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, 2017June 24, 2023
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File Number: 000-03905
TRANSCAT, INC.
(Exact name of registrant as specified in its charter)
Ohio | 16-0874418 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
35 Vantage Point Drive, Rochester, New York 14624
(Address of principal executive offices) (Zip Code)
(585) 352-7777
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.50 par value | TRNS | Nasdaq Global Market |
Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [✓]☑ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically 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, 2018July 28, 2023 was 7,152,764.7,687,851.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
| (Unaudited) | (Unaudited) | |||||||||||
| Third Quarter Ended | Nine Months Ended | |||||||||||
| December 23, | December 24, | December 23, | December 24, | |||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||
| Service Revenue | $ | 18,769 | $ | 17,455 | $ | 55,490 | $ | 51,577 | ||||
| Distribution Sales | 21,714 | 20,358 | 57,199 | 53,868 | ||||||||
| Total Revenue | 40,483 | 37,813 | 112,689 | 105,445 | ||||||||
| Cost of Service Revenue | 14,070 | 13,149 | 41,835 | 38,402 | ||||||||
| Cost of Distribution Sales | 16,712 | 15,749 | 44,308 | 41,855 | ||||||||
| Total Cost of Revenue | 30,782 | 28,898 | 86,143 | 80,257 | ||||||||
| Gross Profit | 9,701 | 8,915 | 26,546 | 25,188 | ||||||||
| Selling, Marketing and Warehouse Expenses | 4,150 | 4,159 | 12,247 | 12,612 | ||||||||
| General and Administrative Expenses | 2,897 | 2,403 | 8,776 | 7,207 | ||||||||
Total Operating Expenses | 7,047 | 6,562 | 21,023 | 19,819 | ||||||||
| Operating Income | 2,654 | 2,353 | 5,523 | 5,369 | ||||||||
| Interest and Other Expense, net | 311 | 188 | 854 | 547 | ||||||||
| Income Before Income Taxes | 2,343 | 2,165 | 4,669 | 4,822 | ||||||||
| Provision for Income Taxes | 512 | 895 | 1,201 | 1,729 | ||||||||
| Net Income | $ | 1,831 | $ | 1,270 | $ | 3,468 | $ | 3,093 | ||||
| Basic Earnings Per Share | $ | 0.26 | $ | 0.18 | $ | 0.49 | $ | 0.44 | ||||
| Average Shares Outstanding | 7,142 | 7,010 | 7,115 | 6,984 | ||||||||
| Diluted Earnings Per Share | $ | 0.25 | $ | 0.18 | $ | 0.48 | $ | 0.43 | ||||
| Average Shares Outstanding | 7,319 | 7,204 | 7,273 | 7,161 | ||||||||
(Unaudited) | ||||||||
First Quarter Ended | ||||||||
June 24, | June 25, | |||||||
2023 | 2022 | |||||||
Service Revenue | $ | 39,853 | $ | 33,876 | ||||
Distribution Sales | 20,745 | 20,785 | ||||||
Total Revenue | 60,598 | 54,661 | ||||||
Cost of Service Revenue | 26,882 | 23,041 | ||||||
Cost of Distribution Sales | 15,006 | 15,582 | ||||||
Total Cost of Revenue | 41,888 | 38,623 | ||||||
Gross Profit | 18,710 | 16,038 | ||||||
Selling, Marketing and Warehouse Expenses | 6,469 | 5,820 | ||||||
General and Administrative Expenses | 7,601 | 6,614 | ||||||
Total Operating Expenses | 14,070 | 12,434 | ||||||
Operating Income | 4,640 | 3,604 | ||||||
Interest and Other Expense, net | 878 | 156 | ||||||
Income Before Income Taxes | 3,762 | 3,448 | ||||||
Provision for Income Taxes | 813 | 376 | ||||||
Net Income | $ | 2,949 | $ | 3,072 | ||||
Basic Earnings Per Share | $ | 0.39 | $ | 0.41 | ||||
Average Shares Outstanding | 7,622 | 7,535 | ||||||
Diluted Earnings Per Share | $ | 0.38 | $ | 0.40 | ||||
Average Shares Outstanding | 7,762 | 7,629 | ||||||
See accompanying notes to consolidated financial statements.
TRANSCAT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
| (Unaudited) | (Unaudited) | ||||||||||||||
| Third Quarter Ended | Nine Months Ended | ||||||||||||||
| December 23, | December 24, | December 23, | December 24, | ||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net Income | $ | 1,831 | $ | 1,270 | $ | 3,468 | $ | 3,093 | |||||||
| Other Comprehensive Income (Loss): | |||||||||||||||
| 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 | |||||||
(Unaudited) | ||||||||
First Quarter Ended | ||||||||
June 24, | June 25, | |||||||
2023 | 2022 | |||||||
Net Income | $ | 2,949 | $ | 3,072 | ||||
Other Comprehensive Income (Loss): | ||||||||
Currency Translation Adjustment | 476 | (440 | ) | |||||
Other, net of tax effects of $2 and $(4) for the first quarter ended June 24, 2023 and June 25, 2022, respectively; | 6 | (13 | ) | |||||
Total Other Comprehensive Income (Loss) | 482 | (453 | ) | |||||
Comprehensive Income | $ | 3,431 | $ | 2,619 | ||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
| (Unaudited) | (Audited) | |||||||
| December 23, | March 25, | |||||||
| 2017 | 2017 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 504 | $ | 842 | ||||
| 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 | ||||||
| Other Receivables | 1,535 | 1,227 | ||||||
| Inventory, net | 11,144 | 10,278 | ||||||
| Prepaid Expenses and Other Current Assets | 988 | 1,193 | ||||||
| Total Current Assets | 36,871 | 35,589 | ||||||
| Property and Equipment, net | 17,478 | 15,568 | ||||||
| Goodwill | 32,823 | 32,520 | ||||||
| Intangible Assets, net | 5,984 | 7,519 | ||||||
| Other Assets | 1,079 | 901 | ||||||
| Total Assets | $ | 94,235 | $ | 92,097 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | 11,478 | $ | 11,615 | ||||
| Accrued Compensation and Other Liabilities | 4,524 | 5,907 | ||||||
| Income Taxes Payable | 468 | 805 | ||||||
| Current Portion of Long-Term Debt | 2,143 | 1,429 | ||||||
| Total Current Liabilities | 18,613 | 19,756 | ||||||
| Long-Term Debt | 24,103 | 25,883 | ||||||
| Deferred Tax Liabilities | 955 | 1,134 | ||||||
| Other Liabilities | 1,960 | 1,923 | ||||||
| Total Liabilities | 45,631 | 48,696 | ||||||
| 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 | ||||||
| Capital in Excess of Par Value | 14,553 | 12,996 | ||||||
| Accumulated Other Comprehensive Loss | (161 | ) | (414 | ) | ||||
| Retained Earnings | 30,640 | 27,297 | ||||||
| Total Shareholders' Equity | 48,604 | 43,401 | ||||||
| Total Liabilities and Shareholders' Equity | $ | 94,235 | $ | 92,097 | ||||
(Unaudited) | (Audited) | |||||||
June 24, | March 25, | |||||||
2023 | 2023 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 2,149 | $ | 1,531 | ||||
Accounts Receivable, less allowance for doubtful accounts of $515 and $457 as of June 24, 2023 and March 25, 2023, respectively | 42,356 | 44,698 | ||||||
Other Receivables | 527 | 506 | ||||||
Inventory, net | 15,177 | 16,929 | ||||||
Prepaid Expenses and Other Current Assets | 3,393 | 3,935 | ||||||
Total Current Assets | 63,602 | 67,599 | ||||||
Property and Equipment, net | 30,186 | 29,064 | ||||||
Goodwill | 77,051 | 69,360 | ||||||
Intangible Assets, net | 15,144 | 13,799 | ||||||
Right To Use Assets, net | 16,280 | 14,876 | ||||||
Other Assets | 1,066 | 1,051 | ||||||
Total Assets | $ | 203,329 | $ | 195,749 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts Payable | $ | 11,564 | $ | 15,869 | ||||
Accrued Compensation and Other Current Liabilities | 9,290 | 10,201 | ||||||
Income Taxes Payable | 601 | - | ||||||
Current Portion of Long-Term Debt | 2,270 | 2,248 | ||||||
Total Current Liabilities | 23,725 | 28,318 | ||||||
Long-Term Debt | 46,090 | 46,869 | ||||||
Deferred Tax Liabilities, net | 7,184 | 6,538 | ||||||
Lease Liabilities | 14,170 | 12,960 | ||||||
Other Liabilities | 1,440 | 1,434 | ||||||
Total Liabilities | 92,609 | 96,119 | ||||||
Shareholders' Equity: | ||||||||
Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,643,099 and 7,562,604 shares issued and outstanding as of June 24, 2023 and March 25, 2023, respectively | 3,822 | 3,781 | ||||||
Capital in Excess of Par Value | 35,717 | 27,886 | ||||||
Accumulated Other Comprehensive Loss | (718 | ) | (1,200 | ) | ||||
Retained Earnings | 71,899 | 69,163 | ||||||
Total Shareholders' Equity | 110,720 | 99,630 | ||||||
Total Liabilities and Shareholders' Equity | $ | 203,329 | $ | 195,749 | ||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| (Unaudited) | ||||||||
| Nine Months Ended | ||||||||
| December 23, | December 24, | |||||||
| 2017 | 2016 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net Income | $ | 3,468 | $ | 3,093 | ||||
