of fiscal year 2006.

Our distribution products net sales results, which accounted for 66.7% of our sales in the first six months of fiscal year 2006 and 66.8% of our sales in the first six months of fiscal year 2005 (calculated on dollars in thousands), reflect improved year over year customer response to our sales and marketing activities.

The majority of our distribution products net sales growth in the first six months of fiscal year 2006 compared to the first six months of fiscal year 2005 was primarily in our core distribution channels. In addition, we experienced product net sales growth in our other distribution channels, primarily from high-volume electrical and instrumentation wholesalers, which caused a shift in our mix by distribution channel. 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 2006 Six Months						FY 2005 Six Months (1)
	Ended September 24, 2005						Ended September 25, 2004
	Percent of			Gross			Percent of			Gross
	Net Sales			Profit % (2)			Net Sales			Profit % (2)
Core		85.0	%		25.0	%		86.4	%		24.1	%
Government		2.0	%		1.9	%		3.3	%		1.8	%
Other		13.0	%		13.4	%		10.3	%		14.3	%
Total		100.0	%		23.0	%		100.0	%		22.4	%

(1)	Certain prior year customer reclassifications have been made to conform with current channel definitions.
(2)	Calculated at net sales less purchase costs.

21

Calibration service sales increased $0.9 million, or 10.6% (calculated on dollars in millions), in the first six months of fiscal year 2006 when compared to the first six months of fiscal year 2005. This increase is attributable to both customer acquisition in our regulated industry markets and customer service efforts to retain existing customers. In addition, within any quarter, there is typically a netting of new customers against existing customers whose calibrations may not repeat for any number of factors. Among those factors are the timing of customer periodic calibrations on equipment and repair services, customer capital expenditure budgets, and customer outsourcing decisions.

Gross Profit:

	Six Months Ended
	September		September
	24, 2005		25, 2004
Gross Profit:
Product	$	4.6	$	3.9
Service		2.6		2.1
Total	$	7.2	$	6.0

Gross profit increased as a percent of sales from 23.5% in the first six months of fiscal year 2005 to 25.6% in the first six months of fiscal year 2006 (calculated on dollars in thousands).

Product gross profit increased $0.7 million, or 17.9% (calculated on dollars in millions) from the first six months of fiscal year 2005 to the first six months of fiscal year 2006, primarily attributable to the 9.3% (calculated on dollars in millions) increase in product net sales. As a percent of net sales, product gross profit increased 1.8 points (calculated on dollars in thousands) from the first six months of fiscal year 2005 to the first six months of fiscal year 2006. 0.8 points of this increase is a result of the timing of certain product purchase rebates earned during the second quarter of fiscal year 2006. The other 1.0 points of the increase is primarily attributable to the mix of products being sold within our core distribution channels.

Our product gross profit can be impacted by a number of factors that can impact quarterly comparisons. Among those factors are sales to certain channels that do not support the margins of our core customer base, periodic rebates on purchases discussed above, and cooperative advertising received from suppliers 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).

Calibration service gross profit increased $0.5 million, or 2.8 points (calculated on dollars in thousands) from the first six months of fiscal year 2005 to the first six months of fiscal year 2006. This increase is a result of a 10.6% (calculated on dollars in millions) increase in service sales and improving laboratory efficiency in a segment of our business where fixed costs are more effectively leveraged by an increase in sales.

Operating Expenses:

	Six Months Ended
	September		September
	24, 2005		25, 2004
Operating Expenses:
Selling, Marketing, and Warehouse	$	3.9	$	3.8
Administrative		2.4		2.4
Total	$	6.3	$	6.2

Operating expenses increased $0.1 million, or 1.6% (calculated on dollars in millions), from the first six months of fiscal year 2005 to the first six months of fiscal year 2006. Selling, marketing, and warehouse expenses increased $0.1 million primarily as a result of an increase in payroll and related costs. Administrative expenses were relatively consistent from the first six months of fiscal year 2005 to the first six months of fiscal year 2006.

