Transcat - 10-Q quarterly report FY2014 Q2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

For the quarterly period ended:  September 28, 2013

or

 

For the transition period from__________ to __________ 

 

Commission File Number:  000-03905

TRANSCAT, INC.

(Exact name of registrant as specified in its charter)

35 Vantage Point Drive, Rochester, New York 14624

(Address of principal executive offices) (Zip Code)

(585) 352-7777

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]   No [x]

The number of shares of common stock, par value $0.50 per share, of the registrant outstanding as of November 7, 2013 was 6,684,161.

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

 

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

 

See accompanying notes to consolidated financial statements.

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

 

See accompanying notes to consolidated financial statements.

TRANSCAT, INC.

See accompanying notes to consolidated financial statements.

 

 

TRANSCAT, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

 

TRANSCAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

NOTE 1 – GENERAL

Description of Business:  Transcat, Inc. (“Transcat” or the “Company”) is a leading provider of accredited calibration, repair, inspection and compliance services and distributor of professional grade handheld test, measurement and control instrumentation primarily for the life science, biotechnology, medical device, pharmaceutical and other FDA-regulated industries, industrial manufacturing, energy and utilities, chemical manufacturing, and other industries.

Basis of Presentation: Transcat’s unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 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 what the results will be for the fiscal year.  The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 30, 2013 (“fiscal year 2013”) contained in the Company’s 2013 Annual Report on Form 10-K filed with the SEC.

Fair Value of Financial Instruments:  Transcat has determined the fair value of debt and other financial instruments using a valuation hierarchy.  The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels.  Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Company to develop its own assumptions.  The carrying amount of debt on the Consolidated Balance Sheets approximates fair value due to variable interest rate pricing, and the carrying amounts for cash, accounts receivable and accounts payable approximate fair value due to their short-term nature.  Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds and are valued based on Level 1 inputs.  At September 28, 2013 and March 30, 2013, investment assets totaled $0.7 million and $0.6 million, respectively, and are included as a component of other assets (non-current) on the Consolidated Balance Sheets.

Stock-Based Compensation:  The Company measures the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date.  The Company records compensation cost related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period of each award.  Excess tax benefits from the exercise of equity awards are presented in the Consolidated Statements of Cash Flows as a financing activity.  Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards.  The Company did not capitalize any stock-based compensation costs as part of an asset.  The Company estimates forfeiture rates based on its historical experience.  During the first six months of the fiscal year ending March 29, 2014 (“fiscal year 2014”) and the first six months of fiscal year 2013, the Company recorded non-cash stock-based compensation cost of $0.3 million and $0.1 million, respectively, in the Consolidated Statements of Income.

The estimated fair value of options granted in the first six months of fiscal year 2014 were calculated using the Black-Scholes-Merton pricing model (“Black-Scholes”), which produced a weighted average fair value of $4.23 per option.  During fiscal year 2013, the Company did not grant any stock options.

The following are the weighted average assumptions used in the Black-Scholes model:

 

The Black-Scholes model incorporates assumptions to value stock-based awards.  The risk-free rate of return for periods within the contractual life of the award was based on a zero-coupon U.S. government instrument over the contractual term of the equity instrument.  Expected volatility was based on historical volatility of the Company’s stock.  The expected option term represented the period that stock-based awards are expected to be outstanding based on the simplified method, which averages an award's weighted-average vesting period and expected term for "plain vanilla" share options.  Options are considered to be "plain vanilla" if they have the following basic characteristics: granted "at-the-money"; exercisability is conditioned upon service through the vesting date; termination of service prior to vesting results in forfeiture; limited exercise period following termination of service; and options are non-transferable and non-hedgeable.  The Company will continue to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life.  

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

Transcat records foreign currency gains and losses on Canadian business transactions.  The net foreign currency loss was less than $0.1 million in the first six months of fiscal years 2014 and 2013.  The Company utilizes foreign exchange forward contracts to reduce the risk that its earnings will be adversely affected by changes in currency exchange rates.  The Company does not apply hedge accounting; therefore, the change in the fair value of the contracts, which totaled a gain of less than $0.1 million during the first six months of fiscal year 2014 and a loss of less than $0.1 million during the first six months of fiscal year 2013, was recognized in other expense in the Consolidated Statements of Income.  The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated in Canadian dollars being hedged.  On September 28, 2013, the Company had two foreign exchange contracts, which mature in October 2013 and January 2014, outstanding in the notional amounts of $3.3 million and $2.0 million, respectively. The Company does not use hedging arrangements for speculative purposes.