| Adjustments to Reconcile Net Income to Net Cash | ||||||||
| Provided by Operating Activities: | ||||||||
| Net Loss on Disposal of Property and Equipment | 57 | 6 | ||||||
| Deferred Income Taxes | 11 | 121 | ||||||
| Depreciation and Amortization | 4,527 | 4,667 | ||||||
| Provision for Accounts Receivable and Inventory Reserves | 341 | 243 | ||||||
| Stock-Based Compensation | 1,095 | 316 | ||||||
| Changes in Assets and Liabilities: | ||||||||
| Accounts Receivable and Other Receivables | (1,009 | ) | (3,168 | ) | ||||
| Inventory | (612 | ) | (3,967 | ) | ||||
| Prepaid Expenses and Other Assets | (29 | ) | (341 | ) | ||||
| Accounts Payable | (137 | ) | 3,378 | |||||
| Accrued Compensation and Other Liabilities | (1,325 | ) | (454 | ) | ||||
| Income Taxes Payable | (570 | ) | (20 | ) | ||||
| Net Cash Provided by Operating Activities | 5,817 | 3,874 | ||||||
| Cash Flows from Investing Activities: | ||||||||
| Purchases of Property and Equipment | (5,084 | ) | (4,104 | ) | ||||
| Proceeds from Sale of Property and Equipment | 11 | 29 | ||||||
| Business Acquisitions | - | (6,977 | ) | |||||
| Net Cash Used in Investing Activities | (5,073 | ) | (11,052 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Repayment of Revolving Credit Facility, net | (7,018 | ) | (1,924 | ) | ||||
| Proceeds from Term Loan | 7,143 | 10,000 | ||||||
| Repayment of Term Loan | (1,190 | ) | (952 | ) | ||||
| Payment of Contingent Consideration and Holdbacks Related to Business Acquisitions | - | (339 | ) | |||||
| Issuance of Common Stock | 821 | 384 | ||||||
| Repurchase of Common Stock | (344 | ) | (98 | ) | ||||
| Stock Option Redemption | (90 | ) | (137 | ) | ||||
| Net Cash (Used in) Provided by Financing Activities | (678 | ) | 6,934 | |||||
| Effect of Exchange Rate Changes on Cash | (404 | ) | 162 | |||||
| Net Decrease in Cash | (338 | ) | (82 | ) | ||||
| Cash at Beginning of Period | 842 | 641 | ||||||
| Cash at End of Period | $ | 504 | $ | 559 | ||||
| Supplemental Disclosure of Cash Flow Activity: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 765 | $ | 488 | ||||
| Income Taxes, net | $ | 1,783 | $ | 1,595 | ||||
| Supplemental Disclosure of Non-Cash Investing and Financing Activities: | ||||||||
| Holdback Amounts Related to Business Acquisitions | $ | - | $ | 735 | ||||
(Unaudited) | ||||||||
First Quarter Ended | ||||||||
June 24, | June 25, | |||||||
2023 | 2022 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Income | $ | 2,949 | $ | 3,072 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | ||||||||
Net Loss on Disposal of Property and Equipment | 8 | 10 | ||||||
Deferred Income Taxes | 44 | (23 | ) | |||||
Depreciation and Amortization | 2,790 | 2,641 | ||||||
Provision for Accounts Receivable and Inventory Reserves | 138 | 88 | ||||||
Stock-Based Compensation Expense | 930 | 828 | ||||||
Changes in Assets and Liabilities, net of acquisitions: | ||||||||
Accounts Receivable and Other Receivables | 3,115 | 1,578 | ||||||
Inventory | 1,950 | (2,118 | ) | |||||
Prepaid Expenses and Other Current Assets | 531 | 432 | ||||||
Accounts Payable | (4,315 | ) | (1,218 | ) | ||||
Accrued Compensation and Other Current Liabilities | (1,203 | ) | (3,247 | ) | ||||
Income Taxes Payable | 599 | - | ||||||
Net Cash Provided by Operating Activities | 7,536 | 2,043 | ||||||
Cash Flows from Investing Activities: | ||||||||
Purchases of Property and Equipment | (2,767 | ) | (2,399 | ) | ||||
Proceeds from Sale of Property and Equipment | - | 10 | ||||||
Business Acquisitions, net of cash acquired | (2,869 | ) | (4,040 | ) | ||||
Net Cash Used in Investing Activities | (5,636 | ) | (6,429 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
(Repayments of) Proceeds from Revolving Credit Facility, net | (204 | ) | 3,816 | |||||
Repayments of Term Loan | (553 | ) | (490 | ) | ||||
Issuance of Common Stock | 199 | 221 | ||||||
Repurchase of Common Stock | (301 | ) | (437 | ) | ||||
Net Cash (Used in) Provided by Financing Activities | (859 | ) | 3,110 | |||||
Effect of Exchange Rate Changes on Cash | (423 | ) | 323 | |||||
Net Increase (Decrease) in Cash | 618 | (953 | ) | |||||
Cash at Beginning of Period | 1,531 | 1,396 | ||||||
Cash at End of Period | $ | 2,149 | $ | 443 | ||||
Supplemental Disclosure of Cash Flow Activity: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 816 | $ | 322 | ||||
Income Taxes, net | $ | 107 | $ | 117 | ||||
Supplemental Disclosure of Non-Cash Investing and Financing Activities: | ||||||||
Common stock issued for acquisitions | $ | 6,831 | $ | 145 | ||||
Assets acquired and liabilities assumed in business combinations: | ||||||||
Accrued holdback consideration related to Alliance acquisition | $ | - | $ | 518 | ||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’CHANGES IN 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) | Earnings | Total | ||||||||||||||||||
| Balance as of March 25, 2017 | 7,044 | $ | 3,522 | $ | 12,996 | $ | (414 | ) | $ | 27,297 | $ | 43,401 | |||||||||||
| Issuance of Common Stock | 102 | 51 | 770 | - | - | 821 | |||||||||||||||||
| Repurchase of Common Stock | (27 | ) | (14 | ) | (205 | ) | - | (125 | ) | (344 | ) | ||||||||||||
| Stock-Based Compensation | 25 | 13 | 1,082 | - | - | 1,095 | |||||||||||||||||
| Redemption of Stock Options | - | - | (90 | ) | - | - | (90 | ) | |||||||||||||||
| Other Comprehensive Income | - | - | - | 253 | - | 253 | |||||||||||||||||
| Net Income | - | - | - | - | 3,468 | 3,468 | |||||||||||||||||
| Balance as of December 23, 2017 | 7,144 | $ | 3,572 | $ | 14,553 | $ | (161 | ) | $ | 30,640 | $ | 48,604 | |||||||||||
Capital | ||||||||||||||||||||||||
Common Stock | In | Accumulated | ||||||||||||||||||||||
Issued | Excess | Other | ||||||||||||||||||||||
$0.50 Par Value | of Par | Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Value | Income (Loss) | Earnings | Total | |||||||||||||||||||
Balance as of March 26, 2022 | 7,529 | $ | 3,765 | $ | 23,900 | $ | (233 | ) | $ | 58,744 | $ | 86,176 | ||||||||||||
Issuance of Common Stock | 8 | 3 | 363 | - | - | 366 | ||||||||||||||||||
Repurchase of Common Stock | (7 | ) | (3 | ) | (164 | ) | - | (270 | ) | (437 | ) | |||||||||||||
Stock-Based Compensation | 16 | 8 | 820 | - | - | 828 | ||||||||||||||||||
Other Comprehensive Loss | - | - | - | (453 | ) | - | (453 | ) | ||||||||||||||||
Net Income | - | - | - | - | 3,072 | 3,072 | ||||||||||||||||||
Balance as of June 25, 2022 | 7,546 | $ | 3,773 | $ | 24,919 | $ | (686 | ) | $ | 61,546 | $ | 89,552 | ||||||||||||
Capital | ||||||||||||||||||||||||
Common Stock | In | Accumulated | ||||||||||||||||||||||
Issued | Excess | Other | ||||||||||||||||||||||
$0.50 Par Value | of Par | Comprehensive | Retained | |||||||||||||||||||||
Shares | Amount | Value | Income (Loss) | Earnings | Total | |||||||||||||||||||
Balance as of March 25, 2023 | 7,562 | $ | 3,781 | $ | 27,886 | $ | (1,200 | ) | $ | 69,163 | $ | 99,630 | ||||||||||||
Issuance of Common Stock | 82 | 42 | 6,988 | - | - | 7,030 | ||||||||||||||||||
Repurchase of Common Stock | (3 | ) | (2 | ) | (86 | ) | - | (213 | ) | (301 | ) | |||||||||||||
Stock-Based Compensation | 2 | 1 | 929 | - | - | 930 | ||||||||||||||||||
Other Comprehensive Income | - | - | - | 482 | - | 482 | ||||||||||||||||||
Net Income | - | - | - | - | 2,949 | 2,949 | ||||||||||||||||||
Balance as of June 24, 2023 | 7,643 | $ | 3,822 | $ | 35,717 | $ | (718 | ) | $ | 71,899 | $ | 110,720 | ||||||||||||
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1(In Thousands, Except Per Share and Per Unit Amounts)(Unaudited)– GENERAL
NOTE 1 – GENERAL
Description of Business:Transcat, Inc. (“Transcat”Transcat,” “we,” “us,” “our” or the “Company”) is a leading provider of accredited calibration and laboratory instrumentservices, enterprise asset management services, and a value-added distributor of professional grade handheld 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-Q10-Q and Article 8-03Rule 10-01 of Regulation S-XS-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, 20172023 (“fiscal year 2017”2023”) contained in the Company’s 2017 Annual Report on Form 10-K10-K for fiscal year 2023 filed with the SEC.
