UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549________________________________
FORM 10-Q
| (Mark one) | |||
| [✓] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
For the quarterly period ended: December 23, 2017
or
| For the quarterly period ended: December 28, 2019 | |||
| or | |||
| [ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
For the transition period from _______________ to _______________
Commission File Number: 000-03905
TRANSCAT, INC.
(Exact name of registrant as specified in its charter)
| Ohio | 16-0874418 | |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
35 Vantage Point Drive, Rochester, New York 14624
(Address of principal executive offices) (Zip Code)
(585) 352-7777
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.50 par value | TRNS | Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [✓Yes[✓] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [✓] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and emerging“emerging growth companycompany” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer | |
| Non-accelerated filer [ ] | Smaller reporting company [✓] | |
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [✓]
The number of shares of common stock, par value $0.50 per share, of the registrant outstanding as of February 1, 2018January 31, 2020 was 7,152,764.7,380,338.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||||
| Third Quarter Ended | Nine Months Ended | Third Quarter Ended | Nine Months Ended | |||||||||||||||||||||
| December 23, | December 24, | December 23, | December 24, | December 28, | December 29, | December 28, | December 29, | |||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||
| Service Revenue | $ | 18,769 | $ | 17,455 | $ | 55,490 | $ | 51,577 | $ | 22,087 | $ | 20,492 | $ | 67,987 | $ | 59,719 | ||||||||
| Distribution Sales | 21,714 | 20,358 | 57,199 | 53,868 | 21,092 | 20,376 | 59,350 | 56,686 | ||||||||||||||||
| Total Revenue | 40,483 | 37,813 | 112,689 | 105,445 | 43,179 | 40,868 | 127,337 | 116,405 | ||||||||||||||||
| Cost of Service Revenue | 14,070 | 13,149 | 41,835 | 38,402 | 17,221 | 16,004 | 51,737 | 45,505 | ||||||||||||||||
| Cost of Distribution Sales | 16,712 | 15,749 | 44,308 | 41,855 | 16,030 | 15,316 | 45,175 | 43,100 | ||||||||||||||||
| Total Cost of Revenue | 30,782 | 28,898 | 86,143 | 80,257 | 33,251 | 31,320 | 96,912 | 88,605 | ||||||||||||||||
| Gross Profit | 9,701 | 8,915 | 26,546 | 25,188 | 9,928 | 9,548 | 30,425 | 27,800 | ||||||||||||||||
| Selling, Marketing and Warehouse Expenses | 4,150 | 4,159 | 12,247 | 12,612 | 4,463 | 4,215 | 13,166 | 12,267 | ||||||||||||||||
| General and Administrative Expenses | 2,897 | 2,403 | 8,776 | 7,207 | 3,374 | 2,939 | 10,151 | 8,938 | ||||||||||||||||
Total Operating Expenses | 7,047 | 6,562 | 21,023 | 19,819 | 7,837 | 7,154 | 23,317 | 21,205 | ||||||||||||||||
| Operating Income | 2,654 | 2,353 | 5,523 | 5,369 | 2,091 | 2,394 | 7,108 | 6,595 | ||||||||||||||||
| Interest and Other Expense, net | 311 | 188 | 854 | 547 | 194 | 295 | 776 | 715 | ||||||||||||||||
| Income Before Income Taxes | 2,343 | 2,165 | 4,669 | 4,822 | 1,897 | 2,099 | 6,332 | 5,880 | ||||||||||||||||
| Provision for Income Taxes | 512 | 895 | 1,201 | 1,729 | 420 | 530 | 758 | 1,395 | ||||||||||||||||
| Net Income | $ | 1,831 | $ | 1,270 | $ | 3,468 | $ | 3,093 | $ | 1,477 | $ | 1,569 | $ | 5,574 | $ | 4,485 | ||||||||
| Basic Earnings Per Share | $ | 0.26 | $ | 0.18 | $ | 0.49 | $ | 0.44 | $ | 0.20 | $ | 0.22 | $ | 0.76 | $ | 0.62 | ||||||||
| Average Shares Outstanding | 7,142 | 7,010 | 7,115 | 6,984 | 7,367 | 7,203 | 7,316 | 7,192 | ||||||||||||||||
| Diluted Earnings Per Share | $ | 0.25 | $ | 0.18 | $ | 0.48 | $ | 0.43 | $ | 0.20 | $ | 0.21 | $ | 0.75 | $ | 0.60 | ||||||||
| Average Shares Outstanding | 7,319 | 7,204 | 7,273 | 7,161 | 7,557 | 7,518 | 7,470 | 7,500 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||||||
| Third Quarter Ended | Nine Months Ended | Third Quarter Ended | Nine Months Ended | ||||||||||||||||||||||||||
| December 23, | December 24, | December 23, | December 24, | December 28, | December 29, | December 28, | December 29, | ||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||
| Net Income | $ | 1,831 | $ | 1,270 | $ | 3,468 | $ | 3,093 | $ | 1,477 | $ | 1,569 | $ | 5,574 | $ | 4,485 | |||||||||||||
| Other Comprehensive Income (Loss): | |||||||||||||||||||||||||||||
| Currency Translation Adjustment | 73 | (286 | ) | 119 | (289 | ) | |||||||||||||||||||||||
| Other, net of tax effects | 22 | (54 | ) | 48 | (45 | ) | |||||||||||||||||||||||
| Total Other Comprehensive Income (Loss) | 95 | (340 | ) | 167 | (334 | ) | |||||||||||||||||||||||
| Currency Translation Adjustment | (151 | ) | (114 | ) | 227 | (88 | ) | ||||||||||||||||||||||
| Other, net of tax effects of $(28) and $(13) for the third quarters ended December 23, 2017 and December 24, 2016, respectively; and $(44) and $(27) for the nine months ended December 23, 2017 and December 24, 2016, respectively. | 1 | 21 | 26 | 43 | |||||||||||||||||||||||||
| Total Other Comprehensive (Loss) Income | (150 | ) | (93 | ) | 253 | (45 | ) | ||||||||||||||||||||||
| Comprehensive Income | $ | 1,681 | $ | 1,177 | $ | 3,721 | $ | 3,048 | $ | 1,572 | $ | 1,229 | $ | 5,741 | $ | 4,151 | |||||||||||||
See accompanying notes to consolidated financial statements.
TRANSCAT, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
| (Unaudited) | (Audited) | (Unaudited) | (Audited) | |||||||||||||
| December 23, | March 25, | December 28, | March 30, | |||||||||||||
| 2017 | 2017 | 2019 | 2019 | |||||||||||||
| ASSETS | ||||||||||||||||
| Current Assets: | ||||||||||||||||
| Cash | $ | 504 | $ | 842 | $ | 204 | $ | 788 | ||||||||
| Accounts Receivable, less allowance for doubtful accounts of $270 and $210 as of December 23, 2017 and March 25, 2017, respectively | 22,700 | 22,049 | ||||||||||||||
| Accounts Receivable, less allowance for doubtful accounts of $439 and $338 as of December 28, 2019 and March 30, 2019, respectively | 26,718 | 27,469 | ||||||||||||||
| Other Receivables | 1,535 | 1,227 | 1,313 | 1,116 | ||||||||||||
| Inventory, net | 11,144 | 10,278 | 14,452 | 14,304 | ||||||||||||
| Prepaid Expenses and Other Current Assets | 988 | 1,193 | 1,920 | 1,329 | ||||||||||||
| Total Current Assets | 36,871 | 35,589 | 44,607 | 45,006 | ||||||||||||
| Property and Equipment, net | 17,478 | 15,568 | 20,646 | 19,653 | ||||||||||||
| Goodwill | 32,823 | 32,520 | 34,961 | 34,545 | ||||||||||||
| Intangible Assets, net | 5,984 | 7,519 | 3,955 | 5,233 | ||||||||||||
| Right To Use Assets, net | 9,021 | - | ||||||||||||||
| Other Assets | 1,079 | 901 | 821 | 793 | ||||||||||||
| Total Assets | $ | 94,235 | $ | 92,097 | $ | 114,011 | $ | 105,230 | ||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||
| Current Liabilities: | ||||||||||||||||
| Accounts Payable | $ | 11,478 | $ | 11,615 | $ | 10,893 | $ | 14,572 | ||||||||
| Accrued Compensation and Other Liabilities | 4,524 | 5,907 | 6,848 | 5,450 | ||||||||||||
| Income Taxes Payable | 468 | 805 | 40 | 228 | ||||||||||||
| Current Portion of Long-Term Debt | 2,143 | 1,429 | 1,960 | 1,899 | ||||||||||||
| Total Current Liabilities | 18,613 | 19,756 | 19,741 | 22,149 | ||||||||||||
| Long-Term Debt | 24,103 | 25,883 | 17,748 | 19,103 | ||||||||||||
| Deferred Tax Liabilities | 955 | 1,134 | 2,472 | 2,450 | ||||||||||||
| Lease Liabilities | 7,333 | - | ||||||||||||||
| Other Liabilities | 1,960 | 1,923 | 1,933 | 1,898 | ||||||||||||
| Total Liabilities | 45,631 | 48,696 | 49,227 | 45,600 | ||||||||||||
| Shareholders' Equity: | ||||||||||||||||
| Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,144,475 and 7,043,754 shares issued and outstanding as of December 23, 2017 and March 25, 2017, respectively | 3,572 | 3,522 | ||||||||||||||
| Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,376,488 and 7,210,882 shares issued and outstanding as of December 28, 2019 and March 30, 2019, respectively | 3,688 | 3,605 | ||||||||||||||
| Capital in Excess of Par Value | 14,553 | 12,996 | 17,556 | 16,467 | ||||||||||||
| Accumulated Other Comprehensive Loss | (161 | ) | (414 | ) | (444 | ) | (611 | ) | ||||||||
| Retained Earnings | 30,640 | 27,297 | 43,984 | 40,169 | ||||||||||||
| Total Shareholders' Equity | 48,604 | 43,401 | 64,784 | 59,630 | ||||||||||||
| Total Liabilities and Shareholders' Equity | $ | 94,235 | $ | 92,097 | $ | 114,011 | $ | 105,230 | ||||||||
See accompanying notes to consolidated financial statements.