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Other Expense:

	Six Months Ended
	September		September
	24, 2005		25, 2004
Other Expense:
Interest Expense	$	0.2	$	0.1
Other Expense		0.1		0.2
Total	$	0.3	$	0.3

Interest expense increased from the first six months of fiscal year 2005 to the first six months of fiscal year 2006 resulting from higher interest rates applied to higher average debt. Other expense decreased in the first six months of fiscal year 2005 to the first six months of fiscal year 2006 primarily attributable to a decrease in net losses in Canadian currency transactions.

Taxes:

	Six Months Ended
	September		September
	24, 2005		25, 2004
Provision for Income Taxes	$	—	$	—

We have not recognized any provision (benefit) for income taxes in the first six months of fiscal years 2006 and 2005 as pretax income (loss) was offset by a reduction (increase) in our deferred tax asset valuation reserve. When calculating income tax expense or benefit, we recognize valuation allowances for deferred tax assets, which may not be realized using a “more likely than not” approach, as is more fully described in Note 2 to our Consolidated Financial Statements.

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LIQUIDITY AND CAPITAL RESOURCES

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

	Six Months Ended
	September			September
	24, 2005			25, 2004
Cash Provided by (Used in):
Operating Activities	$	1,992		$	1,564
Investing Activities		(362	)		(414	)
Financing Activities		(1,721	)		(1,595	)

Operating Activities: Cash provided by operating activities for the first six months of fiscal year 2006 was $2.0 million, an increase of $0.4 million when compared to the $1.6 million of cash provided by operating activities in the first six months of fiscal year 2005. This increase was the result of an increase in net income of $1.0 million, offset by, a decrease in cash provided by working capital of $0.5 million and a decrease in non-cash charges of $0.1 million. Significant working capital fluctuations were as follows:

• Inventory/Accounts Payable: Our inventory decreased by $0.5 million from March 26, 2005 to September 24, 2005. As previously reported, our inventory at March 26, 2005 was higher than we anticipated as product sales were below our expectations. Our inventory increased by $0.9 million from March 31, 2004 to September 25, 2004 in preparation for our historically strong six month product sales period. Our inventory at September 24, 2005 is higher than our inventory at September 25, 2004 primarily to support the product sales growth anticipated for the second half of fiscal year 2006 compared to the second half of fiscal year 2005. Our decline in accounts payable resulted in a significant improvement in our accounts payable to inventory ratio as follows (dollars in millions):

	September		September
	24, 2005		25, 2004
Accounts Payable	$	4.1	$	4.8
Inventory, net	$	5.4	$	4.6
Accounts Payable/Inventory Ratio		0.76		1.04

• Receivables: The increase in our accounts receivable at the end of our second quarter of fiscal year 2006 compared to the end of the second quarter of fiscal year 2005 is due to sales growth in our current second quarter. 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):

	September		September
	24, 2005		25, 2004
Net Sales, for the last two fiscal months	$	9.9	$	9.0
Accounts Receivable, net	$	6.3	$	5.9
Days Sales Outstanding (based on 60 days)		38		39

Investing Activities: The $0.4 million of cash used in investing activities in the first six months of fiscal years 2006 and 2005 resulted from capital expenditures, primarily for our calibration laboratories.

Financing Activities: Our overall debt level was relatively consistent from September 25, 2004 to September 24, 2005, although there was change in the nature of our debt, as our term debt took on greater significance, as the table below illustrates (in millions). The $0.3 million decrease in our overall debt is primarily the result of the relative increase in cash provided by operating activities. See Note 3 to our Consolidated Financial Statements for further information regarding our debt.

	September		September
	24, 2005		25, 2004
Term Debt	$	1.4	$	0.3
Revolving Line of Credit		4.0		5.3
Capital Lease Obligations		0.1		0.2
Total Debt	$	5.5	$	5.8

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Debt.Our third amendment to our Revolving Credit and Loan Agreement (“Credit Agreement”) with GMAC Business Credit, LLC consists of two term notes, a revolving line of credit, a capital expenditure loan option, and certain material terms which are disclosed in Note 3 of our Consolidated Financial Statements.