Use of Estimates: The preparation of Transcat’s Consolidated Financial Statements in accordance with GAAP requires that the Company make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to, allowance for doubtful accounts and returns, inventory reserves, estimated levels of achievement for performance-based restricted stock units, fair value of stock options, depreciable lives of fixed assets, estimated lives of major catalogs and intangible assets, fair value of the goodwill reporting units, and the valuation of assets acquired, liabilities assumed and consideration transferred in business acquisitions. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Consolidated Financial Statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes. Actual results could differ from those estimates. Such changes and refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to the Consolidated Financial Statements.
Revenue Recognition:Distribution sales are recorded when an order’s title and risk of loss transfers to the customer.customer, which is generally upon shipment. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. The majority of the Company’s revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue over time using the output method-time elapsed as this portrays the transfer of control to the customer. Revenue is measured as the amount of consideration the Company expects to receive in 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. Freight billed to customers is included in revenue. Shipping and handling is not included in revenue. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data. In 2014, the Financial
Under Accounting Standards BoardCodification (“FASB”ASC”) issued Accounting Standard Update (“ASU”) 2014-09 to provide specific guidance on how entities should recognizeTopic 606, Revenue from Contracts with Customers, we use judgments that could potentially impact both the timing of our satisfaction of performance obligations and our determination of transaction prices used in determining revenue derivedrecognized. Such judgments include considerations in determining our transaction prices and when our performance obligations are satisfied for our standard product sales that include general payment terms that are between net 30 and 90 days.
Revenue recognized from contracts with customers. Transcat is required to adopt ASU 2014-09 in itsprior period performance obligations for the first quarter of the fiscal year ending March 30, 2019 (“2024 (“fiscal year 2019”2024”). This new standard supercedes previous guidance on was immaterial. As of June 24, 2023, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to ASC Topic 606, 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 requires the usedeferred contract costs recorded on our Consolidated Balance Sheets as of more estimates June 24, 2023 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 expect the adoption of this ASU to have a material impact on the Consolidated Financial Statements.March 25, 2023 were immaterial. See Note 4 for disaggregated revenue information.
Fair Value of Financial Instruments:Transcat has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Company to develop its own assumptions. The carrying amount of debt on the Consolidated Balance Sheets approximates fair value due to variable interest rate pricing on a portion of the debt with the balance bearing an interest rate approximating current market rates, and the carrying amounts for cash, accounts receivable and accounts payable approximate fair value due to their short-term nature. Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds and are valued based on Level 1 inputs. At December 23, 2017 each of June 24, 2023 and March 25, 2017,2023, investment assets totaled $0.8$0.2 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 expensecost 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 2016-09awards expected 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, excessvest. Excess 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 costs for such awards. The Company did not capitalize any stock-based compensation costs as part of an asset. The Company estimates forfeiture rates based on its historical experience. During the first nine months quarter of the fiscal year ending March 31, 2018 (“fiscal year 2018”)2024 and fiscal year 2017,2023, the Company recorded non-cash stock-based compensation expensecost of $1.1$0.9 million and $0.3$0.8 million, respectively, in the Consolidated Statements of Income.
Foreign Currency Translation and Transactions:The accounts of Cal OpEx Limited (d/b/a Transcat Ireland), an Irish company, and Transcat Canada Inc., aboth of which are wholly-owned subsidiarysubsidiaries of the Company, are maintained in the local currency (Canadian dollars)currencies, the Euro and the Canadian dollar, respectively, and have been translated to U.S. dollars. Accordingly, the amounts representing assets and liabilities have been translated at the period-end rates of exchange and related revenue and expense accounts have been translated at an average rate of exchange during the period. Gains and losses arising from translation of Cal OpEx Limited’s and Transcat Canada Inc.’s financial statements into U.S. dollars are recorded directly to the accumulated other comprehensive loss component of shareholders’ equity.
Transcat records foreign currency gains and losses on its Canadian business transactions.transactions denominated in foreign currency. The net foreign currency lossgain was less than $0.1 million duringin the first nine months of each quarter of fiscal years 2018year 2024 and 2017.$0.2 million in the first quarter of fiscal year 2023. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its future earnings willdenominated in Canadian dollars would 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 the first nine months quarter of each of fiscal year 2018years 2024 and a gain of $0.1 million during the first nine months of fiscal year 2017,2023, was recognized as a component of other expenseInterest and Other Expenses, net 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,June 24, 2023, the Company had a foreign exchange contract, which matured in January 2018,July 2023, outstanding in the notional amount of $5.4$2.5 million. The foreign exchangeThis contract was subsequently renewed in January 2018 and continues to beremains 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 beenproceeds 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 thirdfirst quarter of each of fiscal years 2024 and fiscal year 20182023, the net additional common stock equivalents had a $0.01 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, the net additional common stock equivalents had a $0.01($0.01) 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:follows (amounts in thousands):
| Third Quarter Ended | Nine Months Ended | |||||||
| December 23, | December 24, | December 23, | December 24, | |||||
| 2017 | 2016 | 2017 | 2016 | |||||
| Average Shares Outstanding – Basic | 7,142 | 7,010 | 7,115 | 6,984 | ||||
| Effect of Dilutive Common Stock Equivalents | 177 | 194 | 158 | 177 | ||||
| Average Shares Outstanding – Diluted | 7,319 | 7,204 | 7,273 | 7,161 | ||||
| Anti-dilutive Common Stock Equivalents | - | - | - | - | ||||
First Quarter Ended | ||||||||
June 24, | June 25, | |||||||
2023 | 2022 | |||||||
Average Shares Outstanding – Basic | 7,622 | 7,535 | ||||||
Effect of Dilutive Common Stock Equivalents | 140 | 94 | ||||||
Average Shares Outstanding – Diluted | 7,762 | 7,629 | ||||||
Anti-dilutive Common Stock Equivalents | 57 | 145 | ||||||
Goodwill and Intangible Assets: Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment for each reporting unit on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company is permitted, but not required, to qualitatively assess indicators of a reporting unit’s fair value to determine whether it is necessary to perform the two-step goodwill impairment test. If a quantitative test is deemed necessary, a discounted cash flow analysis is prepared to estimate fair value.
Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. A summary of changes in the Company’s goodwill and intangible assets is as follows (amounts in thousands):
Goodwill | Intangible Assets | |||||||||||||||||||||||
Distribution | Service | Total | Distribution | Service | Total | |||||||||||||||||||
Net Book Value as of March 25, 2023 | $ | 11,458 | $ | 57,902 | $ | 69,360 | $ | 448 | $ | 13,351 | $ | 13,799 | ||||||||||||
Additions | - | 7,438 | 7,438 | - | 2,435 | 2,435 | ||||||||||||||||||
Amortization | - | - | - | (37 | ) | (1,056 | ) | (1,093 | ) | |||||||||||||||
Currency Translation Adjustment | - | 253 | 253 | - | 3 | 3 | ||||||||||||||||||
Net Book Value as of June 24, 2023 | $ | 11,458 | $ | 65,593 | $ | 77,051 | $ | 411 | $ | 14,733 | $ | 15,144 | ||||||||||||
Recently IssuedAdopted Accounting Pronouncements:In May 2017, June 2016, the FASBFinancial Accounting Standard Board (“FASB”) issued ASU 2017-09, Scope of Modification Accounting, Compensation—Stock Compensation2016-13, Financial Instruments - Credit Losses (Topic 718). This326), which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU provides clarity and reduces both diversity in practice and cost and complexity when applyingreplaces the guidance in Topic 718"incurred loss" model with an "expected credit loss" model that requires entities to a change to the terms or conditions of a share-based payment award. Thisestimate an expected lifetime credit loss on financial assets, including trade accounts receivable. The ASU is effective for annual reportingfiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and should be applied prospectively. Early2022. Allowance for doubtful accounts is the most significant item for the Company under this ASU. The Company adopted ASU 2016-13 effective on March 26, 2023. The adoption of this ASU is permitted. The Company does standard did not expect adoption of this ASU to have a material impact on its Consolidated Financial Statements.our consolidated financial statements.
NOTE 2– LONG-TERM DEBT
Description:
On October 30, 2017, July 7, 2021, the Company entered into anthe Second Amended and Restated Credit Facility Agreement (the “2017“Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), whichthat amended and restated ourin its entirety the Company’s prior credit facility agreement. agreement with M&T.