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| (Unaudited) | (Unaudited) | |||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||
| December 23, | December 24, | December 28, | December 29, | |||||||||||||
| 2017 | 2016 | 2019 | 2018 | |||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||||
| Net Income | $ | 3,468 | $ | 3,093 | $ | 5,574 | $ | 4,485 | ||||||||
| Adjustments to Reconcile Net Income to Net Cash | ||||||||||||||||
| Provided by Operating Activities: | ||||||||||||||||
| Net Loss on Disposal of Property and Equipment | 57 | 6 | 253 | 6 | ||||||||||||
| Deferred Income Taxes | 11 | 121 | 22 | (20 | ) | |||||||||||
| Depreciation and Amortization | 4,527 | 4,667 | 4,951 | 4,733 | ||||||||||||
| Provision for Accounts Receivable and Inventory Reserves | 341 | 243 | 311 | 122 | ||||||||||||
| Stock-Based Compensation | 1,095 | 316 | 610 | 969 | ||||||||||||
| Changes in Assets and Liabilities: | ||||||||||||||||
| Accounts Receivable and Other Receivables | (1,009 | ) | (3,168 | ) | 398 | 393 | ||||||||||
| Inventory | (612 | ) | (3,967 | ) | 341 | (544 | ) | |||||||||
| Prepaid Expenses and Other Assets | (29 | ) | (341 | ) | (689 | ) | (156 | ) | ||||||||
| Accounts Payable | (137 | ) | 3,378 | (3,679 | ) | (2,169 | ) | |||||||||
| Accrued Compensation and Other Liabilities | (1,325 | ) | (454 | ) | 347 | (1,170 | ) | |||||||||
| Income Taxes Payable | (570 | ) | (20 | ) | (204 | ) | 597 | |||||||||
| Net Cash Provided by Operating Activities | 5,817 | 3,874 | 8,235 | 7,246 | ||||||||||||
| Cash Flows from Investing Activities: | ||||||||||||||||
| Purchases of Property and Equipment | (5,084 | ) | (4,104 | ) | (5,001 | ) | (5,452 | ) | ||||||||
| Proceeds from Sale of Property and Equipment | 11 | 29 | 184 | - | ||||||||||||
| Business Acquisitions | - | (6,977 | ) | |||||||||||||
| Business Acquisitions, net of cash acquired | (452 | ) | (3,614 | ) | ||||||||||||
| Payment of Holdbacks Related to Business Acquisitions | (864 | ) | (108 | ) | ||||||||||||
| Net Cash Used in Investing Activities | (5,073 | ) | (11,052 | ) | (6,133 | ) | (9,174 | ) | ||||||||
| Cash Flows from Financing Activities: | ||||||||||||||||
| Repayment of Revolving Credit Facility, net | (7,018 | ) | (1,924 | ) | ||||||||||||
| Proceeds from Revolving Credit Facility, net | 122 | 807 | ||||||||||||||
| Proceeds from Term Loan | 7,143 | 10,000 | - | 2,500 | ||||||||||||
| Repayment of Term Loan | (1,190 | ) | (952 | ) | ||||||||||||
| Payment of Contingent Consideration and Holdbacks Related to Business Acquisitions | - | (339 | ) | |||||||||||||
| Repayments of Term Loan | (1,416 | ) | (1,607 | ) | ||||||||||||
| Issuance of Common Stock | 821 | 384 | 1,625 | 193 | ||||||||||||
| Repurchase of Common Stock | (344 | ) | (98 | ) | (2,822 | ) | (143 | ) | ||||||||
| Stock Option Redemption | (90 | ) | (137 | ) | ||||||||||||
| Net Cash (Used in) Provided by Financing Activities | (678 | ) | 6,934 | (2,491 | ) | 1,750 | ||||||||||
| Effect of Exchange Rate Changes on Cash | (404 | ) | 162 | (195 | ) | 421 | ||||||||||
| Net Decrease in Cash | (338 | ) | (82 | ) | ||||||||||||
| Net (Decrease) Increase in Cash | (584 | ) | 243 | |||||||||||||
| Cash at Beginning of Period | 842 | 641 | 788 | 577 | ||||||||||||
| Cash at End of Period | $ | 504 | $ | 559 | $ | 204 | $ | 820 | ||||||||
| Supplemental Disclosure of Cash Flow Activity: | ||||||||||||||||
| Cash paid during the period for: | ||||||||||||||||
| Interest | $ | 765 | $ | 488 | $ | 723 | $ | 650 | ||||||||
| Income Taxes, net | $ | 1,783 | $ | 1,595 | $ | 944 | $ | 804 | ||||||||
| Supplemental Disclosure of Non-Cash Investing and Financing Activities: | ||||||||||||||||
| Holdback Amounts Related to Business Acquisitions | $ | - | $ | 735 | ||||||||||||
See accompanying notes to consolidated financial statements.
TRANSCAT, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In Thousands, Except Par Value Amounts)
(Unaudited)
| Capital | Capital | |||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | In | Accumulated | Common Stock | In | Accumulated | |||||||||||||||||||||||||||||||||||||||||
| Issued | Excess | Other | Issued | Excess | Other | |||||||||||||||||||||||||||||||||||||||||
| $0.50 Par Value | of Par | Comprehensive | Retained | $0.50 Par Value | of Par | Comprehensive | Retained | |||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Value | (Loss) | Earnings | Total | Shares | Amount | Value | (Loss) Income | Earnings | Total | |||||||||||||||||||||||||||||||||||
| Balance as of March 25, 2017 | 7,044 | $ | 3,522 | $ | 12,996 | $ | (414 | ) | $ | 27,297 | $ | 43,401 | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2018 | 7,155 | $ | 3,578 | $ | 14,965 | $ | (281 | ) | $ | 33,086 | $ | 51,348 | ||||||||||||||||||||||||||||||||||
| Issuance of Common Stock | 102 | 51 | 770 | - | - | 821 | 4 | 2 | 64 | - | - | 66 | ||||||||||||||||||||||||||||||||||
| Repurchase of Common Stock | (27 | ) | (14 | ) | (205 | ) | - | (125 | ) | (344 | ) | (8 | ) | (4 | ) | (77 | ) | - | (62 | ) | (143 | ) | ||||||||||||||||||||||||
| Stock-Based Compensation | 25 | 13 | 1,082 | - | - | 1,095 | 48 | 23 | 245 | - | - | 268 | ||||||||||||||||||||||||||||||||||
| Redemption of Stock Options | - | - | (90 | ) | - | - | (90 | ) | ||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Loss | - | - | - | (95 | ) | - | (95 | ) | ||||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | - | 1,428 | 1,428 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2018 | 7,199 | $ | 3,599 | $ | 15,197 | $ | (376 | ) | $ | 34,452 | $ | 52,872 | ||||||||||||||||||||||||||||||||||
| Issuance of Common Stock | 3 | 1 | 65 | - | - | 66 | ||||||||||||||||||||||||||||||||||||||||
| Stock-Based Compensation | - | 1 | 337 | - | - | 338 | ||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Income | - | - | - | 253 | - | 253 | - | - | - | 102 | - | 102 | ||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | - | 3,468 | 3,468 | - | - | - | - | 1,488 | 1,488 | ||||||||||||||||||||||||||||||||||
| Balance as of December 23, 2017 | 7,144 | $ | 3,572 | $ | 14,553 | $ | (161 | ) | $ | 30,640 | $ | 48,604 | ||||||||||||||||||||||||||||||||||
| Balance as of September 29, 2018 | 7,202 | $ | 3,601 | $ | 15,599 | $ | (274 | ) | $ | 35,940 | $ | 54,866 | ||||||||||||||||||||||||||||||||||
| Issuance of Common Stock | 2 | 1 | 60 | - | - | 61 | ||||||||||||||||||||||||||||||||||||||||
| Stock-Based Compensation | - | - | 363 | - | - | 363 | ||||||||||||||||||||||||||||||||||||||||
| Other Comprehensive Loss | - | - | - | (341 | ) | - | (341 | ) | ||||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | - | 1,569 | 1,569 | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 29, 2018 | 7,204 | $ | 3,602 | $ | 16,022 | $ | (615 | ) | $ | 37,509 | $ | 56,518 | ||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
TRANSCAT, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In Thousands, Except Par Value Amounts)
(Unaudited)
| Capital | |||||||||||||||||||||||
| Common Stock | In | Accumulated | |||||||||||||||||||||
| Issued | Excess | Other | |||||||||||||||||||||
| $0.50 Par Value | of Par | Comprehensive | Retained | ||||||||||||||||||||
| Shares | Amount | Value | (Loss) Income | Earnings | Total | ||||||||||||||||||
| Balance as of March 30, 2019 | 7,211 | $ | 3,605 | $ | 16,467 | $ | (611 | ) | $ | 40,169 | $ | 59,630 | |||||||||||
| Issuance of Common Stock | 28 | 14 | 355 | - | - | 369 | |||||||||||||||||
| Repurchase of Common Stock | (55 | ) | (27 | ) | (561 | ) | - | (758 | ) | (1,346 | ) | ||||||||||||
| Stock-Based Compensation | 120 | 60 | 143 | - | - | 203 | |||||||||||||||||
| Other Comprehensive Income | - | - | - | 129 | - | 129 | |||||||||||||||||
| Net Income | - | - | - | - | 1,718 | 1,718 | |||||||||||||||||
| Balance as of June 29, 2019 | 7,304 | $ | 3,652 | $ | 16,404 | $ | (482 | ) | $ | 41,129 | $ | 60,703 | |||||||||||
| Issuance of Common Stock | 117 | 59 | 944 | - | - | 1,003 | |||||||||||||||||
| Repurchase of Common Stock | (63 | ) | (32 | ) | (443 | ) | - | (1,001 | ) | (1,476 | ) | ||||||||||||
| Stock-Based Compensation | - | - | 102 | - | - | 102 | |||||||||||||||||
| Other Comprehensive Loss | - | - | - | (55 | ) | - | (55 | ) | |||||||||||||||
| Net Income | - | - | - | - | 2,379 | 2,379 | |||||||||||||||||
| Balance as of September 28, 2019 | 7,358 | $ | 3,679 | $ | 17,007 | $ | (537 | ) | $ | 42,507 | $ | 62,656 | |||||||||||
| Issuance of Common Stock | 18 | 9 | 244 | - | - | 253 | |||||||||||||||||
| Stock-Based Compensation | - | - | 305 | - | - | 305 | |||||||||||||||||
| Other Comprehensive Income | - | - | - | 93 | - | 93 | |||||||||||||||||
| Net Income | - | - | - | - | 1,477 | 1,477 | |||||||||||||||||
| Balance as of December 28, 2019 | 7,376 | $ | 3,688 | $ | 17,556 | $ | (444 | ) | $ | 43,984 | $ | 64,784 | |||||||||||
See accompanying notes to consolidated financial statements.
TRANSCAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share and Per Unit Amounts)
(Unaudited)
NOTE 1 – GENERAL
Description of Business:Transcat, Inc. (“Transcat” or the “Company”) is a leading provider of accredited calibration and laboratory instrument services and a value-added distributor of professional grade test, measurement and control instrumentation. The Company is focused on providing services and products to highly regulated industries, particularly the life science industry, which includes pharmaceutical, biotechnology, medical device and other FDA-regulated businesses. Additional industries served include industrial manufacturing; energy and utilities, including oil and gas; chemical manufacturing; FAA-regulated businesses, including aerospace and defense and other industries that require accuracy in their processes, confirmation of the capabilities of their equipment, and have a high costfor which the risk of failure.failure is very costly.
Basis of Presentation:Transcat’s unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 25, 201730, 2019 (“fiscal year 2017”2019”) contained in the Company’s 20172019 Annual Report on Form 10-K filed with the SEC.
Revenue Recognition:Distribution sales are recorded when an order’s title and risk of loss transfers to the customer. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. The majority of the Company’s revenue generating activities has a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue over time. Revenue is measured as the amount of consideration the Company expects to receive in equal amounts at fixed intervals.exchange for product shipped or services performed. Sales taxes and other taxes billed and collected from customers are excluded from revenue. The Company generally invoices its customers for freight, shipping, and handling charges. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data.
Revenue recognized from prior period performance obligations for the third quarter of the fiscal year ending March 28, 2020 (“fiscal year 2020”) was immaterial. As of December 28, 2019, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606 (defined below), the Company applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of December 28, 2019 and March 30, 2019 were immaterial. Payment terms are generally 30 to 45 days. See Note 4 for disaggregated revenue information.
In 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which established principles to provide specific guidance on how entities should recognizereport useful information to financial statement users about the nature, timing and uncertainty of revenue derived from contracts with customers. ASU No. 2014-09 along with various related amendments comprise Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”) and provide guidance that is applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Transcat is required to adopt ASU 2014-09 inadopted the new standard for its fiscal year ending March 30, 2019, (“fiscal year 2019”). This new standard supercedes previous guidancewhich began April 1, 2018 using the modified retrospective approach to each prior reporting period presented. Based on revenue recognition and requiresour analysis, the use of more estimates and judgments than the present standards. It also requires additional disclosures. We are continuing to evaluate certain contracts to determine their treatment under ASU 2014—09. The Company does not expectconcluded that the adoption of this ASU tothe amended guidance did not have a material impact on its net revenue recognition. The cumulative effect adjustment upon adoption of the Consolidated Financial Statements.ASU in the first quarter of fiscal year 2019 was immaterial.
Fair Value of Financial Instruments:Transcat has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels. 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. Debt approximates fair value as the interest rates approximate current market rates. At December 23, 201728, 2019 and March 25, 2017,30, 2019, investment assets totaled $0.8$0.5 million and $0.7 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 expense related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period of each award. In 2016, FASB issued ASU 2016-09 to simplify certain aspects of the accounting for share-based payment transactions to employees. The Company elected to early adopt this ASU in the fourth quarter of fiscal year 2017. Upon adoption, excessExcess tax benefits for share-based award activity are reflected in the statementConsolidated Statements of incomeIncome as a component of the provision for income taxes. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costsexpenses for such awards. The Company did not capitalize any stock-based compensation costsexpenses as part of an asset. The Company estimates forfeiture rates based on its historical experience. During the first nine months of the fiscal year ending March 31, 2018 (“fiscal year 2018”)2020 and fiscal year 2017,2019, the Company recorded non-cash stock-based compensation expense of $1.1$0.6 million and $0.3$0.8 million, respectively, in the Consolidated Statements of Income.
Foreign Currency Translation and Transactions:The accounts of Transcat Canada Inc., a wholly-owned subsidiary of the Company, are maintained in the local currency (Canadian dollars) and have been translated to U.S. dollars. Accordingly, the amounts representing assets and liabilities have been translated at the period-end rates of exchange and related revenue and expense accounts have been translated at an average rate of exchange during the period. Gains and losses arising from translation of Transcat Canada Inc.’s financial statements into U.S. dollars are recorded directly to the accumulated other comprehensive income or loss component of shareholders’ equity.