The table below indicates our excess (shortage) EBITDA (earnings before interest, income taxes, depreciation and amortization) 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 first and second quarters of fiscal year 2006 and expect to meet the covenant on an on-going basis.

	FY 2006				FY 2005
	Q2		Q1		Q4		Q3		Q2		Q1
Excess (Shortage) EBITDA		33%		23%		22%		17%		(20%)		(16%)

See Note 3 of our Consolidated Financial Statements for more information on our debt. See Item 3, Quantitative and Qualitative Disclosures about Market Risk, for a discussion of interest rates on our debt.

Unconditional Purchase Obligation.In fiscal year 2002, we entered into a distribution agreement (the “Distribution Agreement”) with Fluke Electronics Corporation (“Fluke”) to be the exclusive worldwide distributor of TPG products until December 31, 2006. Under the Distribution Agreement, we also agreed to purchase a pre-determined amount of inventory from Fluke.

On October 31, 2002, with an effective date of September 1, 2002, we entered into a new distribution agreement (the “New Agreement”) with Fluke, which replaced the Distribution Agreement. The New Agreement ends on December 31, 2006. Under the terms of the New Agreement, among other items, we agreed to purchase a larger, pre-determined amount of inventory across a broader array of products and brands during each calendar year. Our purchases for calendar years 2004 and 2003 exceeded the commitment under the New Agreement. We believe that this commitment to make future purchases is consistent with our business needs and plans.

In addition, in accordance with GAAP, we are unable to recognize a gain of $1.5 million on the sale of TPG until the New Agreement expires on December 31, 2006.

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OUTLOOK

We expect positive growth in both sales and earnings to continue throughout fiscal year 2006. We expect revenue growth to be in the high single to low double digits range, with gross margin improvement for the year likely driven primarily by increased volume. We expect operating expenses to grow in line with sales. We plan to increase investment in the following areas: marketing for prospecting and promotion, employee training, additional calibration technicians, and infrastructure investments, including information technology.

Our operating earnings objective for the second half of fiscal year 2006 is to exceed our earnings for the second half of fiscal year 2005, primarily based on our expectations for the calibration services segment. We expect operating earnings to increase for the year driven by the gross margin improvement in the first half of fiscal year 2006. Our planned manpower increases and capital expenditures will be devoted primarily to calibration services and we expect them to be tied to increased volume or replacement/improvement of equipment.

We expect that distribution products revenue will continue to grow in the high single to low double digits range for the second half of fiscal year 2006 as a result of the relatively stable U.S. economy and our increased prospecting. A $0.3 million product purchase rebate in the fourth quarter of fiscal year 2005 is not expected to repeat in the fourth quarter of fiscal year 2006.

We expect that calibration services revenues will grow in the high single to low double digits range as more companies outsource their total calibration management to Transcat. Additional calibration technicians added in the second quarter of fiscal year 2006 are expected to stabilize gross margins in calibration services for the third quarter of fiscal year 2006 but gross margins are expected to improve going forward as calibration services revenue increases.

As previously disclosed, we have had a valuation allowance on our net deferred tax 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 SFAS No. 109. 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 September 24, 2005 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 severance, restructuring, litigation, and directors’ compensation expenses. Although we believe that the Company today is stronger, more profitable, and better 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. We continue to evaluate that evidence on an ongoing basis.

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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 September 24, 2005 and September 25, 2004, we had no hedging arrangements in place to limit our exposure to upward movements in interest rates.

Under the third amendment to our Credit Agreement described in Note 3 of our Consolidated Financial Statements, interest on the term loans and revolving line of credit is adjusted on a quarterly basis based upon our calculated Fixed Charge Coverage Ratio, as defined in the third amendment (see chart below). The prime rate and the 30-day London Interbank Offered Rate (“LIBOR”) as of September 24, 2005 were 6.75% and 3.86%, respectively.