The 2017Credit Agreement extendedprovides for a revolving credit commitment (the “Revolving Credit Commitment”) of $80.0 million through June 2026, with a letter of credit subfacility of $10.0 million. The Company's 2018 term loan, with an original principal amount of $15.0 million (the "2018 Term Loan"), is also provided for under the Credit Agreement.
The Credit Agreement allows the Company to use up to $50.0 million under the Revolving Credit Commitment for acquisitions in any single fiscal year. The Credit Agreement restricts the Company's ability to complete acquisitions of businesses with a principal place of business located in the United Kingdom or the European Union to an aggregate purchase price of $40.0 million during the term of the Company’s $30.0Credit Agreement, if the acquisition is financed directly or indirectly with the Revolving Credit Commitment.
Under the Credit Agreement, the Company may make restricted payments up to $25.0 million in the aggregate over the term of the Credit Agreement and $10.0 million in any single fiscal year to repurchase shares and pay dividends.
As of June 24, 2023, $37.5 million was available for borrowing under the revolving credit facility, (the “Revolving Credit Facility”) to October 29, 2021. As of December 23, 2017, $30.0with $42.5 million was available under the Revolving Credit Facility, of which $11.6 million was outstanding and included in long-term debt on the Consolidated Balance Sheet. The 2017 Agreement also increasedSheets. During the amountfirst quarter of the Company’s outstanding term loan to $15.0fiscal year 2024, $2.9 million (the “2017 Term Loan”), replacing the previous term loan. was used for one business acquisition.
As of December 23, 2017, $14.6June 24, 2023, $5.9 million was outstanding on the 20172018 Term Loan, of which $2.1$2.3 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 amortizing 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. Under the 2017 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 were used for business acquisitions.
Table of Contentsits maturity date in December 2025.
The allowable leverage ratio under the 2017 Agreement remains at 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, 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.
Interest and Other Costs:Interest on outstanding borrowings ofunder the Revolving Credit Facility and term loanrevolving credit facility accrue, at Transcat’s election, at either the variable one-monthone-month London Interbank Offered Rate (“LIBOR”("LIBOR") or a fixed rate for a designated period at the LIBOR corresponding to such period (subject to a 0.25% floor), in each case, plus a margin. CommitmentUnused fees accrue based on the average daily amount of unused credit available on the Revolving Credit Facility.revolving credit facility. Interest rate margins and commitmentunused fees are determined on a quarterly basis based upon the Company’s calculated leverage ratio, as defined in the 2017 Agreement. The one-month LIBOR at December 23, 2017 was 1.6%.ratio. The Company’s interest rate for the revolving credit facility for the first nine months quarter of fiscal year 20182024 ranged from 3.2%6.4% to 3.4%6.9%. Interest on outstanding borrowings under the 2018 Term Loan accrue at a fixed rate of 3.90% over the term of the loan. The Credit Agreement includes a mechanism for the adoption of a different benchmark rate upon the discontinuance of LIBOR. The Company was notified by M&T that effective July 1, 2023, LIBOR was discontinued and replaced with the Daily Simple SOFR plus applicable Benchmark Replacement Adjustment.
Covenants:The 2017Credit Agreement has certain covenants with which the Company has tomust comply, including a fixed charge coverage ratio covenant, which prohibits the Company's fixed charge ratio from being less than 1.15 to 1.00, and a leverage ratio covenant.covenant, which prohibits the Company's leverage ratio from exceeding 3.00 to 1.00. The Company was in compliance with all loan covenants and requirements during the thirdfirst quarter of fiscal year 2018.2024. The Company's leverage ratio, as defined in the Credit Agreement, was 1.50 at June 24, 2023, compared with 1.60 at March 25, 2023.
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.revolving credit facility.
NOTE 3– STOCK-BASED COMPENSATION
The
In September 2021, the Transcat, Inc. 20032021 Stock Incentive Plan as Amended(the “2021 Plan”) was approved by shareholders and Restatedbecame effective. The 2021 Plan replaced the Transcat, Inc. 2003 Incentive Plan (the “2003“2003 Plan”),. Shares available for grant under the 2021 Plan include any shares remaining available for issuance under the 2003 Plan and any shares that are subject to outstanding awards under the 2003 Plan that are subsequently canceled, expired, forfeited, or otherwise not issued or are settled in cash. The 2021 Plan provides for, among other awards, grants of restricted stock units and stock options to directors, officers and key employees at the fair market value at the date of grant. At December 23, 2017, 1.1June 24, 2023, 0.6 million shares of common stock were available for future grant under the 20032021 Plan.
The Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete tax benefits related to share-based compensation and stock option activity during the first quarter of fiscal year 2024 and fiscal year 2023 were $0.1 million and $0.5 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. The restricted stock units granted in June 2017 were time vested.
Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the unit that coincides with the actual outcome of the performance conditions. On an interim basis, the Company records compensation cost based on the estimated level of achievement of the performance conditions. The expense relating to the time vested restricted stock units is recognized on a straight-line basis over the requisite service period for the entire award.
The Company achieved 50% of the target level for the performance-based restricted stock units granted in the fiscal year ended March 28, 2015 and as a result, issued 25 shares of common stock to executive officers and certain key employees during the first quarter of fiscal year 2018.
The following table summarizes the non-vested performance-based restricted stock units outstanding as of December 23, 2017:June 24, 2023 (in thousands, except per unit data):
| 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 | June 24, 2023 | ||||||
October 2018 | October 2018 – September 2027 | 6 | $ | 20.81 | Time Vested | |||||
July 2020 | July 2020 – July 2023 | 26 | $ | 27.08 | Time Vested | |||||
September 2020 | September 2020 – July 2023 | 4 | $ | 28.54 | Time Vested | |||||
September 2020 | September 2020 – July 2023 | 5 | $ | 29.76 | Time Vested | |||||
September 2020 | September 2020 – September 2023 | 3 | $ | 29.76 | Time Vested | |||||
June 2021 | June 2021 – March 2024 | 10 | $ | 53.17 | 133% of target level | |||||
June 2021 | June 2021 – March 2024 | 11 | $ | 53.17 | Time Vested | |||||
September 2021 | September 2021 – September 2024 | 4 | $ | 67.76 | Time Vested | |||||
January 2022 | January 2022 – March 2024 | 1 | $ | 90.92 | 133% of target level | |||||
January 2022 | January 2022 – March 2024 | 1 | $ | 90.92 | Time Vested | |||||
January 2022 | January 2022 – January 2025 | 1 | $ | 90.41 | Time Vested | |||||
March 2022 | March 2022 – March 2025 | 1 | $ | 76.31 | Time Vested | |||||
May 2022 | May 2022 – March 2025 | 11 | $ | 63.17 | 52% of target level | |||||
May 2022 | May 2022 – March 2025 | 12 | $ | 63.17 | Time Vested | |||||
August 2022 | August 2022 – August 2025 | 1 | $ | 78.04 | Time Vested | |||||
September 2022 | September 2022 – September 2023 | 5 | $ | 73.80 | Time Vested | |||||
December 2022 | December 2022 – December 2025 | 1 | $ | 81.26 | Time Vested | |||||
December 2022 | December 2022 – December 2025 | 1 | $ | 67.48 | Time Vested | |||||
May 2023 | May 2023 – March 2026 | 10 | $ | 89.70 | 100% of target level | |||||
May 2023 | May 2023 – March 2026 | 11 | $ | 89.70 | Time Vested | |||||
May 2023 | May 2023 – May 2026 | 19 | $ | 89.70 | 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$0.4 million respectively in the first nine months of fiscal years 2018 and 2017. Total expense relating to time vested restricted stock units was less than $0.1 million for the first nine months quarter of fiscal year 2018.2024 and fiscal year 2023, respectively. As of December 23, 2017,June 24, 2023, unearned compensation, to be recognized over the grants’ respective service periods, totaled $1.2$4.6 million.
Stock Options:Options vest either immediately or over a periodThe Company grants stock options to employees and directors with an exercise price equal to the quoted market price of up to four years using a straight-line basis and expire either five years or ten years fromthe Company’s stock at the date of the grant. The expense relating tofair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Expense for stock options is recognized on a straight-line basis over the requisite service period for each award. Options vest either immediately or over a period of up to five years using a straight-line basis and expire either five years or ten years from the entire award.date of grant.
We calculate the fair value of the stock options granted using the Black-Scholes model. The following weighted-average assumptions were used to value options granted during the first quarter of fiscal year 2024 and fiscal year 2023:
Three Months Ended | ||||||||
June 24, | June 25, | |||||||
2023 | 2022 | |||||||
Risk-Free Interest Rate | 3.43 | % | 2.32 | % | ||||
Volatility Factor | 37.16 | % | 38.11 | % | ||||
Expected Term (in Years) | 6.19 | 3.32 | ||||||
Annual Dividend Rate | 0.00 | % | 0.00 | % | ||||
We calculate expected volatility for stock options by taking an average of historical volatility over the expected term. The computation of expected term was determined based on safe harbor rules, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield in effect at the time of grant. We assume no expected dividends. Under FASB ASC Topic 718, “Compensation – Stock Compensation”, the Company has elected to account for forfeitures as they occur.
During the first quarter of fiscal year 2024, the Company granted options for 6,000 shares of common stock in the aggregate to Company employees that vest over three years and an option for 10,000 shares of common stock to a Company employee that vests over five years.