Transcat records foreign currency gains and losses on its Canadian business transactions. The net foreign currency loss was less than $0.1 million during the first nine months of each of fiscal years 20182020 and 2017.2019. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its earnings will be adversely affected by changes in currency exchange rates. The Company does not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a loss of $0.1 million during each of the first nine months of fiscal year 2018years 2020 and a gain of $0.1 million during the first nine months of fiscal year 2017,2019, was recognized as a component of other expense in the Consolidated Statements of Income. The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated in Canadian dollars being hedged. On December 23, 2017,28, 2019, the Company had a foreign exchange contract, which matured in January 2018,2020, outstanding in the notional amount of $5.4$3.8 million. The foreign exchange contract was renewed in January 20182020 and continues to be in place. The Company does not use hedging arrangements for speculative purposes.
Earnings Per Share:Basic earnings per share of common stock are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of stock options and unvested restricted stock units using the treasury stock method in periods in which they have a dilutive effect. In computing the per share effect of assumed conversion, funds which would have been received from the exercise of options and unvested restricted stock units and the related tax benefits are considered to have been used to purchase shares of common stock at the average market prices during the period, and the resulting net additional shares of common stock are included in the calculation of average shares of common stock outstanding.
For the third quarter of fiscal year 20182020, the net additional common stock equivalents had a $0.01no effect on the calculation of diluted earnings per share. For the third quarter of fiscal year 2017, the net additional common stock equivalents had no effect on the calculation of dilutive earnings per share. For each of the first nine months of fiscal year 2018 and fiscal year 2017,2019, the net additional common stock equivalents had a $0.01($0.01) effect on the calculation of diluted earnings per share. For the first nine months of fiscal year 2020, the net additional common stock equivalents had a ($0.01) effect on the calculation of diluted earnings per share. For the first nine months of fiscal year 2019, the net additional common stock equivalents had a ($0.02) effect on the calculation of diluted earnings per share. The average shares outstanding used to compute basic and diluted earnings per share are as follows:
| Third Quarter Ended | Nine Months Ended | Third Quarter Ended | Nine Months Ended | |||||||||||||
| December 23, | December 24, | December 23, | December 24, | December 28, |
| December 29, | December 28, | December 29, | ||||||||
| 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||
| Average Shares Outstanding – Basic | 7,142 | 7,010 | 7,115 | 6,984 | 7,367 | 7,203 | 7,316 | 7,192 | ||||||||
| Effect of Dilutive Common Stock Equivalents | 177 | 194 | 158 | 177 | 190 | 315 | 154 | 308 | ||||||||
| Average Shares Outstanding – Diluted | 7,319 | 7,204 | 7,273 | 7,161 | 7,557 | 7,518 | 7,470 | 7,500 | ||||||||
| Anti-dilutive Common Stock Equivalents | - | - | - | - | 35 | 20 | 35 | 20 | ||||||||
Recently Issued Accounting Pronouncements:
In May 2017,February 2016, the FASB issued ASU 2017-09, ScopeNo. 2016-02, Leases (ASC Topic 842), which requires lessees to recognize substantially all leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right to use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of Modification Accounting, Compensation—Stock Compensation (Topic 718). Thisexpense recognition in the income statement.
In July 2018, FASB issued ASU 2018-11, Leases (ASC Topic 842), which provides clarityentities with an additional transition method to adopt the new leases standard. Under this method, an entity initially applies the new leases standard at the adoption date and reduces both diversity in practice and cost and complexity when applying the guidance in Topic 718 torecognizes a changecumulative-effect adjustment to the terms or conditionsopening balance of a share-based payment award. This ASU is effective for annual reporting periods beginning after December 15, 2017 and should be applied prospectively. Early adoptionretained earnings in the period of this ASU is permitted. adoption. Consequently, the prior comparative period's financials will remain the same as those previously presented.
The Company doesadopted the new leasing standard on March 31, 2019. The Company adopted the package of practical expedients permitted under the transition guidance which allowed us to carry forward the historical lease classification. Upon adoption, the Company used hindsight in determining lease terms. The most significant impact of adoption was adding ROU lease assets and lease liabilities on the Consolidated Balance Sheets by the present value of the Company’s leasing obligations, which are primarily related to facility and vehicle leases. The present value of the remaining lease payments is recognized as lease liabilities on the Consolidated Balance Sheets with corresponding ROU assets. The value of the assets and liabilities added to the Consolidated Balance Sheets was approximately $8 million each. The ROU assets are shown separately on the face of the Consolidated Balance Sheets. $1.7 million of the lease liabilities was included in Accrued Compensation and Other Liabilities on the Consolidated Balance Sheets with the remainder included in Lease Liabilities. Adopting the new standard did not expect adoption of this ASU to have a material impact on itsour Consolidated Financial Statements.Statement of Income or Consolidated Statement of Cash Flows.
NOTE 2 – LONG-TERM DEBT
Description:On October 30, 2017, the Company entered into an Amended and Restated Credit Agreement (the “2017“Credit Agreement”), which amended and restated our prior credit facility agreement. The 2017Credit Agreement extended the term of the Company’s $30.0 million revolving credit facility (the “Revolving Credit Facility”) to October 29, 2021. As of December 23, 2017,28, 2019, $30.0 million was available under the Revolving Credit Facility, of which $11.6$6.6 million was outstanding and included in long-term debt on the Consolidated Balance Sheet.Sheets.
On December 10, 2018, the Company entered into an Amended and Restated Credit Agreement Amendment 1 (the “2018 Agreement”). The 20172018 Agreement also increasedhas a term loan (the “2018 Term Loan”) in the amount of the Company’s outstanding term loan to $15.0 million (the “2017 Term Loan”), replacingwhich replaced the previous term loan.loan which had an outstanding balance of $12.5 million as of December 10, 2018. As of December 23, 2017, $14.628, 2019, $13.1 million was outstanding on the 20172018 Term Loan, of which $2.1$2.0 million was included in current liabilities on the Consolidated Balance SheetSheets with the remainder included in long-term debt. The 20172018 Term Loan requires principaltotal repayments (principal plus interest) of $0.2 million per month plus interest through September 2022 with a $4.3 million repayment required on October 29, 2022. December 2025.
Under the 2017Credit Agreement, borrowings that may be used for business acquisitions are limited to $20.0 million per fiscal year. During the first nine months of fiscal year 2018, no borrowings were2020, $1.3 million was used for business acquisitions.
Table of Contentsacquisitions, including holdback payments.
The allowable leverage ratio under the 2017Credit Agreement remains atis a maximum multiple of 3.0 of total debt outstanding compared to earnings before income taxes, depreciation and amortization, and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. The excess funds of the 2017 Term Loan over the previous term loan were used to repay amounts outstanding under the Revolving Credit Facility.
Previously, on March 31, 2016, the Company entered into Amendment 3 (“Amendment 3”) to the prior credit agreement. Under Amendment 3, borrowings that could be used for business acquisitions were limited to $15.0 million in fiscal years 2018 and 2019. Amendment 3 also provided the Company with a $10.0 million term loan. The term loan required principal repayments of $0.1 million per month plus interest. Total annual repayment amounts of $1.4 million were required in fiscal years 2017 through 2021 with a $3.0 million repayment required in fiscal year 2022. Amendment 3 also increased the allowable leverage ratio to a maximum of 3.0 from 2.75. As described above,quarters, as defined in the third quarter of fiscal year 2018, we entered into the 2017 Agreement that amended and restated the prior credit agreement, including Amendment 3.Credit Agreement.
Interest and Other Costs:Interest on outstanding borrowings ofunder the Revolving Credit Facility and term loan accrue,accrues, at Transcat’s election, at either the variable one-month London Interbank Offered Rate (“LIBOR”) or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case, plus a margin. Interest on outstanding borrowings under the 2018 Term Loan accrues at a fixed rate of 4.15% over the term of the loan. Commitment fees accrue based on the average daily amount of unused credit available on the Revolving Credit Facility. Interest rate margins and commitment fees are determined on a quarterly basis based upon the Company’s calculated leverage ratio, as defined in the 2017Credit Agreement. The one-month LIBOR atas of December 23, 201728, 2019 was 1.6%1.8%. The Company’s interest rate for the Revolving Credit Facility for the first nine months of fiscal year 20182020 ranged from 3.2%3.0% to 3.4%3.7%.
Covenants:The 2017Credit Agreement has certain covenants with which the Company has tomust comply, including a fixed charge coverage ratio covenant and a leverage ratio covenant. The Company was in compliance with all loan covenants and requirements during the third quarter of fiscal year 2018.2020. Our leverage ratio, as defined in the Credit Agreement, was 1.07 at December 28, 2019, compared with 1.12 at the end of fiscal year 2019.
Other Terms:The Company has pledged all of its U.S. tangible and intangible personal property, the equity interests of its U.S.-based subsidiaries, and a majority of the common stock of Transcat Canada Inc. as collateral security for the loans made under the Revolving Credit Facility.
NOTE 3 – STOCK-BASED COMPENSATION
The Transcat, Inc. 2003 Incentive Plan, as Amended and RestatedCompany has a share-based incentive plan (the “2003 Plan”), that provides for, among other awards, grants of restricted stock units and stock options to directors, officers and key employees at the fair market value at the date of grant. At December 23, 2017, 1.128, 2019, 1.0 million shares of our common stock were available for future grant under the 2003 Plan.
The Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete tax benefits related to share-based compensation activity during the first nine months of fiscal year 2020 and 2019 were $0.9 million and $0.1 million, respectively.
Restricted Stock Units:The Company generally grants time-based and performance-based restricted stock units as a primary component of executive and key employee compensation. Expense for restricted stock unit grants is recognized on a straight-line basis for the service period of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock unit grants is the quoted market price for the Company’s common stock on the date of grant. These restricted stock units generallyare either time vested or 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.
Beginning in fiscal year 2020, the annual performance-based award for the Company’s non-employee directors was replaced with an annual grant of restricted stock units valued at $50,000 that vest after one year. The restricted stock units grantedunit grants to non-employee directors were made in June 2017 were time vested. September 2019.
Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the unitnumber of units that coincides with the actual outcome of the performance conditions. On an interim basis, the Company records compensation cost based on the estimated level of achievement of the performance conditions. The expense relating to the time vested restricted stock units is recognized on a straight-line basis over the requisite service period for the entire award.
The Company achieved 50%131% of the target level for the performance-based restricted stock units granted in the fiscal year ended March 28, 201525, 2017 and as a result, issued 25108 shares of common stock to executive officers and certain key employees during the first quarter of fiscal year 2018.2020. The following table summarizes the non-vested performance-based restricted stock units outstanding as of December 23, 2017:28, 2019:
| Total | Grant Date | Estimated | |||||||
| Number | Fair | Level of | |||||||
| Date | Measurement | of Units | Value | Achievement at | |||||
| Granted | Period | Granted | Per Unit | December 23, 2017 | |||||
| April 2015 | April 2015 - March 2018 | 63 | $ | 9.59 | 50% of target level | ||||
| April 2016 | April 2016 - March 2019 | 84 | $ | 10.13 | 115% of target level | ||||
| April 2017 | April 2017 – March 2020 | 77 | $ | 12.90 | 100% of target level | ||||
| June 2017 | July 2017 – June 2020 | 3 | $ | 12.00 | Time Vested | ||||
| Total | Grant Date | Estimated | |||||||
| Number | Fair | Level of | |||||||
| Date | Measurement | of Units | Value | Achievement at | |||||
| Granted | Period | Outstanding | Per Unit | December 28, 2019 | |||||
| April 2017 | April 2017 – March 2020 | 62 | $ | 12.90 | 88% of target level | ||||
| April 2018 | April 2018 – March 2021 | 1 | $ | 15.65 | Time Vested | ||||
| May 2018 | April 2018 – March 2021 | 23 | $ | 15.30 | 90% of target level | ||||
| May 2018 | April 2018 – March 2021 | 23 | $ | 15.30 | Time Vested | ||||
| October 2018 | October 2018 – September 2027 | 10 | $ | 20.81 | Time Vested | ||||
| March 2019 | April 2019 – March 2022 | 24 | $ | 23.50 | 100% of target level | ||||
| March 2019 | April 2019 – March 2022 | 24 | $ | 23.50 | Time Vested | ||||
| August 2019 | August 2019 – August 2022 | 1 | $ | 23.00 | Time Vested | ||||
| September 2019 | September 2019 – September 2020 | 18 | $ | 22.76 | Time Vested | ||||
Total expense relating to performance-based restricted stock units, based on grant date fair value and the achievement criteria, was $0.6 million and $0.2$0.8 million, respectively induring the first nine months of fiscal years 20182020 and 2017. Total expense relating to time vested restricted stock units was less than $0.1 million for the first nine months of fiscal year 2018.2019, respectively. As of December 23, 2017,28, 2019, unearned compensation to be recognized over the grants’ respective service periods totaled $1.2$1.6 million.