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

The average shares outstanding used to compute basic and diluted earnings per share are as follows:

Shareholders’ Equity:  During the second quarter of fiscal year 2014, the Company repurchased 0.1 million shares of its common stock from an unaffiliated shareholder in a privately-negotiated transaction and less than 0.1 million shares from a member of its Board of Directors under the Company’s Executive Officer and Director Share Repurchase Plan, for a total purchase price of $0.8 million.

Subsequent Event:  On October 4, 2013, the Company repurchased 0.7 million shares of its common stock from an unaffiliated shareholder in a privately-negotiated transaction for $8.10 per share.

NOTE 2 – DEBT

Interest and Other Costs:  Interest on the Revolving Credit Facility accrues, at Transcat’s election, at either the one-month London Interbank Offered Rate (“LIBOR”), adjusting daily, or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case, plus a margin.  Commitment fees accrue based on the average daily amount of unused credit available on the Revolving Credit Facility.  Interest rate margins and commitment fees are determined on a quarterly basis based upon the Company’s calculated leverage ratio, as defined in the Credit Agreement.  The one-month LIBOR as of September 28, 2013 was 0.2%.  The Company’s interest rate for the first six months of fiscal year 2014 ranged from 1.09% to 1.15%.

Covenants:  The Credit Agreement has certain covenants with which the Company has to comply, including a fixed charge ratio covenant and a leverage ratio covenant.  The Company was in compliance with all loan covenants and requirements throughout the first six months of fiscal year 2014.

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

NOTE 3 – STOCK-BASED COMPENSATION

The Transcat, Inc. 2003 Incentive Plan, as Amended and Restated (the “2003 Plan”), provides for, among other awards, grants of restricted stock units and stock options to directors, officers and key employees at the fair market value at the date of grant.  At September 28, 2013, the number of shares available for future grant under the 2003 Plan totaled 1.5 million.

Restricted Stock:  The Company grants performance-based restricted stock units as a primary component of executive compensation.  The units generally vest following the third fiscal year from the date of grant subject to certain cumulative diluted earnings per share growth targets over the eligible period.

Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the unit that coincides with the actual outcome of the performance conditions.  On an interim basis, the Company records compensation cost based on an assessment of the probability of achieving the performance conditions.  The Company achieved 75% of the target level for the performance-based restricted stock units granted in the fiscal year ended March 26, 2011 (“fiscal year 2011”) and as a result, issued 28 thousand shares of common stock to executive officers and certain key employees during the first quarter of fiscal year 2014.  At September 28, 2013, the Company estimated the probability of achievement for the units granted in fiscal years 2014 and 2013 to be 100% of the target levels and 125% of the target level for the units granted in the fiscal year ended March 31, 2012 (“fiscal year 2012”).  Total expense relating to performance-based restricted stock units, based on grant date fair value and the estimated probability of achievement, in the first six months of fiscal years 2014 and 2013 was $0.2 million and $0.1 million, respectively.  Unearned compensation totaled $0.8 million as of September 28, 2013.

Stock Options: Options generally vest over a period of up to four years, using either a graded schedule or on a straight-line basis, and expire ten years from the date of grant.  The expense relating to options is recognized on a straight-line basis over the requisite service period for the entire award.

The following table summarizes the Company’s options as of and for the six months ended September 28, 2013:

 

Total unrecognized compensation cost related to non-vested stock options as of September 28, 2013 was $0.4 million, which is expected to be recognized over a weighted average period of less than three years.  The aggregate intrinsic value of stock options exercised in the first six months of fiscal year 2014 was less than $0.1 million.  Cash received from the exercise of options in the first six months of fiscal year 2014 was less than $0.1 million.