During the first quarter of fiscal year 2023, the Company granted options for 34,000 shares of common stock in the aggregate to Company employees that vest over three years.
The expense related to all stock option awards was $0.3 million in the first quarter of fiscal year 2024 and $0.4 million in the first quarter of fiscal year 2023.
The following table summarizes the Company’s options as of and for the first nine months of fiscal year 2018: quarter ended June 24, 2023 (in thousands, except price per option data and years):
| 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 | |||||||||||||
Options | Option | Term (in years) | Value | |||||||||||||
Outstanding as of March 25, 2023 | 217 | $ | 56.25 | |||||||||||||
Granted | 16 | $ | 83.59 | |||||||||||||
Exercised | (3 | ) | $ | 24.30 | ||||||||||||
Forfeited | (2 | ) | $ | 63.17 | ||||||||||||
Outstanding as of June 24, 2023 | 228 | $ | 58.45 | 6 | $ | 6,579 | ||||||||||
Exercisable as of June 24, 2023 | 42 | $ | 49.59 | 6 | $ | 1,563 | ||||||||||
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 thirdfirst quarter of fiscal year 20182024 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.June 24, 2023. 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 and $0.1 million during each of the first nine months of fiscal years 2018 and 2017, respectively. There was no unrecognized compensation cost related to non-vested stock options as of December 23, 2017.June 24, 2023 was $2.1 million, which is expected to be recognized over a period of three years. The aggregate intrinsic value of stock options exercised induring the first nine months quarter of each of fiscal year 20182024 and fiscal year 2023 was $0.6$0.2 million. Cash received from the exercise of options in the first nine months quarter of each of fiscal year 20182024 and fiscal year 2023 was $0.6less than $0.1 million.
NOTE 4– SEGMENT INFORMATION
NOTE 4 – SEGMENT INFORMATION
The basis for determining our operating segments is the manner in which financial information is used in monitoring our operations. Transcat has two reportable segments: Service and Distribution. Through our Service segment, we offer calibration, repair, inspection, analytical qualifications, preventative maintenance, consulting and other related services. Through our Distribution segment, we sell and Service.rent national and proprietary brand instruments to customers globally. The Company has no inter-segment sales. We believe that reporting performance at the operating income level is the best indicator of segment performance. The following table presents segment informationand geographic data for the thirdfirst quarter and first nine months of fiscal years 2018year 2024 and 2017:fiscal year 2023 (dollars in thousands):
| Third Quarter Ended | Nine Months Ended | |||||||||||
| December 23, | December 24, | December 23, | December 24, | |||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||
| Revenue: | ||||||||||||
| Service | $ | 18,769 | $ | 17,455 | $ | 55,490 | $ | 51,577 | ||||
| Distribution | 21,714 | 20,358 | 57,199 | 53,868 | ||||||||
| Total | 40,483 | 37,813 | 112,689 | 105,445 | ||||||||
| Gross Profit: | ||||||||||||
| Service | 4,699 | 4,306 | 13,655 | 13,175 | ||||||||
| Distribution | 5,002 | 4,609 | 12,891 | 12,013 | ||||||||
| Total | 9,701 | 8,915 | 26,546 | 25,188 | ||||||||
| Operating Expenses: | ||||||||||||
| Service (1) | 3,636 | 3,365 | 10,917 | 10,399 | ||||||||
| Distribution (1) | 3,411 | 3,197 | 10,106 | 9,420 | ||||||||
| Total | 7,047 | 6,562 | 21,023 | 19,819 | ||||||||
| Operating Income: | ||||||||||||
| Service | 1,063 | 941 | 2,738 | 2,776 | ||||||||
| Distribution | 1,591 | 1,412 | 2,785 | 2,593 | ||||||||
| Total | 2,654 | 2,353 | 5,523 | 5,369 | ||||||||
| Unallocated Amounts: | ||||||||||||
| Interest and Other Expense, net | 311 | 188 | 854 | 547 | ||||||||
| Provision for Income Taxes | 512 | 895 | 1,201 | 1,729 | ||||||||
| Total | 823 | 1,083 | 2,055 | 2,276 | ||||||||
| Net Income | $ | 1,831 | $ | 1,270 | $ | 3,468 | $ | 3,093 | ||||
First Quarter Ended | ||||||||
June 24, | June 25, | |||||||
2023 | 2022 | |||||||
Revenue: | ||||||||
Service | $ | 39,853 | $ | 33,876 | ||||
Distribution | 20,745 | 20,785 | ||||||
Total | 60,598 | 54,661 | ||||||
Gross Profit: | ||||||||
Service | 12,971 | 10,835 | ||||||
Distribution | 5,739 | 5,203 | ||||||
Total | 18,710 | 16,038 | ||||||
Operating Expenses: | ||||||||
Service (1) | 9,779 | 8,303 | ||||||
Distribution (1) | 4,291 | 4,131 | ||||||
Total | 14,070 | 12,434 | ||||||
Operating Income: | ||||||||
Service | 3,192 | 2,532 | ||||||
Distribution | 1,448 | 1,072 | ||||||
Total | 4,640 | 3,604 | ||||||
Unallocated Amounts: | ||||||||
Interest and Other Expense, net | 878 | 156 | ||||||
Provision for Income Taxes | 813 | 376 | ||||||
Total | 1,691 | 532 | ||||||
Net Income | $ | 2,949 | $ | 3,072 | ||||
Geographic Data: | ||||||||
Revenues to Unaffiliated Customers (2) | ||||||||
United States (3) | $ | 54,257 | $ | 48,998 | ||||
Canada | 4,247 | 3,986 | ||||||
Other International | 2,094 | 1,677 | ||||||
Total | $ | 60,598 | $ | 54,661 | ||||
(1) | Operating expense allocations between segments |
(2) | Revenues are attributed to the countries based on the destination of a product shipment or the location where service is rendered. |
(3) | United States includes Puerto Rico. |
NOTE 5– BUSINESS ACQUISITIONS
During fiscal year 2017,
TIC-MS: Effective March 27, 2023, Transcat acquired substantiallypurchased all of the assetsoutstanding capital stock of Excalibur Engineering,TIC-MS, Inc. (“Excalibur”TIC-MS”), a California-basedMissouri based provider of calibration services, new and used test equipment sales, and equipment rentals.
services. This transaction aligned with a key component of 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 serviceService capabilities. In addition, Excalibur provided an established equipment rental and used equipment business, which are complimentary
The TIC-MS goodwill is primarily attributable to the Company’s traditional Distribution segment sales.
The Company appliesworkforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the acquisition method of accounting for business acquisitions. Under the acquisition method, the purchase price of an acquisition is assigned to the underlying tangiblegoodwill and intangible assets acquired and liabilities assumed based on their respective fair values atrelating to 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 specialistsTIC-MS acquisition has been allocated 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.Service segment. Intangible assets related to the ExcaliburTIC-MS acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to 10fifteen years and arenot deductible for tax purposes. Amortization of goodwill related to the TIC-MS acquisition is not deductible for tax purposes.
The purchase price for TIC-MS was approximately $9.8 million and was paid with $2.9 million in cash, including $0.5 million placed in escrow for certain post-closing adjustments and indemnification claims, if any, and the issuance of 77,387 shares of our common stock valued at $6.8 million. Pursuant to the asset purchase agreement, the purchase price will be subject to reduction by up to $0.5 million if a key customer relationship is not retained through March 27, 2024.
The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, working capital adjustments, assets acquired, and liabilities assumed. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of TIC-MS's assets and liabilities acquired on March 27, 2023 (in thousands):
Goodwill | $ | 7,438 | |||
Intangible Assets – Customer Base & Contracts | 2,303 | ||||
Intangible Assets – Covenant Not to Compete | 132 | ||||
| 9,873 | |||||
Plus: | Cash | 80 | |||
Accounts Receivable | 470 | ||||
Property and Equipment | 77 | ||||
Less: | Current Liabilities | (118 | ) | ||
Deferred Tax Liability | (602 | ) | |||
Total Purchase Price | $ | 9,780 | |||
From the date of acquisition through the end of the first quarter of fiscal year 2024, TIC-MS has contributed revenue of $0.9 million and operating income of $0.4 million, which includes the negative impact of amortization of the acquired intangible assets.
Elite: Effective February 2, 2023, Transcat acquired substantially all of the assets of Elite Calibration LLC (“Elite”), a California based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that can leverage the Company’s already existing operating infrastructure.
All the goodwill related to the Elite acquisition has been allocated to the Service segment. Amortization of goodwill related to the Elite acquisition is deductible for tax purposes. The goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition.