Stock Options:The Company grants stock options to employees and directors equal to the quoted market price of the Company’s stock at the date of the grant. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Expense for stock options is recognized on a straight-line basis over the requisite service period for each award. Options vest either immediately or over a period of up to fourfive years using a straight-line basis and expire either five years or 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 first nine months of fiscal year 2018:2020:
| Weighted | Weighted | |||||||||||
| Average | Average | |||||||||||
| Number | Exercise | Remaining | Aggregate | |||||||||
| Of | Price Per | Contractual | Intrinsic | |||||||||
| Shares | Share | Term (in years) | Value | |||||||||
| Outstanding as of March 25, 2017 | 241 | $ | 7.48 | |||||||||
| Granted | 165 | 12.00 | ||||||||||
| Exercised | (89 | ) | 7.29 | |||||||||
| Forfeited | (15 | ) | 7.36 | |||||||||
| Redeemed | (20 | ) | 7.72 | |||||||||
| Outstanding as of December 23, 2017 | 282 | $ | 10.17 | 5 | $ | 1,167 | ||||||
| Exercisable as of December 23, 2017 | 282 | $ | 10.17 | 5 | $ | 1,167 | ||||||
| Weighted | Weighted | ||||||||||
| Average | Average | ||||||||||
| Number | Exercise | Remaining | Aggregate | ||||||||
| Of | Price Per | Contractual | Intrinsic | ||||||||
| Shares | Share | Term (in years) | Value | ||||||||
| Outstanding as of March 30, 2019 | 291 | $ | 11.16 | ||||||||
| Granted | 15 | 25.06 | |||||||||
| Exercised | (154 | ) | 9.15 | ||||||||
| Outstanding as of December 28, 2019 | 152 | $ | 14.57 | 4 | $ | 2,568 | |||||
| Exercisable as of December 28, 2019 | 117 | $ | 12.16 | 3 | $ | 2,302 | |||||
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of fiscal year 20182020 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all holders exercised their options on December 23, 2017.28, 2019. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.
Total expense related to stock options was $0.4 million andless than $0.1 million during each of the first nine months of fiscal years 2018 and 2017, respectively.year 2020. There was no expense related to stock options during the first nine months of fiscal year 2019. Total unrecognized compensation cost related to non-vested stock options as of December 23, 2017.28, 2019 was $0.2 million, which is expected to be recognized over a period of five years. The aggregate intrinsic value of stock options exercised in the first nine months of fiscal year 20182020 was $0.6$3.5 million. Cash received from the exercise of options in the first nine months of fiscal year 20182020 was $0.6$1.4 million. There were no stock options exercised during the first nine months of fiscal year 2019.
NOTE 4 – SEGMENT INFORMATION
Transcat has two reportable segments: Distribution and Service. The Company has no inter-segment sales. The following table presents segment information for the third quarter and first nine months of fiscal years 20182020 and 2017:2019:
| Third Quarter Ended | Nine Months Ended | Third Quarter Ended | Nine Months Ended | |||||||||||||||||||||
| December 23, | December 24, | December 23, | December 24, | December 28, | December 29, | December 28, | December 29, | |||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Service | $ | 18,769 | $ | 17,455 | $ | 55,490 | $ | 51,577 | $ | 22,087 | $ | 20,492 | $ | 67,987 | $ | 59,719 | ||||||||
| Distribution | 21,714 | 20,358 | 57,199 | 53,868 | 21,092 | 20,376 | 59,350 | 56,686 | ||||||||||||||||
| Total | 40,483 | 37,813 | 112,689 | 105,445 | 43,179 | 40,868 | 127,337 | 116,405 | ||||||||||||||||
| Gross Profit: | ||||||||||||||||||||||||
| Service | 4,699 | 4,306 | 13,655 | 13,175 | 4,866 | 4,488 | 16,250 | 14,214 | ||||||||||||||||
| Distribution | 5,002 | 4,609 | 12,891 | 12,013 | 5,062 | 5,060 | 14,175 | 13,586 | ||||||||||||||||
| Total | 9,701 | 8,915 | 26,546 | 25,188 | 9,928 | 9,548 | 30,425 | 27,800 | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||
| Service (1) | 3,636 | 3,365 | 10,917 | 10,399 | 4,378 | 3,910 | 13,187 | 11,443 | ||||||||||||||||
| Distribution (1) | 3,411 | 3,197 | 10,106 | 9,420 | 3,459 | 3,244 | 10,130 | 9,762 | ||||||||||||||||
| Total | 7,047 | 6,562 | 21,023 | 19,819 | 7,837 | 7,154 | 23,317 | 21,205 | ||||||||||||||||
| Operating Income: | ||||||||||||||||||||||||
| Service | 1,063 | 941 | 2,738 | 2,776 | 488 | 578 | 3,063 | 2,771 | ||||||||||||||||
| Distribution | 1,591 | 1,412 | 2,785 | 2,593 | 1,603 | 1,816 | 4,045 | 3,824 | ||||||||||||||||
| Total | 2,654 | 2,353 | 5,523 | 5,369 | 2,091 | 2,394 | 7,108 | 6,595 | ||||||||||||||||
| Unallocated Amounts: | ||||||||||||||||||||||||
| Interest and Other Expense, net | 311 | 188 | 854 | 547 | 194 | 295 | 776 | 715 | ||||||||||||||||
| Provision for Income Taxes | 512 | 895 | 1,201 | 1,729 | 420 | 530 | 758 | 1,395 | ||||||||||||||||
| Total | 823 | 1,083 | 2,055 | 2,276 | 614 | 825 | 1,534 | 2,110 | ||||||||||||||||
| Net Income | $ | 1,831 | $ | 1,270 | $ | 3,468 | $ | 3,093 | $ | 1,477 | $ | 1,569 | $ | 5,574 | $ | 4,485 | ||||||||
| (1) | Operating expense allocations between segments were based on actual amounts, a percentage of revenues, headcount, and management’sestimates. |
NOTE 5 – BUSINESS ACQUISITIONS
DuringEffective July 19, 2019, Transcat acquired Infinite Integral Solutions Inc. (“IIS”). IIS, headquartered in Mississauga, Ontario, Canada, is the owner and developer of the CalTree™ suite of software solutions for the automation of calibration procedures and datasheet generation. Total consideration for the shares of IIS was 1.4 million Canadian dollars, subject in part to the achievement of certain milestones. 0.6 million Canadian dollars was paid during the second quarter of fiscal year 2017,2020 and is included as a business acquisition in the Consolidated Statement of Cash Flows. In January 2020, an additional 0.4 million Canadian dollars was paid as provided for in the stock purchase agreement. All of the purchase price has been preliminarily allocated to software and property and equipment. Due to the immaterial amount of pre-acquisition revenue and expenses, no pro forma table of results has been presented.
Effective April 1, 2019, Transcat acquired substantially all of the assets of Excalibur Engineering, Inc.Gauge Repair Service (“Excalibur”GRS”), a California-based provider of calibration services, new and used test equipment sales, and equipment rentals.
services. This transaction aligned withleveraged the Company’s acquisition strategy of targeting businesses that expand the Company’s geographic reach and leverage its infrastructure while also increasing the depth and breadth of the Company’s service capabilities. In addition, Excalibur provided an established equipment rental and used equipment business, which are complimentaryDue to the immaterial amount of the purchase price of the GRS assets, it has been included in the purchases of property and equipment in the Consolidated Statement of Cash Flows.
Effective August 31, 2018, Transcat acquired substantially all of the assets of Angel’s Instrumentation, Inc. (“Angel’s”), a Virginia-based provider of calibration services. This transaction expanded the Company’s traditional Distribution segment sales.geographic reach while also increasing the depth and breadth of the Company’s service capabilities.
The Company applies the acquisition method of accounting for business acquisitions. Under the acquisition method, the purchase price of an acquisition is assigned to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The Company uses a valuation hierarchy, as further described under Fair Value of Financial Instruments in Note 1 above, and typically utilizes independent third-party valuation specialists to determine the fair values used in this allocation. Purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. All of the goodwill and intangible assets relating to the Angel’s acquisition have been allocated to the Service segment. Intangible assets related to the ExcaliburAngel’s acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to 10 years and are deductible for tax purposes. Amortization of goodwill related to the Angel’s acquisition is deductible for tax purposes only.
The total purchase price paid for the assets of ExcaliburAngel’s was approximately $7.6$4.7 million, net of less than $0.1 million cash acquired. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Angel’s assets and liabilities acquired during the period presented:
| FY 2017 | FY 2019 | ||||||||||
| Goodwill | Goodwill | $ | 3,455 | Goodwill | $ | 1,902 | |||||
| Intangible Assets – Customer Base | 1,990 | ||||||||||
| Intangible Assets – Customer Base & Contracts | Intangible Assets – Customer Base & Contracts | 1,470 | |||||||||
| Intangible Assets – Covenant Not to Compete | Intangible Assets – Covenant Not to Compete | 100 | Intangible Assets – Covenant Not to Compete | 130 | |||||||
| 5,545 | 3,502 | ||||||||||
| Plus: | Current Assets | 973 | Current Assets | 786 | |||||||
| Non-Current Assets | 1,652 | Non-Current Assets | 473 | ||||||||
| Less: | Current Liabilities | (606 | ) | Current Liabilities | (24 | ) | |||||
| Total Purchase Price | Total Purchase Price | $ | 7,564 | Total Purchase Price | $ | 4,737 | |||||
Certain of the Company’s acquisition agreements, have includedincluding Angel’s, include provisions for contingent consideration and other holdback amounts. The Company accrues for contingent consideration and holdback provisions based on their estimated fair value atthe date of acquisition. As of December 23, 2017 and March 25, 2017,28, 2019, there were no unpaid contingent consideration or otherholdback amounts reflected in the Consolidated Balance Sheets. $0.9 million of holdback amounts were outstanding.paid during the first nine months of fiscal year 2020.
The results of the acquired businesses are included in Transcat’s consolidated operating results as of the dates the businesses were acquired. The following unaudited pro forma information presents the Company’s results of operations as if the acquisition of ExcaliburAngel’s had occurred at the beginning of fiscal year 2017.2019. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transaction had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods.
| (Unaudited) | (Unaudited) | |||||
| Nine Months | Nine Months | |||||
| Ended | Ended | |||||
| December 24, | December | |||||
| 2016 | 29, 2018 | |||||
| Total Revenue | $ | 105,595 | $ | 118,546 | ||
| Net Income | $ | 3,013 | $ | 5,057 | ||
| Basic Earnings Per Share | $ | 0.43 | $ | 0.70 | ||
| Diluted Earnings Per Share | $ | 0.42 | $ | 0.67 | ||
Effective June 12, 2018, Transcat acquired substantially all of the assets of NBS Calibration, Inc. (“NBS”), an Arizona-based provider of calibration services. This transaction leveraged the Company’s infrastructure while also increasing the depth and breadth of the Company’s service capabilities. Due to the immaterial amount of the purchase price of the NBS assets, it has been included in the purchases of property and equipment in the Consolidated Statement of Cash Flows.
During each of the first nine months of fiscal years 2018year 2020 and 2017,fiscal year 2019, acquisition costs of less than $0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.
NOTE 6 – INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1), the tax reform bill (the "Act"), was signed into law. The Act includes numerous changes to existing tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%. Since the Company is a fiscal year taxpayer, the lower corporate income tax rate will be phased in and the U.S. federal tax rate recorded is a blended rate of the old rates and the new rates for fiscal year 2018. The result was a $0.1 million reduction of the Company’s provision for income taxes in the third quarter of fiscal year 2018.
The Company has concluded that the Act will cause the Company’s U.S. deferred tax assets and liabilities to be revalued. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their reported basis in the financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are revalued and any change is adjusted through the provision for income tax expense in the reporting period of the enactment. The Act required the Company to do such a revaluation and record a reduction in its net deferred tax liability of approximately $0.2 million, which reduced the provision for income taxes during the third quarter of fiscal year 2018.