NOTE 4 – SEGMENT INFORMATION

Transcat has two reportable segments:  distribution (“Distribution”) and service (“Service”).  The Company has no inter-segment sales.  The following table presents segment information for the second quarter and the six months ended September 28, 2013 and September 29, 2012:

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 and outcomes may materially differ from those expressed or forecasted in any such forward-looking statements.  When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements contained elsewhere in this report and in any documents incorporated herein by reference.  New risks and uncertainties arise from time to time and we cannot predict those events or how they may affect us.  For a more detailed discussion of the risks and uncertainties that may affect Transcat’s operating and financial results and its ability to achieve its financial objectives, interested parties should review the “Risk Factors” sections in Transcat’s reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended March 30, 2013.  Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates from the information provided in our Annual Report on Form 10-K for the fiscal year ended March 30, 2013.

 

RESULTS OF OPERATIONS

The following table presents, for the second quarter and first six months of fiscal years 2014 and 2013, the components of our Consolidated Statements of Income.

SECOND QUARTER ENDED SEPTEMBER 28, 2013 COMPARED TO SECOND QUARTER ENDED SEPTEMBER 29, 2012 (dollars in thousands):

Revenue:

 

Total revenue increased $2.1 million, or 7.8%, from the second quarter of fiscal year 2013 to the second quarter of fiscal year 2014.

Service revenue increased to $11.5 million in the second quarter of fiscal year 2014, a 16.6% increase, when compared with $9.8 million in the second quarter of fiscal year 2013.  The growth can be attributed to expansion of our existing customer base and incremental revenue associated with our recent business acquisitions.  Our fiscal years 2014 and 2013 Service revenue growth in relation to prior fiscal year quarter comparisons was as follows:

Within any quarter, while we add new customers, we also have customers from the prior year whose service orders may not repeat for any number of reasons.  Among those reasons are variations in the timing of periodic calibrations and other services, customer capital expenditures and customer outsourcing decisions.  Because the timing of Service segment orders and expenses can vary on a quarter-to-quarter basis, we believe a trailing twelve-month trend provides a better indication of the progress of this segment.  Service segment revenue for the twelve months ended September 28, 2013 was $45.3 million, up 18.1% when compared with $38.3 million for the twelve months ended September 29, 2012.

Within the calibration industry, there is a broad array of measurement disciplines, making it costly and inefficient for any one provider to invest the needed capital for facilities, equipment and uniquely trained personnel necessary to address all measurement disciplines with in-house calibration capabilities.  Our strategy has been to focus our investments in the core electrical, temperature, pressure and dimensional disciplines.  Accordingly, over the long-term, we expect to outsource 10% to 20% of our Service revenue to third party vendors for calibrations beyond our chosen scope of capabilities. During any individual quarter, our outsourcing needs may fluctuate beyond these percentages.  We continuously evaluate our outsourcing needs and make capital investments, as deemed necessary, to add additional in-house capabilities and reduce the need for third party vendors.  The following table presents the source of our Service revenue and the percentage of Service segment revenue derived from each source for each quarter during fiscal years 2014 and 2013:

Distribution sales accounted for 60.3% of our total revenue in the second quarter of fiscal year 2014 and 63.3% of our total revenue in the second quarter of fiscal year 2013.  Distribution sales increased $0.5 million, or 2.7%, in the second quarter of fiscal year 2014 compared to the second quarter of fiscal year 2013, despite one fewer business day in the period. Our fiscal years 2014 and 2013 Distribution sales growth (decline) in relation to prior fiscal year quarter comparisons was as follows:

Our average Distribution sales per business day were $281 in the second quarter of fiscal year 2014, a 4.5% improvement over the second quarter of fiscal year 2013.  Our Distribution sales per business day for each quarter during the fiscal years 2014 and 2013 were as follows:

Distribution orders include orders for instruments that we routinely stock in our inventory, customized products, and other products ordered less frequently, which we do not stock.  Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in our service centers prior to shipment, orders required to be shipped complete or at a future date, and other orders awaiting final credit or management review prior to shipment.  Our total pending product shipments for the second quarter of fiscal year 2014 increased by $1.1 million, or 45.4%, from the second quarter of fiscal year 2013.  This increase was primarily driven by increased backorders and orders awaiting calibration or installation.  Variations in pending product shipments can be impacted by several factors, including the timing of when product orders are placed in relation to the end of the fiscal period, specialized product orders that are not stocked, or production issues experienced by manufacturers.  The following table presents our historical trend of total pending product shipments and the percentage of total pending product shipments that were backorders at the end each quarter of fiscal years 2014 and 2013:

 

Gross Profit:

 

Total gross profit in the second quarter of fiscal year 2014 increased $0.7 million, or 12.2%, from the second quarter of fiscal year 2013.  Total gross margin in the second quarter of fiscal year 2014 increased 90 basis points from the second quarter of fiscal year 2013.