The total purchase price paid for the assets of ExcaliburElite was approximately $7.6$0.9 million, net of less thanwhich $0.8 million was paid in cash. Pursuant to the asset purchase agreement, the Company held back $0.1 million cash acquired.of the purchase price for certain potential post-closing adjustments. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Elite’s assets and liabilities acquired during the period presented:on February 2, 2023 (in thousands):
Goodwill | $ | 820 | |||
Plus: | Accounts Receivable | 62 | |||
Total Purchase Price | $ | 882 | |||
Since this operation was integrated immediately into our existing operations, its separate contributed revenue and operating income is undeterminable.
| FY 2017 | |||||
| Goodwill | $ | 3,455 | |||
| Intangible Assets – Customer Base | 1,990 | ||||
| Intangible Assets – Covenant Not to Compete | 100 | ||||
| 5,545 | |||||
| Plus: | Current Assets | 973 | |||
| Non-Current Assets | 1,652 | ||||
| Less: | Current Liabilities | (606 | ) | ||
| Total Purchase Price | $ | 7,564 | |||
Complete Calibrations All the goodwill related to the Complete Calibrations acquisition has been allocated to the Service segment. Amortization of goodwill related to the Complete Calibrations acquisition is not deductible for The total purchase price paid for Complete Calibrations was approximately $1.2 million in cash. In connection with this transaction, the Company The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Goodwill Plus: Cash Inventory Total Purchase Price During the first quarter of fiscal year 2024, Complete Calibrations has contributed revenue of $0.1 million and operating loss of less than $0.1 million. e2b: Effective September 27, 2022, Transcat acquired substantially all of the assets of e2b Calibration (“e2b”), an Ohio based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. The e2b goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the e2b acquisition has been allocated to the Service segment. Intangible assets related to the e2b acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are deductible for tax purposes. Amortization of goodwill related to the e2b acquisition is deductible for tax purposes. The total purchase price paid for the assets of e2b was approximately $3.1 million in cash. Pursuant to the asset purchase agreement, the Company held back $0.9 million of the purchase price in escrow for certain potential post-closing adjustments. During the third quarter of fiscal year 2023, $0.6 million of the escrow was released to the sellers. As of June 24, 2023, $0.3 million remains in escrow. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, Certain: Effective September 28, 2022, Transcat purchased all of the outstanding capital stock of Galium Limited (d/b/a Complete Calibrations) ("Complete Calibrations"), an Irish company. This transaction aligned with a key component of the Company’s acquisition agreements have included provisionsstrategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. contingent considerationtax purposes. The goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other holdback amounts. intangibles that do not qualify for separate recognition.accruesalso entered into a Technology License Agreement with Calibration Robots Limited, an Irish company and related party to Complete Calibrations, for contingent considerationthe use of their proprietary robotics in completing calibrations. The Technology License Agreement includes transactional royalties in the amount of 3 Euros ($3.27) per calibration performed by technology covered under this license agreement, with a royalty term of up to ten years commencing from the earlier of (i) the date on which cumulative revenue earned from technology covered under this license agreement equals 0.75 million Euros ($0.82 million), and holdback provisions(ii) March 28, 2024. In addition to the transactional royalties, as long as a key employee is employed by the Company, there is an annual royalty fee of 0.1 million Euros ($0.11 million). For purposes of this paragraph, we used a conversion rate of 1.0895 to convert Euro to U.S. dollar as of June 24, 2023.theirLevel 3 inputs, of Complete Calibrations’ assets and liabilities acquired on September 28, 2022 (in thousands): $ 1,123 10 44 $ 1,177 at
Goodwill | $ | 1,367 | |||
Intangible Assets – Customer Base & Contracts | 746 | ||||
Intangible Assets – Covenant Not to Compete | 396 | ||||
| 2,509 | |||||
Plus: | Accounts Receivable | 361 | |||
Other Current Assets | 24 | ||||
Property and Equipment | 326 | ||||
Less: | Current Liabilities | (121 | ) | ||
Total Purchase Price | $ | 3,099 | |||
During the datefirst quarter of acquisition. Asfiscal year 2024,e2b has contributed revenue of December 23, 2017$0.8 million and March 25, 2017, no contingent consideration oroperating income of $0.1 million, which includes the negative impact of amortization of the acquired intangible assets.
Alliance: Effective May 31, 2022, Transcat acquired substantially all of the assets of Charlton Jeffmont Inc., Raitz Inc. and Toolroom Calibration Inc. d/b/a Alliance Calibration (“Alliance”), an Ohio based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities.
The Alliance goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other holdback amounts were outstanding.intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the Alliance acquisition has been allocated to the Service segment. Intangible assets related to the Alliance acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are deductible for tax purposes. Amortization of goodwill related to the Alliance acquisition is deductible for tax purposes.
The purchase price for Alliance was approximately $4.7 million and was paid with $4.0 million in cash and the issuance of 2,284 shares of our common stock valued at $0.1 million. Pursuant to the asset purchase agreement, the Company held back $0.5 million of the purchase price for certain potential post-closing adjustments, and the purchase price will be subject to reduction by $0.5 million if a key customer relationship is not retained.
The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Alliance’s assets and liabilities acquired on May 31, 2022 (in thousands):
Goodwill | $ | 1,783 | |||
Intangible Assets – Customer Base & Contracts | 2,320 | ||||
Intangible Assets – Covenant Not to Compete | 114 | ||||
| 4,217 | |||||
Plus: | Accounts Receivable | 343 | |||
Property and Equipment | 170 | ||||
Less: | Current Liabilities | (27 | ) | ||
Total Purchase Price | $ | 4,703 | |||
During the first quarter of fiscal year 2024, Alliance has contributed revenue of $0.6 million and operating income of $0.2 million, which includes the negative impact of amortization of the acquired intangible assets.
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 acquisitionacquisitions of ExcaliburTIC-MS, Elite, Complete Calibrations, e2b and Alliance had occurred at the beginning of fiscal year 2017.2023. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transactiontransactions had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods.
| (Unaudited) | |||
| Nine Months | |||
| Ended | |||
| December 24, | |||
| 2016 | |||
| Total Revenue | $ | 105,595 | |
| Net Income | $ | 3,013 | |
| Basic Earnings Per Share | $ | 0.43 | |
| Diluted Earnings Per Share | $ | 0.42 | |
During each
(Unaudited) | ||||||||
First Quarter Ended | ||||||||
(in thousands except per share information) | June 24, 2023 | June 25, 2022 | ||||||
Total Revenue | $ | 60,598 | $ | 56,829 | ||||
Net Income | $ | 2,964 | $ | 3,270 | ||||
Basic Earnings Per Share | $ | 0.39 | $ | 0.43 | ||||
Diluted Earnings Per Share | $ | 0.38 | $ | 0.43 | ||||
Certain of the Company’s acquisition agreements include provisions for contingent consideration and other holdback amounts. The Company accrues for contingent consideration and holdback provisions based on their estimated fair value at the date of acquisition. As of June 24, 2023, no contingent consideration and $0.1 million of other holdback amounts unpaid are reflected in current liabilities on the Consolidated Balance Sheets. During the first nine months quarter of fiscal years 2018year 2024, no contingent consideration and 2017,$0.3 million of other holdback amounts were paid. During the first quarter of fiscal year 2023, no contingent consideration or other holdback amounts were paid.
During the first quarter of fiscal year 2024 and fiscal year 2023, acquisition costs of $0.2 million and less than $0.1 million, respectively, were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.
NOTE 6– INCOME TAXES SUBSEQUENT EVENT
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
Effective July 12, 2023, Transcat purchased all of the old ratesoutstanding capital stock of SteriQual, Inc. (“SteriQual”), a Florida based provider of expert consulting services to pharmaceutical, biopharmaceutical, medical device and the new rates for fiscal year 2018. The result wasdiagnostic equipment manufacturers. This transaction aligned with a $0.1 million reductionkey component of the Company’s provisionacquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. The total purchase price paid for income taxesSteriQual was approximately $4.2 million, which was paid by the issuance of 38,785 shares of our common stock valued at $3.3 million. Pursuant to the asset purchase agreement, the Company held back approximately $0.9 million of the purchase price for certain potential post-closing adjustments.
The purchase price allocation has not been finalized, due to the timing of the acquisition and the filing date of this Quarterly Report on Form 10-Q. Therefore, the allocation of the purchase price to the assets acquired and liabilities assumed, including values to be recognized for goodwill and other intangible assets, will be disclosed in the thirdQuarterly Report on Form 10-Q for the fiscal quarter ending September 23, 2023 with the pro forma results of fiscal year 2018.
operations from the SteriQual acquisition. The Company has concluded that the Act will cause the Company’s U.S. deferred tax assets and liabilitiesgoodwill related 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 areSteriQual is not 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 provisiondeductible for income tax expense in the reporting periodpurposes. All of the enactment. The Act required the Company to do such a revaluationgoodwill 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 dueintangible assets relating to the Act inSteriQual acquisition will be allocated to the third quarterService segment.