In addition, the Act provides for a one-time “deemed repatriation” of accumulated foreign earnings. The Company has estimated the additional provision for income tax expense on the repatriation to be less than $0.1 million. The Company will pay any amounts owed over eight years.
The reduction in the Company’s provision for income taxes due to the Act in the third quarter of fiscal year 2018 was approximately $0.3 million or $0.04 per share.
The impact of the Act may differ from this estimate, possibly materially, due to, among other things, changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Act.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements.This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, estimates, beliefs, assumptions and predictions of future events and are identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “projects,” “intends,” “could,” “plans,” “may” and other similar words. Forward-looking statements are not statements of historical fact and thus are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or those expressed in such forward-looking statements. You should evaluate forward-looking statements in light of important risk factors and uncertainties that may affect our operating and financial results and our ability to achieve our financial objectives. These factors include, but are not limited to, the highly competitive nature of the industries in which we compete and in the nature of our two business segments, cybersecurity risks, the risk of significant disruptions in our information technology systems, our inability to recruit, train and retain quality employees, skilled technicians and senior management, fluctuations in our operating results, competition in the rental market, the volatility of our stock price, our ability to adapt our technology, reliance on oneour enterprise resource planning system, technology updates, risks related to our acquisition strategy and the integration of the businesses we acquire, volatility in our customers’ industries, changes in vendor rebate programs, our vendors’ abilities to supply a significant amount ofprovide desired inventory, purchases, the risks related to current and future indebtedness, the relatively low trading volume of our common stock, risks related to our acquisition strategy and the integration of the businesses we acquire, the impact of economic conditions, risks related to the accuracy of the estimates and assumptions we use to revalue our U.S. deferred tax assets and liabilities in accordance with the Act, volatility in the oil and gas industry, the highly competitive nature of our two business segments, foreign currency rate fluctuations and cybersecurity risks.the impact of general economic conditions on our business. These risk factors and uncertainties are more fully described by us under the heading “Risk Factors” in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 25, 2017.30, 2019. You should not place undue reliance on our forward-looking statements.statements, which speak only as of the date they are made. Except as required by law, we undertake no obligation to update or publicly announce any revisions to any of the forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.
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 25, 2017.30, 2019.
RESULTS OF OPERATIONS
We achieved recordDuring the third quarter of fiscal year 2020, we recorded consolidated revenue of $40.5$43.2 million. This represented an increase of $2.7$2.3 million or 7.1%5.7% versus the third quarter of fiscal year 2017.2019. Revenue growth was led byprimarily due to our Service segment, which increased 7.5%7.8% or $1.6 million to $18.8$22.1 million. Sales growth in ourOur Distribution segment was 6.7%showed a sales increase of 3.5% to $21.7 million, a record quarter for that segment. The growth achieved in both segments was all organic.$21.1 million.
Gross profit in the third quarter of fiscal year 2020 was $9.7$9.9 million, an increase of $0.8$0.4 million or 8.8%4.0% versus the third quarter of fiscal year 2017.2019. Gross margin increaseddecreased by 40 basis points due to improved productivitypoints. Gross profit and gross margin were negatively impacted by a slow December 2019 caused by the timing of the holidays and slower customers activity that resulted in lower sales activity for both segments and the under absorption of fixed Service segment costs including underutilized Service capacity.
Total operating expenses were $7.8 million in the Service segment and changes in the Distribution segment sales mix, with more rental revenues and opportunistic strategic pricing being applied to our core industrial customer base.
Operating expenses were $7.0 million,third quarter of fiscal year 2020, an increase of $0.5$0.7 million or 7.4% as9.5% compared to the third quarter of fiscal year 2017. General and administrative expenses increased2019, as wethe Company continued to invest in our technology infrastructure and operational excellence initiatives. This was partially offset by a decrease in selling, marketing and warehouse expenses which was a result of reduced acquired customer amortization expense.its operating infrastructure. Operating expenses as a percentage of total revenue were 17.4%18.2%, the same asup from 17.5% in the third quarter of fiscal year 2017.2019, an increase of 70 basis points.
Net income was $1.8$1.5 million for the third quarter of fiscal year 2018 for the reasons stated above, up2020, down from $1.3$1.6 million in the third quarter of fiscal year 2017. The Company also benefitted from reduced provision for income taxes of $0.3 million2019 primarily due to the Act.increased operating expenses, somewhat offset by a lower income tax rate in fiscal year 2019.
The following table presents, for the third quarter and first nine months of fiscal years 20182020 and 2017,2019, the components of our Consolidated Statements of Income:
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||
| Third Quarter Ended | Nine Months Ended | Third Quarter Ended | Nine Months Ended | |||||||||||||||||
| December 23, | December 24, | December 23, | December 24, | December 28, | December 29, | December 28, | December 29, | |||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||
| As a Percentage of Total Revenue: | ||||||||||||||||||||
| Service Revenue | 46.4% | 46.2% | 49.2% | 48.9% | 51.2 | % | 50.1 | % | 53.4 | % | 51.3 | % | ||||||||
| Distribution Sales | 53.6% | 53.8% | 50.8% | 51.1% | 48.8 | % | 49.9 | % | 46.6 | % | 48.7 | % | ||||||||
| Total Revenue | 100.0% | 100.0% | 100.0% | 100.0% | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Gross Profit Percentage: | ||||||||||||||||||||
| Service Gross Profit | 25.0% | 24.7% | 24.6% | 25.5% | 22.0 | % | 21.9 | % | 23.9 | % | 23.8 | % | ||||||||
| Distribution Gross Profit | 23.0% | 22.6% | 22.5% | 22.3% | 24.0 | % | 24.8 | % | 23.9 | % | 24.0 | % | ||||||||
| Total Gross Profit | 24.0% | 23.6% | 23.6% | 23.9% | 23.0 | % | 23.4 | % | 23.9 | % | 23.9 | % | ||||||||
| Selling, Marketing and Warehouse Expenses | 10.2% | 11.0% | 10.9% | 12.0% | 10.3 | % | 10.3 | % | 10.3 | % | 10.5 | % | ||||||||
| General and Administrative Expenses | 7.2% | 6.4% | 7.8% | 6.8% | 7.9 | % | 7.2 | % | 8.0 | % | 7.7 | % | ||||||||
| Total Operating Expenses | 17.4% | 17.4% | 18.7% | 18.8% | 18.2 | % | 17.5 | % | 18.3 | % | 18.2 | % | ||||||||
| Operating Income | 6.6% | 6.2% | 4.9% | 5.1% | 4.8 | % | 5.9 | % | 5.6 | % | 5.7 | % | ||||||||
| Interest and Other Expense, net | 0.8% | 0.5% | 0.8% | 0.5% | 0.4 | % | 0.8 | % | 0.6 | % | 0.6 | % | ||||||||
| Income Before Income Taxes | 5.8% | 5.7% | 4.1% | 4.6% | 4.4 | % | 5.1 | % | 5.0 | % | 5.1 | % | ||||||||
| Provision for Income Taxes | 1.3% | 2.3% | 1.0% | 1.6% | 1.0 | % | 1.3 | % | 0.6 | % | 1.2 | % | ||||||||
| Net Income | 4.5% | 3.4% | 3.1% | 2.9% | 3.4 | % | 3.8 | % | 4.4 | % | 3.9 | % | ||||||||
THIRD QUARTER ENDED DECEMBER 23, 201728, 2019 COMPARED TO THIRD QUARTER ENDED DECEMBER 24, 201629, 2018(dollars in thousands):
Revenue:
| Third Quarter Ended | Change | Third Quarter Ended | Change | |||||||||||||||||||||
| December 23, | December 24, | December 28, | December 29, | |||||||||||||||||||||
| 2017 | 2016 | $ | % | 2019 | 2018 | $ | % | |||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Service | $ | 18,769 | $ | 17,455 | $ | 1,314 | 7.5% | $ | 22,087 | $ | 20,492 | $ | 1,595 | 7.8 | % | |||||||||
| Distribution | 21,714 | 20,358 | 1,356 | 6.7% | 21,092 | 20,376 | 716 | 3.5 | % | |||||||||||||||
| Total | $ | 40,483 | $ | 37,813 | $ | 2,670 | 7.1% | $ | 43,179 | $ | 40,868 | $ | 2,311 | 5.7 | % | |||||||||
Total revenue was $40.5 million, an increase of $2.7increased $2.3 million, or 7.1%5.7%, in our fiscal year 20182020 third quarter compared to the prior year third quarter. This year-over-year revenue growth was purelyall organic.
Service revenue, which accounted for 46.4%51.2% and 46.2%50.1% of our total revenue in the third quarter of fiscal years 20182020 and 2017,2019, respectively, increased 7.5%7.8% from the third quarter of fiscal year 20172019 to the third quarter of fiscal year 2018. This year-over-year increase in Service2020. Higher revenue was comprisedthe result of new business from the highly-regulated life sciencesciences market, including higher revenue from client-based labs and growth in general industrial manufacturing customers, which includes the defenseother regulated sectors such as aerospace and aerospace market.defense.
Our fiscal years 20182020 and 20172019 quarterly Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows:
| FY 2018 | FY 2017 | ||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||
| Service Revenue Growth | 7.5% | 7.6% | 7.6% | 11.2% | 25.4% | 19.4% | 26.9% | ||||||||
| FY 2020 | FY 2019 | ||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||
| Service Revenue Growth | 7.8% | 18.1% | 15.9% | 10.8% | 9.2% | 9.1% | 4.6% | ||||||||
FiscalWithin any year, 2017 quarterlywhile we add new customers, we also have customers from the prior fiscal year whose service orders may not repeat for any number of factors. Among those factors are variations in the timing of periodic calibrations and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of Service segment orders can vary on a quarter-to-quarter basis, we believe trailing twelve-month information provides an indication of the progress of this segment. The following table presents the trailing twelve-month Service segment revenue for each quarter in fiscal years 2020 and 2019 as well as the trailing twelve-month revenue growth comparisons include organic and acquisition relatedas a comparison to that of the prior fiscal year period:
| FY 2020 | FY 2019 | ||||||||||||||||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||||||||
| Trailing Twelve-Month: | |||||||||||||||||||||||||||||
| Service Revenue | $ | 92,308 | $ �� | 90,713 | $ | 87,114 | $ | 84,041 | $ | 81,674 | $ | 79,951 | $ | 78,288 | |||||||||||||||
| Service Revenue Growth | 13.0 | % | 13.5 | % | 11.3 | % | 8.5 | % | 8.9 | % | 8.5 | % | 8.1 | % | |||||||||||||||
The growth whilein Service segment revenue during the first, second, and third quartersquarter of fiscal year 2018 include no acquisition related growth. Our goal is to deliver mid-to-high single digit2020 was all organic and was primarily the result of new business from the highly regulated life sciences market, including the ramp-up of new client-based lab contracts, and growth in U.S. general industrial manufacturing. The trailing twelve-month Service segment revenue growth eachfor the third quarter overof fiscal year 2019 includes the same quarter prior year.Angel’s Instrumentation, Inc. (“Angel’s”) acquisition in fiscal year 2019.
Our strategy has been to focus our investments in the core electrical, temperature, pressure, physical/dimensional and radio frequency/microwave calibration disciplines. We expect to subcontract approximately 13% to 15% of our Service revenue to third-party vendors for calibration beyond our chosen scope of capabilities. We continually evaluate our outsourcing needs and make capital investments, as deemed necessary, to add more in-house capabilities and reduce the need for third-party vendors. Capability expansion through business acquisitions is another way that we seek to reduce the need for outsourcing. The following table presents the source of our Service revenue and the percentage of Service revenue derived from each source for each quarter during fiscal years 20182020 and 2017:2019:
| FY 2018 | FY 2017 | ||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||
| Percent of Service Revenue: | |||||||||||||||
| In-House | 83.9% | 83.6% | 83.5% | 85.1% | 84.3% | 83.6% | 84.3% | ||||||||
| Outsourced | 14.4% | 14.7% | 14.7% | 13.0% | 13.9% | 14.6% | 13.8% | ||||||||
| Freight Billed to Customers | 1.7% | 1.7% | 1.8% | 1.9% | 1.8% | 1.8% | 1.9% | ||||||||
| 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | |||||||||
| FY 2020 | FY 2019 | |||||||||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
| Percent of Service Revenue: | ||||||||||||||||||||||
| In-House | 82.9 | % | 82.9 | % | 83.3 | % | 82.7 | % | 83.3 | % | 84.0 | % | 84.4 | % | ||||||||
| Outsourced | 15.6 | % | 15.6 | % | 15.1 | % | 15.8 | % | 15.1 | % | 14.4 | % | 14.0 | % | ||||||||
| Freight Billed to Customers | 1.5 | % | 1.5 | % | 1.6 | % | 1.5 | % | 1.6 | % | 1.6 | % | 1.6 | % | ||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Our Distribution sales accounted for 53.6%48.8% of our total revenue in the third quarter of fiscal year 20182020 and 53.8%49.9% of our total revenue in the third quarter of fiscal year 2017.2019. During the third quarter of fiscal year 2018,2020, Distribution sales growth reflected higher demand from industrial customers, especially those sold through our independent sales representative network,included rental revenue which increased rental business and web-based sales. Rental revenue was $1.0 million and $0.7 million in the third quarters of fiscal years 2018 and 2017, respectively.3.4% to $1.2 million.