Service segment gross profit increased $0.4 million, or 15.0%, from the second quarter of fiscal year 2013 to the second quarter of fiscal year 2014.  Service segment gross margin decreased 30 basis points over the same time period.  Because the timing of Service segment orders and expenses can vary on a quarter-to-quarter basis, we believe a trailing twelve-month trend provides a better indication of the progress of this segment.  Service segment gross profit for the twelve months ended September 28, 2013 was $11.9 million, up 30.3% when compared with $9.1 million for the twelve months ended September 29, 2012.  Service segment gross margin was 26.2% and 23.7% for the twelve months ended September 28, 2013 and September 29, 2012, respectively.  The following table reflects the quarterly historical trend of our Service segment gross margin as a percent of Service revenues:

Distribution segment gross profit increased $0.4 million, or 10.5%, in the second quarter of fiscal year 2014 compared with the second quarter of fiscal year 2013.  As a percent of Distribution sales, Distribution gross margin increased to 23.6% in the second quarter of fiscal year 2014 compared with 22.0% in the second quarter of fiscal year 2013. The increase in gross margin was the result of increased vendor rebates, which was partially offset by increased price discounts extended to customers.   The following table reflects the quarterly historical trend of our Distribution segment gross margin as a percent of total Distribution sales:

Operating Expenses:

 

Operating expenses in the second quarter of fiscal year 2014 increased $0.6 million, or 13.1%, compared with the second quarter of fiscal year 2013.  This increase was primarily due to sales and marketing investments in the Service segment. As a percentage of total revenue, operating expenses were 19.2% and 18.3% in the second quarter of fiscal years 2014 and 2013, respectively.

Taxes:

 

 

 

Our effective tax rates for the second quarter of fiscal years 2014 and 2013 were 36.4% and 34.0%, respectively.  We continue to evaluate our tax provision on a quarterly basis and make adjustments, as deemed necessary, to our effective tax rate given changes in facts and circumstances expected for the entire fiscal year.

Revenue:

Total revenue increased $5.7 million, or 11.0%, from the first six months of fiscal year 2013 to the first six months of fiscal year 2014.

Service revenue increased $4.6 million, or 25.0%, from the first six months of fiscal year 2013 to the first six months of fiscal year 2014.  The growth is attributed to higher organic revenue combined with incremental revenue from recent business acquisitions.

Our Distribution sales accounted for 59.7% and 64.2% of our total revenue in the first six months of fiscal years 2014 and 2013, respectively.  For the first six months of fiscal year 2014, Distribution sales increased $1.1 million, or 3.2%, compared with the first six months of fiscal year 2013.  Sales to both direct and reseller customers increased in this period while sales to Canadian customers decreased.

Gross Profit:

Total gross profit in the first six months of fiscal year 2014 increased $1.8 million, or 14.2%, from the first six months of fiscal year 2013.  Total gross margin increased 70 basis points in the first six months of fiscal year 2014 compared with the same time period in the previous fiscal year.

Service segment gross profit increased $1.6 million, or 35.7%, from the first six months of fiscal year 2013 to the first six months of fiscal year 2014.  Service segment gross margin increased 200 basis points over the same time period to 25.4%.  The increase was driven by operating leverage, achieved through higher organic growth in the first six months of fiscal year 2014 compared with the first six months of fiscal year 2013.

Operating Expenses:

Operating expenses for the first six months of fiscal year 2014 were $11.6 million, an increase of 10.4% from the first six months of fiscal year 2013.  As a percentage of total revenue, operating expenses during the first six month of fiscal year 2014 were 20.2%, compared to 20.3% in the first six months of fiscal year 2013.