ITEM 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements.This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, estimates, beliefs, assumptions and predictions of future events and are identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “projects,“seek,” “intends,“strategy,” “target,” “could,” “may”“may,” “will,” “would,” and other similar words. Forward-looking statements are not statements of historical fact and thus are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or those expressed in such forward-looking statements. You should evaluate forward-looking statements in light of important risk factors and uncertainties that may affect our operating and financial results and our ability to achieve our financial objectives. These factors include, but are not limited to, general economic conditions applicable to our business, inflationary impacts, the impact of widespread public health crises, the highly competitive nature of the industries in which we compete and in the nature of our two business segments, the concentration of Service segment customers in the life science and other FDA-regulated and industrial manufacturing industries, the significant competition we face in our Distribution segment, any impairment of our goodwill or intangible assets, tariffs and trade relations, our ability to successfully complete and integrate business acquisitions, cybersecurity risks, the risk of significant disruptions in our information technology systems, our ability to recruit, train and retain quality employees, skilled technicians and senior management, fluctuations in our operating results, our ability to achieve or maintain adequate utilization and pricing rates for our technical service providers, the prices we are able to charge for our services in our Service segment, competition in the rental market, our ability to adapt our technology, reliance on one vendor toour enterprise resource planning system, technology updates, supply a significant amount of inventory purchases,chain delays or disruptions, the risks related to current and future indebtedness, foreign currency rate fluctuations, risks related to our intellectual property, adverse weather events or other catastrophes or natural disasters, the volatility of our stock price, the relatively low trading volume of our common stock, changes in tax rates, changes in accounting standards, legal requirements and listing standards, and legal and regulatory 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.international operations. 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, 2017.2023. 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, correct 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, 2017.2023.
RESULTS OF OPERATIONS
Executive Summary
We achieved record
During our first quarter of fiscal year 2024, we had consolidated revenue of $40.5$60.6 million. This represented an increase of $2.7$5.9 million or 7.1%10.9% versus the thirdfirst quarter of fiscal year 2017. Revenue growth2023. This increase was led byprimarily due to recently completed acquisitions, strong demand in our Service segment, whichsegment’s highly-regulated end markets and increased 7.5% to $18.8 million. Sales growth in our Distribution segment was 6.7% to $21.7 million, a record quarter for that segment. The growth achieved in both segments was all organic.rental sales.
Gross profit was $9.7 million, an increase of $0.8 million or 8.8% versus the third
Our first quarter of fiscal year 2017. Gross margin increased 40 basis points due to improved productivity 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,2024 gross profit was $18.7 million. This was an increase of $0.5$2.7 million or 7.4% as compared to16.7% versus the thirdfirst quarter of fiscal year 2017. General and administrative expenses increased as we continued to invest in our technology infrastructure and operational excellence initiatives.2023. In addition, consolidated gross margin was 30.9%, an increase of 160 basis points versus the first quarter of fiscal year 2023. This increase was partially offset by a decrease in selling, marketing and warehouse expenses which was alargely the result of reduced acquired customer amortization expense. Operatingoperating leverage on our fixed costs and accretive gross margins from our rental business.
Total operating expenses aswere $14.1 million in the first quarter of fiscal year 2024, an increase of $1.6 million or 13.2% when compared to the prior year first quarter. Included in operating expenses during the first quarter of fiscal year 2024 were incremental operating expenses related to the acquisitions of TIC-MS, e2b and Complete Calibrations, investments in technology and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were 17.4%, the same as23.2% in the thirdfirst quarter of fiscal year 2017.2024, up 50 basis points from 22.7% in the first quarter of fiscal year 2023. Operating income was $4.6 million, an increase of $1.0 million, or 28.7% and operating margin increased from 6.6% to 7.7% in the first quarter of fiscal year 2024.
Net income was $1.8$2.9 million forin the thirdfirst quarter of fiscal year 2018 for the reasons stated above, up from $1.32024 versus $3.1 million in the thirdfirst quarter of fiscal year 2017.2023. The Company also benefitted from reduceddifference between higher operating income and lower net income compared to the prior period is due to higher interest expense and provision for income taxestaxes.
The following table presents, for the thirdfirst quarter and first nine months of fiscal years 2018year 2024 and 2017,fiscal year 2023, the components of our Consolidated Statements of Income:
| (Unaudited) | (Unaudited) | |||||||
| Third Quarter Ended | Nine Months Ended | |||||||
| December 23, | December 24, | December 23, | December 24, | |||||
| 2017 | 2016 | 2017 | 2016 | |||||
| As a Percentage of Total Revenue: | ||||||||
| Service Revenue | 46.4% | 46.2% | 49.2% | 48.9% | ||||
| Distribution Sales | 53.6% | 53.8% | 50.8% | 51.1% | ||||
| Total Revenue | 100.0% | 100.0% | 100.0% | 100.0% | ||||
| Gross Profit Percentage: | ||||||||
| Service Gross Profit | 25.0% | 24.7% | 24.6% | 25.5% | ||||
| Distribution Gross Profit | 23.0% | 22.6% | 22.5% | 22.3% | ||||
| Total Gross Profit | 24.0% | 23.6% | 23.6% | 23.9% | ||||
| Selling, Marketing and Warehouse Expenses | 10.2% | 11.0% | 10.9% | 12.0% | ||||
| General and Administrative Expenses | 7.2% | 6.4% | 7.8% | 6.8% | ||||
| Total Operating Expenses | 17.4% | 17.4% | 18.7% | 18.8% | ||||
| Operating Income | 6.6% | 6.2% | 4.9% | 5.1% | ||||
| Interest and Other Expense, net | 0.8% | 0.5% | 0.8% | 0.5% | ||||
| Income Before Income Taxes | 5.8% | 5.7% | 4.1% | 4.6% | ||||
| Provision for Income Taxes | 1.3% | 2.3% | 1.0% | 1.6% | ||||
| Net Income | 4.5% | 3.4% | 3.1% | 2.9% | ||||
(Unaudited) | ||||||||
First Quarter Ended | ||||||||
June 24, | June 25, | |||||||
2023 | 2022 | |||||||
As a Percentage of Total Revenue: | ||||||||
Service Revenue | 65.8 | % | 62.0 | % | ||||
Distribution Sales | 34.2 | % | 38.0 | % | ||||
Total Revenue | 100.0 | % | 100.0 | % | ||||
Gross Profit Percentage: | ||||||||
Service Gross Profit | 32.5 | % | 32.0 | % | ||||
Distribution Gross Profit | 27.7 | % | 25.0 | % | ||||
Total Gross Profit | 30.9 | % | 29.3 | % | ||||
Selling, Marketing and Warehouse Expenses | 10.7 | % | 10.6 | % | ||||
General and Administrative Expenses | 12.5 | % | 12.1 | % | ||||
Total Operating Expenses | 23.2 | % | 22.7 | % | ||||
Operating Income | 7.7 | % | 6.6 | % | ||||
Interest and Other Expense, net | 1.5 | % | 0.3 | % | ||||
Income Before Income Taxes | 6.2 | % | 6.3 | % | ||||
Provision for Income Taxes | 1.3 | % | 0.7 | % | ||||
Net Income | 4.9 | % | 5.6 | % | ||||
THIRD QUARTER ENDED DECEMBER 23, 2017First Quarter Ended June 24, 2023 COMPARED TO THIRD QUARTER ENDED DECEMBER 24, 2016First Quarter Ended June 25, 2022(dollars (dollars in thousands):
Revenue:
| Third Quarter Ended | Change | |||||||||||
| December 23, | December 24, | |||||||||||
| 2017 | 2016 | $ | % | |||||||||
| Revenue: | ||||||||||||
| Service | $ | 18,769 | $ | 17,455 | $ | 1,314 | 7.5% | |||||
| Distribution | 21,714 | 20,358 | 1,356 | 6.7% | ||||||||
| Total | $ | 40,483 | $ | 37,813 | $ | 2,670 | 7.1% | |||||
First Quarter Ended | Change | |||||||||||||||
June 24, | June 25, | |||||||||||||||
2023 | 2022 | $ | % | |||||||||||||
Revenue: | ||||||||||||||||
Service | $ | 39,853 | $ | 33,876 | $ | 5,977 | 17.6 | % | ||||||||
Distribution | 20,745 | 20,785 | (40 | ) | (0.2 | )% | ||||||||||
Total | $ | 60,598 | $ | 54,661 | $ | 5,937 | 10.9 | % | ||||||||
Total revenue was $40.5$60.6 million, an increase of $2.7$5.9 million, or 7.1%10.9%, in our fiscal year 2018 third2024 first quarter compared to the prior fiscal year thirdfirst quarter. This year-over-year growth was purely organic.
Service revenue, which accounted for 46.4%65.8% and 46.2%62.0% of our total revenue in the thirdfirst quarter of fiscal years 20182024 and 2017,2023, respectively, increased 7.5%17.6% from the thirdfirst quarter of fiscal year 20172023 to the thirdfirst quarter of fiscal year 2018.2024. This year-over-year increase included $2.2 million in Service revenue was comprisedfrom acquisitions, and also included organic revenue growth of new business from the life science11.2% driven by improvement in end market conditions and growth in general industrial manufacturing customers, which includes the defense and aerospace market.continued market share gains.
Our fiscal years 20182024 and 2017 quarterly2023 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% | ||||||||
Fiscal year 2017 quarterly
| FY 2024 | FY 2023 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Service Revenue Growth | 17.6 | % | 14.7 | % | 19.0 | % | 19.4 | % | 22.9 | % | ||||||||||
The growth comparisons include organic and acquisition related 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 digit2024 versus the first quarter of fiscal year 2023 reflected both organic growth and acquisitions.
Within any fiscal year, while we add new customers, we also have customers from the prior fiscal year whose service orders may not repeat for any number of factors. Among those factors are variations in the timing of periodic calibrations and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of Service segment orders can vary on a quarter-to-quarter basis, we believe trailing twelve-month information provides a better indication of the progress of this segment.