Our fiscal years 20182020 and 20172019 Distribution sales growth (decline), in relation to prior fiscal year quarter comparisons, was as follows. The sales growth in fiscal year 2017 over fiscal year 2016 reflects the recovery of sales in the oil and gas market which were severely impacted by oil price drops and the ripple effects to that sector in fiscal year 2016.follows:
| FY 2018 | FY 2017 | |||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||
| Distribution Sales Growth (Decline) | 6.7% | 0.9% | 11.4% | 23.7% | 25.4% | 14.7% | (1.0%) | |||||||
| FY 2020 | FY 2019 | |||||||||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
| Distribution Sales Growth (Decline) | 3.5 | % | (3.8 | %) | 15.4 | % | (1.6 | %) | (6.2 | %) | 7.3 | % | (2.6 | %) | ||||||||
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 by the customer 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 at the end of the third quarter of fiscal year 20182020 were $3.9$3.7 million, a decreasean increase of $0.1 million from $4.0 million at the end of the third quarter of fiscal year 2017.2019. The following table presents our total pending product shipments and the percentage of total pending product shipments that were backorders at the end of each quarter of fiscal years 20182020 and 2017:2019:
| FY 2018 | FY 2017 | FY 2020 | FY 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||||||||||||||||||
| Total Pending Product Shipments | $ | 3,929 | $ | 3,940 | $ | 3,513 | $ | 3,662 | $ | 3,989 | $ | 3,530 | $ | 3,469 | $ | 3,743 | $ | 4,205 | $ | 4,115 | $ | 3,850 | $ | 3,658 | $ | 3,734 | $ | 3,486 | |||||||||||||||||||||||
| % of Pending Product Shipments that were Backorders | 71.4% | 74.2% | 69.6% | 73.5% | 66.1% | 74.9% | 69.8% | 77.6 | % | 71.7 | % | 77.2 | % | 74.8 | % | 71.6 | % | 66.7 | % | 70.2 | % | ||||||||||||||||||||||||||||||
Gross Profit:
| Third Quarter Ended | Change | Third Quarter Ended | Change | ||||||||||||||||||||
| December 23, | December 24 | December 28, | December 29, | ||||||||||||||||||||
| 2017 | 2016 | $ | % | 2019 | 2018 | $ | % | ||||||||||||||||
| Gross Profit: | |||||||||||||||||||||||
| Service | $ | 4,699 | $ | 4,306 | $ | 393 | 9.1% | $ | 4,866 | $ | 4,488 | $ | 378 | 8.4 | % | ||||||||
| Distribution | 5,002 | 4,609 | 393 | 8.5% | 5,062 | 5,060 | 2 | 0.0 | % | ||||||||||||||
| Total | $ | 9,701 | $ | 8,915 | $ | 786 | 8.8% | $ | 9,928 | $ | 9,548 | $ | 380 | 4.0 | % | ||||||||
Total gross profit for the third quarter of fiscal year 20182020 was $9.7$9.9 million, an increase of $0.8$0.4 million or 8.8%4.0% versus the third quarter of fiscal year 2017.2019. Total gross margin was 24.0%23.0% in the third quarter of fiscal year 2018, a 40 basis point increase versus2020, down from 23.4% in the third quarter of fiscal year 2017.2019, a decrease of 40 basis points. Gross margin was negatively impacted by the under absorption of fixed costs from a slow December 2019.
Service gross profit in the third quarter of fiscal year 20182020 increased $0.4 million, or 9.1%8.4%, from the third quarter of fiscal year 2017.2019. Service gross margin was 25.0%22.0% in the third quarter of fiscal year 2018, a 30 basis point increase2020 versus 21.9% in the third quarter of fiscal year 2017. This improved2019. Although Service segment gross margin was largely dueincreased 10 basis points, the small gross margin compared to productivity improvements, including the ramp-up productivityrevenue increase reflects the impact of a slow, holiday-impacted December 2019. While we experienced the under absorption of fixed costs from servicethe slow December 2019, we believe the incremental technicians hired earlier induring fiscal year 2018.2019 to support Service growth will help improve our productivity metrics going forward.
The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:
| FY 2018 | FY 2017 | |||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||
| Service Gross Margin | 25.0% | 23.7% | 25.1% | 30.0% | 24.7% | 24.4% | 27.5% | |||||||
| FY 2020 | FY 2019 | ||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||
| Service Gross Margin | 22.0% | 25.6% | 24.0% | 27.7% | 21.9% | 24.2% | 25.5% | ||||||||
Our Distribution gross margin includes net sales less the direct cost of inventory sold and the direct costs of equipment rental revenues, primarily depreciation expense for the fixed assets in our rental equipment pool, as well as the impact of rebates and cooperative advertising income we receive from vendors, freight billed to customers, freight expenses and direct shipping costs. In general, our Distribution gross margin can vary based upon the mix of products sold, price discounting, and the timing of periodic vendor rebates and cooperative advertising programs from suppliers.
The following table reflects the quarterly historical trend of our Distribution gross margin as a percent of Distribution sales:
| FY 2018 | FY 2017 | ||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||
| Total Distribution Gross Margin | 23.0% | 21.7% | 22.8% | 20.7% | 22.6% | 22.2% | 22.0% | ||||||||
| FY 2020 | FY 2019 | ||||||||||||||
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||
| Distribution Gross Margin | 24.0% | 24.3% | 23.4% | 23.9% | 24.8% | 22.8% | 24.2% | ||||||||
Distribution segment gross margin was 23.0%24.0% in the third quarter of fiscal year 2018, a 40 basis2020, an 80-basis point increasedecrease versus the third quarter of fiscal year 2017.2019. The increasedecrease in gross margin was driven by the salespricing and mix which offset a decreaseof products sold, including less higher-margin rentals than experienced in volume-based vendor rebates.recent quarters.
Operating Expenses:
| Third Quarter Ended | Change | Third Quarter Ended | Change | |||||||||||||||||||||
| December 23, | December 24, | December 28, | December 29, | |||||||||||||||||||||
| 2017 | 2016 | $ | % | 2019 | 2018 | $ | % | |||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||
| Selling, Marketing and Warehouse | $ | 4,150 | $ | 4,159 | $ | (9 | ) | (0.2% | ) | $ | 4,463 | $ | 4,215 | $ | 248 | 5.9 | % | |||||||
| General and | ||||||||||||||||||||||||
| Administrative | 2,897 | 2,403 | 494 | 20.6% | ||||||||||||||||||||
| General and Administrative | 3,374 | 2,939 | 435 | 14.8 | % | |||||||||||||||||||
| Total | $ | 7,047 | $ | 6,562 | $ | 485 | 7.4% | $ | 7,837 | $ | 7,154 | $ | 683 | 9.5 | % | |||||||||
Total operating expenses were $7.8 million in the third quarter of fiscal year 2020 versus $7.2 million during the third quarter of fiscal year 2019. The year-over-year increase in operating expenses was primarily due to incremental general and administrative expenses related toa result of our continued investment in technology infrastructure improvements and operational excellence initiatives. The year-over-year decrease in selling, marketing and warehouseOperating expenses is due to reduced acquisition related amortization expense. Asas a percentage of total revenue operating expenses were 17.4%18.2% in the third quarter of fiscal year 2018, the same as2020, up from 17.5% in the third quarter of fiscal year 2017.2019.
Provision for Income Taxes:
| Third Quarter Ended | Change | ||||||||||
| December 28, | December 29, | ||||||||||
| 2019 | 2018 | $ | % | ||||||||
| Provision for Income Taxes | $ | 420 | $ | 530 | $ | (110) | (20.8%) | ||||
| Third Quarter Ended | Change | |||||||||||
| December 23, | December 24, | |||||||||||
| 2017 | 2016 | $ | % | |||||||||
| Provision for Income Taxes | $ | 512 | $ | 895 | $ | (383 | ) | (42.8% | ) | |||
Our effective tax rates for the third quarter of fiscal years 20182020 and 20172019 were 21.9%22.1% and 41.3%25.3%, respectively. The year-over-year decrease largely reflects the enactment of the Act which was signed into law on December 22, 2017. The Act required a reduction in our U.S. net deferred tax liability of approximately $0.2 million, which reducedrate is due to the increased discrete tax benefits from share-based compensation activity. Our quarterly provision for income taxes duringis affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the third quarter of fiscal year 2018. The Act also required us2020 were $0.1 million. There were no discrete benefits related to use a blended U.S. federal tax rate of the old rates and the new rates because we are a fiscal year taxpayer and, as a result, we will phaseshare-based compensation activity in the lower corporate income tax rate. This use of a blended rate reduced the provision for income taxes during the third quarter of fiscal year 2018 by $0.1 million. Due2019. We continue to evaluate our tax provision on a quarterly basis and adjust, as deemed necessary, our effective tax rate given changes in facts and circumstances expected for the Act, we nowentire fiscal year. We expect our total fiscal year 20182020 effective tax rate to be approximately 28.0%17.0% to 29.0%18.0%. The impact of the Act may differ from this estimate, possibly materially, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued and actions we may take as a result of the Act.
Net Income:
| Third Quarter Ended | Change | |||||||||
| December 23, | December 24, | |||||||||
| 2017 | 2016 | $ | % | |||||||
| Net Income | $ | 1,831 | $ | 1,270 | $ | 561 | 44.2% | |||
| Third Quarter Ended | Change | ||||||||||
| December 28, | December 29, | ||||||||||
| 2019 | 2018 | $ | % | ||||||||
| Net Income | $ | 1,477 | $ | 1,569 | $ | (92) | (5.9%) | ||||
Net income for the third quarter of fiscal year 20182020 was up 44.2% from$1.5 million, a decrease of $0.1 million or 5.9% versus the third quarter of fiscal year 20172019. The year over year decrease is for the reasons stated above.
Adjusted EBITDA:
In addition to reporting net income, a GAAP measure presented in accordance with accounting principles generally accepted in the United States (“GAAP”), we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, and non-cash stock compensation expense)expense and non-cash loss on sale of building), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, and stock-based compensation expense, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.
Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of operating income or net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.
| Third Quarter Ended | Third Quarter Ended | ||||||||||||||
| December 23, | December 24, | December 28, | December 29, | ||||||||||||
| 2017 | 2016 | 2019 | 2018 | ||||||||||||
| Net Income | $ | 1,831 | $ | 1,270 | $ | 1,477 | $ | 1,569 | |||||||
| + Interest Expense | 250 | 184 | 216 | 250 | |||||||||||
| + Other Expense | 61 | 4 | (22 | ) | 45 | ||||||||||
| + Tax Provision | 512 | 895 | 420 | 530 | |||||||||||
| Operating Income | $ | 2,654 | $ | 2,353 | 2,091 | 2,394 | |||||||||
| + Depreciation & Amortization | 1,543 | 1,562 | 1,648 | 1,666 | |||||||||||
| + Other Expense | (61 | ) | (4 | ) | 22 | (45 | ) | ||||||||
| + Noncash Stock Compensation | 264 | (10 | ) | 305 | 363 | ||||||||||
| Adjusted EBITDA | $ | 4,400 | $ | 3,901 | $ | 4,066 | $ | 4,378 | |||||||
Total Adjusted EBITDA for the third quarter of fiscal year 20182020 was $4.1 million, versus $4.4 million a $0.5 million or 12.8% increase versusduring the third quarter of fiscal year 2017.2019, a $0.3 million or 7.1% decrease. As a percentage of revenue, Adjusted EBITDA was 10.9%9.4% for the third quarter of fiscal year 20182020 and 10.3%10.7% for the third quarter of fiscal year 2017.2019. The difference between the increase infiscal year 2020 third quarter net income and Adjusted EBITDA and increase in net income duringcompared to the third quartersame period of the prior fiscal year 2018 is primarily driven by increased non-cashdue to the decrease in tax provision and noncash stock compensation expense and the impactexpense.