Taxes:

Our effective tax rates for the first six months of fiscal years 2014 and 2013 were 36.8% and 34.0%, respectively.  We continue to evaluate our tax provision on a quarterly basis and make adjustments, as deemed necessary, to our effective tax rate given changes in facts and circumstances expected for the entire fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Through our credit agreement (the “Credit Agreement”), which matures in September 2015, we have a revolving credit facility in the amount of $20.0 million (the “Revolving Credit Facility”).  As of September 28, 2013, $8.7 million was outstanding under the Revolving Credit Facility and included in long-term debt on the Consolidated Balance Sheet.  The Credit Agreement has certain covenants with which we have to comply, including a fixed charge ratio covenant and a leverage ratio covenant.  We were in compliance with all loan covenants and requirements throughout the first six months of fiscal year 2014.

Subsequent to September 28, 2013, we repurchased 0.7 million shares of our common stock from an unaffiliated shareholder in a privately-negotiated transaction for $8.10 per share.  This repurchase was funded by a borrowing from our Revolving Credit Facility.  In conjunction with the borrowing, we obtained from our bank, a letter allowing the repurchase to be excluded from certain financial covenant provisions under the Credit Agreement.

We believe that amounts available under our Revolving Credit Facility and our cash on hand are sufficient to satisfy our expected working capital and capital expenditure needs as well as our lease commitments for the foreseeable future.

Cash Flows:  The following table is a summary of our Consolidated Statements of Cash Flows:

Operating Activities:   Net cash provided by operations was $0.2 million for the first six months of fiscal year 2014 compared to $0.7 million in the first six months of fiscal year 2013.  Significant working capital fluctuations were as follows:

 

Investing Activities:  During the first six months of fiscal year 2014 we invested $0.6 million in capital expenditures, compared with $1.3 million in the second quarter of fiscal year 2013, primarily on Service segment capability expansion and information technology.  In addition, in the first quarter of fiscal year 2014, we received proceeds of $0.2 million from the sale of plant property and equipment.  During the first six months of fiscal year 2013, we invested $3.1 million in a business acquisition.

Financing Activities: During the first six months of fiscal year 2014, net cash provided by financing activities was less than $0.1 and included $0.7 million from our revolving line of credit and $0.1 million from the issuance of common stock, offset by the use of $0.8 million to repurchase 0.1 million shares of our common stock.  During the first six months of fiscal year 2013, financing activities provided net cash of approximately $4.0 million, primarily from our revolving line of credit.

OUTLOOK

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATES

Our exposure to changes in interest rates results from our borrowing activities. In the event interest rates were to move by 1%, our yearly interest expense would increase or decrease by less than $0.1 million assuming our average borrowing levels remained constant. As of September 28, 2013, $20.0 million was available under our credit facility, of which $8.7 million was outstanding and included in long-term debt on the Consolidated Balance Sheet.

We mitigate our interest rate risk by electing to borrow from our credit facility at the one-month LIBOR, adjusting daily, or at a fixed rate for a designated period at the LIBOR corresponding to such period, in each case, plus a margin. Our interest rate margin is determined on a quarterly basis based upon our calculated leverage ratio. As of September 28, 2013, the one-month LIBOR was 0.2%. Our interest rate for the first six months of fiscal year 2014 ranged from 1.09% to 1.15%. On September 28, 2013, we had no hedging arrangements in place to limit our exposure to upward movements in interest rates.

FOREIGN CURRENCY

Over 90% of our total revenue for the first six months of fiscal years 2014 and 2013 was denominated in U.S. dollars, with the remainder denominated in Canadian dollars.  A 10% change in the value of the Canadian dollar to the U.S. dollar would impact our total revenue by less than 1%.  We monitor the relationship between the U.S. 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.

We utilize foreign exchange forward contracts to reduce the risk that future earnings would be adversely affected by changes in currency exchange rates.  We do not apply hedge accounting; therefore, the change in the fair value of the contracts, which totaled a gain of less than $0.1 million during the first six months of fiscal year 2014 and a loss of less than $0.1 million  during the first six months of fiscal year 2013, was recognized in other expense in the Consolidated Statements of Income.  The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated in Canadian dollars being hedged.  On September 28, 2013, the Company had two foreign exchange contracts, which mature in October 2013 and January 2014, outstanding in the notional amounts of $3.3 million and $2.0 million, respectively. The Company does not use hedging arrangements for speculative purposes.

ITEM 4.  CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Control and Procedures.  Our principal executive officer and 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.  Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure.  Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of such date.

Changes in Internal Control over Financial Reporting.  There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this quarterly report (our 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

ITEM 6.  EXHIBITS

See Index to Exhibits.