	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%

Our interest rate for the first and second quarters of fiscal year 2006 was at Tier 3 and will continue to be at Tier 3 for the third quarter of fiscal year 2006.

FOREIGN CURRENCY

Approximately 91% and 92% of our sales were denominated in United States dollars with the remainder denominated in Canadian dollars for the second quarter and six months ended September 24, 2005 and September 25, 2004, respectively. A 10% change in the value of the Canadian dollar to the United States dollar would impact our revenues by approximately 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 September 24, 2005 and September 25, 2004, 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 quarterly report on Form 10-Q. The risks and uncertainties described below and elsewhere in this quarterly report on Form 10-Q are not the only ones facing our business. If any of the following risks were to 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 May Have A Material Adverse Effect On Our Operating Results, Financial Condition, Or Our Ability To Meet Our Commitments.The electronic instrumentation distribution industry is affected by changes in economic conditions, which are outside our control. Economic slowdowns, adverse economic conditions or cyclical trends in certain customer markets may have a material adverse effect on our operating results, financial condition, or our ability to meet our commitments.

We Depend On Manufacturers To Supply Our Inventory And Rely On One Vendor Group To Supply A Significant Amount Of Our Inventory Purchases. If They Fail To Provide Desired Products To Us, Increase Prices, Or Fail To Timely Deliver Products, Our Sales Could Suffer.A significant amount of our inventory purchases are made from one vendor group. Our reliance on this vendor group leaves us vulnerable to having an inadequate supply of required products, price increases, late deliveries, and poor product quality. Like other distributors in our industry, we occasionally experience supply shortages and are unable to purchase our desired volume of products. If we are unable to enter into and maintain satisfactory distribution arrangements with leading

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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. Finally, we cannot provide any assurance that particular products, or product lines, will be available to us, or available in quantities sufficient to meet customer demand. This is of particular significance to our business because the products we sell are often only available from one source. Any limits to product access could materially and adversely affect our business.

Indebtedness.In November 2004, we entered into a third amendment to our existing agreement with our lender. This amendment resulted in two additional term loans, in addition to our revolving line of credit. As of September 24, 2005, we owed $5.4 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. Although we believe that we will continue to be in compliance with such covenants, if we do not remain in compliance with such covenants, our lenders may demand immediate repayment of amounts outstanding. 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 quarterly report on 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, and 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 crises;

• 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. Such Fluctuation 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 pre-determined 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 second fiscal quarter) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On August 16, 2005, our shareholders voted on the following proposals at our annual meeting of shareholders:

Proposal 1:

To elect E. Lee Garelick, Richard J. Harrison, Dr. Harvey J. Palmer, and John T. Smith as Directors of the Company, each to serve until the annual meeting of shareholders to be held in 2008:

Nominees	Votes For		Votes Withheld
E. Lee Garelick		5,843,002		257,164
Richard J. Harrison		6,071,366		28,800
Dr. Harvey J. Palmer		6,071,290		28,876
John T. Smith		6,071,366		28,800

There were no broker non-votes.

The other directors, whose terms of office continued after the meeting, are Francis R. Bradley, Nancy D. Hessler, Robert G. Klimasewski, Paul D. Moore, Cornelius J. Murphy, Alan H. Resnick, and Carl E. Sassano.

Proposal 2:

To approve and ratify the selection of BDO Seidman, LLP as the Company’s independent registered public accounting firm for the fiscal year ending March 25, 2006.

Votes For:		6,072,401
Votes Against:		5,687
Votes Abstained:		22,078
Broker Non-Votes:	—

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: November 3, 2005	/s/ Carl E. Sassano
	Carl E. Sassano
	Chairman, President, and Chief Executive Officer
Date: November 3, 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)	Material Contracts
		10.1	Form of Award Notice for Non-qualified Stock Options 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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