Table of the Act on our tax provision.Contents
NINE MONTHS ENDED DECEMBER 23, 201728, 2019 COMPARED TO NINE MONTHS ENDED DECEMBER 24, 2016
29, 2018(dollars in thousands):
Revenue:
| Nine Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||
| December 23, | December 24, | December 28, | December 29, | |||||||||||||||||||
| 2017 | 2016 | $ | % | 2019 | 2018 | $ | % | |||||||||||||||
| Revenue: | ||||||||||||||||||||||
| Service | $ | 55,490 | $ | 51,577 | $ | 3,913 | 7.6% | $ | 67,987 | $ | 59,719 | $ | 8,268 | 13.8 | % | |||||||
| Distribution | 57,199 | 53,868 | 3,331 | 6.2% | 59,350 | 56,686 | 2,664 | 4.7 | % | |||||||||||||
| Total | $ | 112,689 | $ | 105,445 | $ | 7,244 | 6.9% | $ | 127,337 | $ | 116,405 | $ | 10,932 | 9.4 | % | |||||||
Our Service revenue which accounted for 49.2%53.4% and 51.3% of our total revenue during the first nine months of fiscal year 2018years 2020 and 48.9% of our total revenue during2019, respectively. For the first nine months of fiscal year 2017,2020, Service revenue increased $4.0$8.3 million, or 7.6%13.8%, from the first nine months of fiscal year 2017compared to the first nine months of fiscal year 2018. The year-over-year increase2019. Higher revenue was all organic as we tookthe result of new business from the highly-regulated life sciences market shareand growth in the life science sector and general industrial manufacturing sector which includes both the defense and aerospace markets and raised prices where appropriate.other regulated sectors.
Our Distribution sales accounted for 50.8%46.6% and 51.1%48.7% of our total revenue in the first nine months of fiscal years 20182020 and 2017,2019, respectively. For the first nine months of fiscal year 2018,2020, Distribution sales increased $3.3$2.7 million, or 6.2%4.7%, compared to the first nine months of fiscal year 2017. This year-over-year increase2019. These results were driven by increased demand and revenue in sales reflects higher demand from industrial customers, including those sold through our independent representative networkall channels, especially in the alternative energy sector, used equipment and increased rental revenues.sales.
Gross Profit:
| Nine Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||
| December 23, | December 24, | December 28, | December 29, | |||||||||||||||||||
| 2017 | 2016 | $ | % | 2019 | 2018 | $ | % | |||||||||||||||
| Gross Profit: | ||||||||||||||||||||||
| Service | $ | 13,655 | $ | 13,175 | $ | 480 | 3.6% | $ | 16,250 | $ | 14,214 | $ | 2,036 | 14.3 | % | |||||||
| Distribution | 12,891 | 12,013 | 878 | 7.3% | 14,175 | 13,586 | 589 | 4.3 | % | |||||||||||||
| Total | $ | 26,546 | $ | 25,188 | $ | 1,358 | 5.4% | $ | 30,425 | $ | 27,800 | $ | 2,625 | 9.4 | % | |||||||
Total gross profit increased $1.4 million or 5.4% for the first nine months of fiscal year 20182020 was $30.4 million, an increase of $2.6 million or 9.4% versus the first nine months of fiscal year 2017.2019. Total gross margin was 23.6%23.9%, a 30 basis points reduction compared to 23.9% inthe same as the first nine months of fiscal year 2017. This year-over-year decline was primarily due to Service segment technician productivity challenges earlier in fiscal year 2018.2019.
Operating Expenses:
| Nine Months Ended | Change | Nine Months Ended | Change | |||||||||||||||||||||
| December 23, | December 24, | December 28, | December 29, | |||||||||||||||||||||
| 2017 | 2016 | $ | % | 2019 | 2018 | $ | % | |||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||
| Selling, Marketing and Warehouse | $ | 12,247 | $ | 12,612 | $ | (365 | ) | (2.9% | ) | $ | 13,166 | $ | 12,267 | $ | 899 | 7.3 | % | |||||||
| General and Administrative | 8,776 | 7,207 | 1,569 | 21.8% | 10,151 | 8,938 | 1,213 | 13.6 | % | |||||||||||||||
| Total | $ | 21,023 | $ | 19,819 | $ | 1,204 | 6.1% | $ | 23,317 | $ | 21,205 | $ | 2,112 | 10.0 | % | |||||||||
Total operating expenses for the first nine months of fiscal year 2020 were $23.3 million, an increase of $2.1 million or 10.0% compared to the first nine months of fiscal year 2019. The year-over-year increase in operating expenses was primarily due to incremental general and administrative expenses related toa result of our continued investment in technology infrastructure improvements and operational excellence initiatives. The year-over-year decrease in selling, marketing and warehouse expenses is due to reduced acquisition related amortization expense. As a percentage of total revenue, operating expenses during the first nine months of fiscal year 20182020 were 18.7%18.3%, compared to 18.8% in18.2% during the first nine months of fiscal year 2017.2019, a 10-basis point increase.
Provision for Income Taxes:
| Nine Months Ended | Change | |||||||||
| December 23, | December 24, | |||||||||
| 2017 | 2016 | $ | % | |||||||
| Provision for Income Taxes | $ | 1,201 | $ | 1,729 | $ | (528) | (30.5%) | |||
| Nine Months Ended | Change | ||||||||||||
| December 28, | December 29, | ||||||||||||
| 2019 | 2018 | $ | % | ||||||||||
| Provision for Income Taxes | $ | 758 | $ | 1,395 | $ | (637 | ) | (45.7 | %) | ||||
Our effective tax rates for the first nine months of fiscal years 20182020 and 20172019 were 25.7%12.0% and 35.9%23.7%, respectively. The year-over-year decrease largely reflects the enactment of the Act which was signed into law on December 22, 2017. The Act required a reduction in our net U.S. deferred tax liability of approximately $0.2 million, which reducedrate is due to the increased discrete tax benefits from share-based compensation activity. Our provision for income taxes duringis affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the third quarterfirst nine months of fiscal year 2018. The Act also required usyears 2020 and 2019 were $0.9 million and $0.1 million, respectively. We continue to useevaluate our tax provision on a blended U.S. federalquarterly basis and adjust, as deemed necessary, our effective tax rate ofgiven changes in facts and circumstances expected for the old rates and the new rates because we are aentire fiscal year taxpayer and, as a result, we will phase in the lower corporate income tax rate. This use of a blended rate reduced the provision for income taxes during the third quarter of fiscal year 2018 by $0.1 million. Due to the Act, we nowyear. We expect our total fiscal year 20182020 effective tax rate to be approximately 28.0%17.0% to 29.0%18.0%. The impact of the Act may differ from this estimate, possibly materially, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued and actions we may take as a result of the Act.
Net Income:
| Nine Months Ended | Change | |||||||||
| December 23, | December 24, | |||||||||
| 2017 | 2016 | $ | % | |||||||
| Net Income | $ | 3,468 | $ | 3,093 | $ | 375 | 12.1% | |||
| Nine Months Ended | Change | |||||||||||
| December 28, | December 29, | |||||||||||
| 2019 | 2018 | $ | % | |||||||||
| Net Income | $ | 5,574 | $ | 4,485 | $ | 1,089 | 24.3 | % | ||||
Net income for the first nine months of fiscal year 20182020 was up 12.1% from$5.6 million, an increase of $1.1 million or 24.3% versus the first nine months of fiscal year 2017 as increased interest and other expense more than offset a lower provision2019. The year over year increase is for income taxes.the reasons stated above.
Adjusted EBITDA:
In addition to reporting net income, a GAAP measure presented in accordance with accounting principles generally accepted in the United States (“GAAP”), we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, and non-cash stock compensation expense)expense and non-cash loss on sale of building), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of itsour core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, and stock-based compensation expense, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.
Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of operating income or net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.
| Nine Months Ended | |||||||
| December 28, | December 29, | ||||||
| 2019 | 2018 | ||||||
| Net Income | $ | 5,574 | $ | 4,485 | |||
| + Interest Expense | 703 | 653 | |||||
| + Other Expense | 73 | 62 | |||||
| + Tax Provision | 758 | 1,395 | |||||
| Operating Income | 7,108 | 6,595 | |||||
| + Depreciation & Amortization | 4,951 | 4,733 | |||||
| + Other Expense | 127 | (62 | ) | ||||
| + Noncash Stock Compensation | 610 | 969 | |||||
| Adjusted EBITDA | $ | 12,796 | $ | 12,235 | |||
| Nine Months Ended | |||||||
| December 23, | December 24, | ||||||
| 2017 | 2016 | ||||||
| Net Income | $ | 3,468 | $ | 3,093 | |||
| + Interest Expense | 767 | 501 | |||||
| + Other Expense | 87 | 46 | |||||
| + Tax Provision | 1,201 | 1,729 | |||||
| Operating Income | $ | 5,523 | $ | 5,369 | |||
| + Depreciation & Amortization | 4,527 | 4,667 | |||||
| + Other Expense | (87 | ) | (46 | ) | |||
| + Noncash Stock Compensation | 1,095 | 316 | |||||
| Adjusted EBITDA | $ | 11,058 | $ | 10,306 | |||
During the first nine months of fiscal year 2018,2020, Adjusted EBITDA was $11.1$12.8 million, an increase of $0.8$0.6 million or 7.3%4.6% versus the first nine months of fiscal year 2017.2019. As a percentage of revenue, Adjusted EBITDA was 9.8%10.0% for each of the first nine months of fiscal year 20182020 and 2017.10.5% for the first nine months of fiscal year 2019. The difference between the increase in Adjusted EBITDA and increase in net income during the first nine months of fiscal year 20182020 is primarily driven by increased non-cashthe increase in net income, offset by a decrease in provision for income taxes and noncash stock compensation expense and the impact of the Act on our tax provision.expense.
LIQUIDITY AND CAPITAL RESOURCES
We expect our foreseeable liquidity and capital resource requirements to be met through anticipated cash flows from operations and long-term borrowings from our Revolving Credit Facility (as defined below). We believe that these sources of financing will be adequate to meet our future requirements.
On October 30, 2017, the Companywe entered into an Amended and Restated Credit Agreement (the “2017“Credit Agreement”), which amended and restated our prior credit facility agreement. The 2017Credit Agreement extended the term of the Company’sour $30.0 million revolving credit facility (the “Revolving Credit Facility”) to October 29, 2021. As of December 23, 2017,28, 2019, $30.0 million was available under the Revolving Credit Facility, of which $11.6$6.6 million was outstanding and included in long-term debt on the Consolidated Balance Sheet.
Table of ContentsSheets.
On December 10, 2018, we entered into an Amended and Restated Credit Agreement Amendment 1 (the “2018 Agreement”). The 20172018 Agreement also increasedhas a term loan (the “2018 Term Loan”) in the amount of the Company’s outstanding term loan to $15.0 million, (the “2017 Term Loan”), replacingwhich replaced the previous term loan. As of December 23, 2017, $14.628, 2019, $13.1 million was outstanding on the 20172018 Term Loan, of which $2.1$2.0 million was included in current liabilities on the Consolidated Balance SheetSheets with the remainder included in long-term debt. The 20172018 Term Loan requires principaltotal repayments (principal plus interest) of $0.2 million per month plus interest through September 2022 with a $4.3 million repayment required on October 29, 2022. December 2025.
Under the 2017Credit Agreement, borrowings that may be used for business acquisitions are limited to $20.0 million per fiscal year. During the first nine months of fiscal year 2018, no borrowings were2020, $1.3 million was used for business acquisitions.acquisitions, including holdback payments. During the first nine months of fiscal year 2019, $3.7 million was used for business acquisitions, including holdback payments.
The allowable leverage ratio under the 2017Credit Agreement remains atis a maximum multiple of 3.0 of total debt outstanding compared to earnings before income taxes, depreciation and amortization, or EBITDA, and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. The excess fundsCredit Agreement provides that the trailing twelve-month pro forma EBITDA of the 2017 Term Loan over the previous term loan were used to repay amounts outstanding under the Revolving Credit Facility.
Previously, on March 31, 2016, the Company entered into Amendment 3 (“Amendment 3”) to the prior credit agreement. Under Amendment 3, borrowings that couldan acquired business be used for business acquisitions were limited to $15.0 millionincluded in fiscal years 2018 and 2019. Amendment 3 also provided the Company with a $10.0 million term loan. The term loan required principal repayments of $0.1 million per month plus interest. Total annual repayment amounts of $1.4 million were required in fiscal years 2017 through 2021 with a $3.0 million repayment required in fiscal year 2022. Amendment 3 also increased the allowable leverage ratio to a maximum of 3.0 from 2.75. As described above, in the third quarter of fiscal year 2018, we entered into the 2017 Agreement that amended and restated the prior credit agreement, including Amendment 3.calculation.
The 2017Credit Agreement has certain covenants with which we must comply, including a fixed charge ratio covenant and a leverage ratio covenant. We were in compliance with all loan covenants and requirements during the third quarter of fiscal year 2018.2020. Our leverage ratio, as defined in the 2017Credit Agreement, was 1.721.07 at December 23, 2017,28, 2019, compared with 1.881.12 at the end of fiscal 2017 year-end.year 2019.
Interest on the 2017 Agreement and 2017 Term LoanRevolving Credit Facility continues to accrue, at our election, at either the variable one-month London Interbank Offered Rate (“LIBOR”) or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case, plus a margin. Interest on outstanding borrowings of the 2018 Term Loan accrues at a fixed rate of 4.15% over the term of the loan with principal and interest payments made monthly. Commitment fees accrue based on the average daily amount of unused credit available under the 2017Credit Agreement. Interest rate margins and commitment fees are determined on a quarterly basis based upon our calculated leverage ratio, as defined in the 2017Credit Agreement.
Cash Flows:The following table is a summary of our Consolidated Statements of Cash Flows:
| Nine Months Ended | Nine Months Ended | |||||||||||||||
| December 23, | December 24, | December 28, | December 29, | |||||||||||||
| 2017 | 2016 | 2019 | 2018 | |||||||||||||
| Cash (Used in) Provided by: | ||||||||||||||||
| Cash Provided by (Used in): | ||||||||||||||||
| Operating Activities | $ | 5,817 | $ | 3,874 | $ | 8,235 | $ | 7,246 | ||||||||
| Investing Activities | $ | (5,073 | ) | $ | (11,052 | ) | $ | (6,133 | ) | $ | (9,174 | ) | ||||
| Financing Activities | $ | (678 | ) | $ | 6,934 | $ | (2,491 | ) | $ | 1,750 | ||||||
Operating Activities:
Net cash provided by operating activities was $5.8$8.2 million during the first nine months of fiscal year 20182020 compared to $3.9$7.2 million during the first nine months of fiscal year 2017.2019. The year-over-year increase in cash provided by operations is primarily the result of changes in net working capital (defined as current assets less current liabilities). The significant working capital fluctuations were as follows:
| ● | Receivables: Accounts receivable |
| December 23, | December 24, | |||||
| 2017 | 2016 | |||||
| Net Sales, for the last two fiscal months | $ | 27,428 | $ | 25,952 | ||
| Accounts Receivable, net | $ | 22,700 | $ | 19,967 | ||
| Days Sales Outstanding | 49 | 46 | ||||
| December 28, | December 29, | ||||||
| 2019 | 2018 | ||||||
| Net Sales, for the last two fiscal months | $ | 29,487 | $ | 28,669 | |||
| Accounts Receivable, net | $ | 26,718 | $ | 24,583 | |||
| Days Sales Outstanding | 54 | 51 | |||||
| ● | Inventory: Our inventory strategy includes making appropriate large quantity, high dollar purchases with key manufacturers for various reasons, including maximizing on-hand availability of key products, expanding the number of SKU’s stocked in anticipation of customer demand, reducing backorders for products with long lead times and optimizing vendor purchase and sales volume discounts. As a result, inventory levels may vary from quarter-to-quarter based on the timing of these large orders in relation to our quarter end. Our inventory balance increased |
| ● | Accounts Payable: Changes in accounts payable may or may not correlate with changes in inventory balances at any given quarter end due to the timing of vendor payments for inventory, as well as the timing of payments for outsourced Service vendors and capital expenditures. Accounts payable decreased |
| ● | Accrued Compensation and Other Liabilities: Accrued |
| ● | Income Taxes Payable: In any given period, net working capital may be affected by the timing and amount of income tax payments. During the first nine months of fiscal year |
Investing Activities:
During the first nine months of fiscal year 2018,2020, we invested $5.1$5.0 million in capital expenditures including $1.0 million spentthat was used primarily for expanded Service segment capabilities, specifically for our mobile calibration truck fleettechnology infrastructure to drive operational excellence, fund organic growth opportunities within both operating segments and radio-frequency asset capabilities,to purchase new equipment to expand the number and $1.5 million spent for rental assets.type of assets available to rent. During the first nine months of fiscal year 2017,2019, we invested $4.1$5.5 million in capital expenditures, that was also largely used primarily for additionalassets for our rental business and customer-driven expansion of Service segment capabilitiescapabilities. The purchase of assets from GRS during the first nine months of fiscal year 2020 and rental assets.NBS during the first nine months of fiscal year 2019 are included in our capital expenditures above. During the first nine months of fiscal year 2018,2020, we had noused $0.5 million for a business acquisitions.acquisition. During the first nine months of fiscal year 2017,2019, we used $7.0$3.6 million for a business acquisition. We generally fund capital expenditures with cash flow from operations and our Revolving Credit Facility.
Financing Activities:During the first nine months of fiscal year 2018,2020, we received $7.1used $0.9 million fromfor holdback payments related to a business acquisition. During the proceedsfirst nine months of fiscal year 2019, we used $0.1 million for a holdback payment related to a business acquisition.
Financing Activities:
During the 2017 Term Loan and $0.8first nine months of fiscal year 2020, $1.6 million in cash was generated from the issuance of our common stock.stock and we received $0.1 million from our Revolving Credit Facility. In addition, we used $7.0$1.4 million to repay our Revolving Credit Facility, we used $1.2 million in cash for repaymentscheduled repayments of our term loan and $0.3used $2.8 million for the “net” award of certain share awards to cover tax-withholding obligations for share award activity in the period which are shown as a repurchase of shares of our common stock. During the first nine months of fiscal year 2017,2019, we received $9.0$2.5 million from the issuance of our term loan, $0.8 million from our Revolving Credit Facility, and $0.2 million in net proceedscash was generated from athe issuance of common stock. We used $1.6 million for scheduled repayments of our term loan and used approximately $1.9$0.1 million for the net award of certain share awards to cover tax-withholding obligations for share award activity in cash for repaymentthe period which are shown as a repurchase of shares of our Revolving Credit Facility. In addition, we used $0.3 million in cash for payment of holdbacks related to a business acquisition. Commencing in fiscal year 2018, we have revised our non-employee director performance-based compensation program such that any compensation earned under that program will be paid in Company stock awards, rather than in cash. The achievement criteria and the payment parameters (target payment of $20,000 per non-employee director with a maximum payment of $30,000), have not changed.
On December 20, 2017, we filed a universal shelf registration statement on Form S-3 with the SEC. Under the shelf registration statement, we may from time to time in one or more future offerings, issue various types of securities up to an aggregate amount of $50 million. We have no immediate plans to use this registration statement. The SEC declared the shelf registration statement effective on January 5, 2018.common stock.
OUTLOOK
The fourthOur sales have bounced back in January and early February from the slow, holiday-impacted December 2019 and we believe we remain on track to achieve record results in fiscal 2020. In addition, our acquisition pipeline is healthy and will remain a key element of our strategic growth plan.
We are strategically positioned to capitalize on growth opportunities as we have added significant capacity to our lab network. We ended the third quarter of our fiscal year 2020 with a net increase of 37 technicians over the prior-year period, a 12% increase in staffing. Availability of trained technical labor is annow a key differentiator and competitive advantage for us.
We are also pleased with our progress in developing a culture centered on technology and increased productivity as imperatives. As we move forward, we expect to continue to improve on this important one as we usually generate approximately one third of our annual operating income in the fourth quarter. Wecultural advancement, and believe we are well positioned and on track for a record year in fiscal 2018. Although still early, we believewell-positioned to support double digit Service growth with improved profitability margins going forward.
We expect our multi-year technology infrastructure and operational excellence initiatives are starting to gain early traction and are positively impacting both segments. Our Service segment continues to strengthen its market position, particularly in the life science space where we believe our value proposition resonates the most, and where regulation and the high cost of failure drive recurring revenue streams. We will continue to focus on leveraging technology as a competitive advantage and a driver of increased margins.
Given the changes to the federal corporate income tax rate, Transcat expects its blended income tax rate for fiscal year 2018 to range between 28% and 29%. For fiscal year 2019, the Company expects its effective income tax rate to be approximately 26%. The Company expects to invest any windfallrange between 17.0% and 18.0% for full fiscal year 2020 down from the Act in its people, processes and technology.previously provided range of 18.0% to 19.0% due to the increased discrete income tax benefits related to certain share-based awards.
The Company tightened itsWe lowered our capital expendituresexpenditure expectations for the full year fiscal 20182020 to a range of $6.0$6.8 million to $6.3$7.1 million, which is being usedfrom the previously provided range of $7.8 to $8.2 million, largely due to the timing of certain projects and less spend required on Service lab replacement assets. Capital investments are primarily forfocused on technology infrastructure investments to drive operational excellence specific customer-opportunity driven Service capabilities and additional assetsorganic growth opportunities within both operating segments, and for the Company’s growing rental business.pool assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATES
Our exposure to changes in interest rates results from our borrowing activities. In the event interest rates were to move by 1%, our yearly interest expense would increase or decrease by approximately $0.3$0.1 million assuming our average borrowing levels remained constant.constant on our variable rate Revolving Credit Facility. As of December 23, 2017,28, 2019, $30.0 million was available under our Revolving Credit Facility, of which $11.6$6.6 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. As described above under “Liquidity and Capital Resources,” we also hadhave a $15.0 million (original principal) term loan during the third quarter of fiscal year 2018. The term loan is considered a LIBOR loan. As of December 23, 2017, $14.628, 2019, $13.1 million was outstanding on the term loan and was included in long-term debt and current portion of long-term debt on the Consolidated Balance Sheet.Sheets. The term loan requires principaltotal (principal and interest) repayments of $0.2 million per month plus interest.through December 2025.
At our option, we borrow from our Revolving Credit Facility and term loan at the variable one-month LIBOR 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 December 23, 2017,28, 2019, the one-month LIBOR was 1.6%1.8%. Our interest rate for the first nine months of fiscal year 20182020 for our Revolving Credit Facility ranged from 3.2%3.0% to 3.4%3.7%. Interest on outstanding borrowings of the 2018 Term Loan accrues at a fixed rate of 4.15% over the term of the loan. On December 23, 2017,28, 2019, we had no hedging arrangements in place to limit our exposure to upward movements in interest rates.
FOREIGN CURRENCY
Approximately 90% of our total revenues for each of the first nine months of fiscal years 20182020 and 20172019 were 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 revenue by approximately 1%. We monitor the relationship between the U.S. and Canadian currencies on a monthly basis and adjust sales prices for products and services sold in Canadian dollars as we believe to be appropriate.
We continually utilize short-term foreign exchange forward contracts to reduce the risk that future earnings would be adversely affected by changes in currency exchange rates. We do not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a loss of $0.1 million during each of the first nine months of fiscal year 20182020 and a gain of $0.1 million for the first nine months of fiscal year 2017,2019, was recognized as a component of other expense in the Consolidated Statements of Income. The change in the fair value of the contracts is offset by the change in the fair value on the underlying accounts receivables denominated in Canadian dollars being hedged. On December 23, 2017,28, 2019, we had a foreign exchange contract, which matured in January 2018,2020, outstanding in the notional amount of $5.4$3.8 million. The foreign exchange contract was renewed in January 20182020 and continues to be in place. We do not use hedging arrangements for speculative purposes.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.Our principal executive officer and our principal financial officer evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of such date.
Changes in Internal Control over Financial Reporting.There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this quarterly report (our third quarter of fiscal year 2018)2020) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Index to Exhibits
| * | Filed herewith |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TRANSCAT, INC. | ||
| Date: February | /s/ Lee D. Rudow | |
| Lee D. Rudow | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: February | /s/ Michael J. Tschiderer | |
| Michael J. Tschiderer | ||
| Vice President of Finance and Chief Financial Officer | ||
| (Principal Financial Officer) |
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