The following table presents the trailing twelve-month Service segment revenue for the first quarter of fiscal year 2024 and each quarter in fiscal year 2023 as well as the trailing twelve-month revenue growth each quarter overas a comparison to that of the same quarter prior year.fiscal year period:
| FY 2024 | FY 2023 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Trailing Twelve-Month: | ||||||||||||||||||||
Service Revenue | $ | 150,860 | $ | 144,883 | $ | 139,787 | $ | 134,047 | $ | 128,324 | ||||||||||
Service Revenue Growth | 17.6 | % | 18.8 | % | 20.2 | % | 20.9 | % | 21.2 | % | ||||||||||
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 the first quarter of fiscal year 2024 and for each quarter during fiscal years 2018 and 2017:year 2023:
| 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 2024 | FY 2023 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Percent of Service Revenue: | ||||||||||||||||||||
In-House | 87.3 | % | 86.9 | % | 86.2 | % | 86.2 | % | 85.4 | % | ||||||||||
Outsourced | 11.6 | % | 11.9 | % | 12.6 | % | 12.6 | % | 13.2 | % | ||||||||||
Freight Billed to Customers | 1.1 | % | 1.2 | % | 1.2 | % | 1.2 | % | 1.4 | % | ||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||
Our Distribution sales accounted for 53.6%34.2% of our total revenue in the thirdfirst quarter of fiscal year 20182024 and 53.8%38.0% of our total revenue in the thirdfirst quarter of fiscal year 2017.2023. During the thirdfirst quarter of fiscal year 2018,2024, Distribution segment sales showed a decrease of 0.2% or less than $0.1 million to $20.7 million. This decrease was primarily due to slower demand for our traditional products offset by increases in rental orders.
The following table presents the quarterly historical trend of Distribution sales growth reflected higher demand from industrial customers, especially those sold through our independentin fiscal years 2024 and 2023 compared to the prior year fiscal quarter:
| FY 2024 | FY 2023 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Distribution Sales Growth (Decline) | (0.2 | )% | 5.1 | % | 3.7 | % | 1.6 | % | 2.7 | % | ||||||||||
Distribution segment sales representative network, increased rental business and web-based sales. Rental revenue was $1.0 million and $0.7 millionwere relatively flat in the third quartersfirst quarter of fiscal years 2018 and 2017, respectively.
Our fiscal years 2018 and 2017 Distribution sales growth (decline), in relation to prioryear 2024 versus the first quarter of fiscal year quarter comparisons, was as follows. The2023.
Distribution 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.
| 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%) | |||||||
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. Backorders are the total dollar value of orders received for which revenue has not yet been recognized. 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. Management uses pending product shipments and backorders as measures of our future business performance and financial performance within the distribution segment.
Our total pending product shipments at the end of the thirdfirst quarter of fiscal year 20182024 were $3.9$7.1 million, a decrease of $0.1$1.9 million from $4.0 million atversus the end of the thirdfirst quarter of fiscal year 2017. 2023 and a decrease of $1.0 million since March 25, 2023. The year-over-year decrease in pending product shipments and backorders was a result of improved fulfillment of existing orders.
The following table presents our total pending product shipments and the percentage of total pending product shipments that were backorders at the end of the first quarter of fiscal year 2024 and each quarter of fiscal years 2018 and 2017:year 2023:
| FY 2018 | FY 2017 | |||||||||||||||||||||
| 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 | ||||||||
| % of Pending Product Shipments that were Backorders | 71.4% | 74.2% | 69.6% | 73.5% | 66.1% | 74.9% | 69.8% | |||||||||||||||
| FY 2024 | FY 2023 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Total Pending Product Shipments | $ | 7,109 | $ | 8,101 | $ | 9,543 | $ | 9,116 | $ | 9,034 | ||||||||||
| ||||||||||||||||||||
% of Pending Product Shipments that were Backorders | 85.0 | % | 84.8 | % | 78.4 | % | 80.8 | % | 78.1 | % | ||||||||||
Gross Profit:
| Third Quarter Ended | Change | ||||||||||
| December 23, | December 24 | ||||||||||
| 2017 | 2016 | $ | % | ||||||||
| Gross Profit: | |||||||||||
| Service | $ | 4,699 | $ | 4,306 | $ | 393 | 9.1% | ||||
| Distribution | 5,002 | 4,609 | 393 | 8.5% | |||||||
| Total | $ | 9,701 | $ | 8,915 | $ | 786 | 8.8% | ||||
First Quarter Ended | Change | |||||||||||||||
June 24, | June 25, | |||||||||||||||
2023 | 2022 | $ | % | |||||||||||||
Gross Profit: | ||||||||||||||||
Service | $ | 12,971 | $ | 10,835 | $ | 2,136 | 19.7 | % | ||||||||
Distribution | 5,739 | 5,203 | 536 | 10.3 | % | |||||||||||
Total | $ | 18,710 | $ | 16,038 | $ | 2,672 | 16.7 | % | ||||||||
Total gross profit for the thirdfirst quarter of fiscal year 20182024 was $9.7$18.7 million, an increase of $0.8$2.7 million or 8.8%16.7% versus the thirdfirst quarter of fiscal year 2017.2023. Total gross margin was 24.0%30.9% in the thirdfirst quarter of fiscal year 2018, a 40 basis point increase versus2024, up from 29.3% in the thirdfirst quarter of fiscal year 2017.2023, a 160 basis point increase.
Service gross profit in the thirdfirst quarter of fiscal year 20182024 increased $0.4$2.1 million, or 9.1%19.7%, from the thirdfirst quarter of fiscal year 2017.2023. Service gross margin was 25.0%32.5% in the thirdfirst quarter of fiscal year 2018,2024, a 3050 basis point increase versus the thirdfirst quarter of fiscal year 2017.2023. This improvedincrease in gross margin was largely due tothe result of improved productivity improvements, including the ramp-up productivityoffset by increased start-up costs from service technicians hired earlier in fiscal year 2018.new client-based lab implementations.
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 2024 | FY 2023 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Service Gross Margin | 32.5 | % | 34.0 | % | 30.0 | % | 32.6 | % | 32.0 | % | ||||||||||
Our Distribution gross margin includes net sales less the direct cost of inventory sold and the direct costs of equipment rental revenues, primarily depreciation expense for the fixed assets in our rental equipment pool, as well as the impact of rebates and cooperative advertising income we receive from vendors, freight billed to customers, freight expenses and direct shipping costs. In general, our Distribution gross margin can vary based upon the mix of products sold, price discounting, and the timing of periodic vendor rebates offered and cooperative advertising programs from suppliers.
The following table reflects the quarterly historical trend of our Distribution gross margin as a percent of Distribution sales:
| FY 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 2024 | FY 2023 | |||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||
Distribution Gross Margin | 27.7 | % | 25.2 | % | 26.2 | % | 24.9 | % | 25.0 | % | ||||||||||
Distribution segment gross margin was 23.0%27.7% in the thirdfirst quarter of fiscal year 2018, a 40 basis point increase2024 versus 25.0% in the thirdfirst quarter of fiscal year 2017.2023, a 270 basis point increase. The increase in segment gross margin was driven by the sales mix which offset a decrease in volume-based vendor rebates.
Operating Expenses:
| Third Quarter Ended | Change | |||||||||||
| December 23, | December 24, | |||||||||||
| 2017 | 2016 | $ | % | |||||||||
| Operating Expenses: | ||||||||||||
| Selling, Marketing and Warehouse | $ | 4,150 | $ | 4,159 | $ | (9 | ) | (0.2% | ) | |||
| General and | ||||||||||||
| Administrative | 2,897 | 2,403 | 494 | 20.6% | ||||||||
| Total | $ | 7,047 | $ | 6,562 | $ | 485 | 7.4% | |||||
The year-over-year increase in operating expenses was primarily due to incremental generala favorable mix of higher margin products sold and administrativerented.
Operating Expenses:
First Quarter Ended | Change | |||||||||||||||
June 24, | June 25, | |||||||||||||||
2023 | 2022 | $ | % | |||||||||||||
Operating Expenses: | ||||||||||||||||
Selling, Marketing and Warehouse | $ | 6,469 | $ | 5,820 | $ | 649 | 11.2 | % | ||||||||
General and Administrative | 7,601 | 6,614 | 987 | 14.9 | % | |||||||||||
Total | $ | 14,070 | $ | 12,434 | $ | 1,636 | 13.2 | % | ||||||||
Total operating expenses related to our continued investmentwere $14.1 million in technology infrastructure improvements and operational excellence initiatives.the first quarter of fiscal year 2024 versus $12.4 million during the first quarter of fiscal year 2023. The year-over-year decreaseincrease in selling, marketing and warehouse expenses is due to reduced acquisitionincreased expenses related amortization expense. to recent acquisitions and higher incentive-based employee costs due to higher sales. The increase in general and administrative expenses includes incremental expenses related to acquired companies, increased payroll costs for new employees and continued investments in technology.
As a percentage of total revenue, operating expenses were 17.4%23.2% in the thirdfirst quarter of fiscal year 2018, the same as2024 and 22.7% in the thirdfirst quarter of fiscal year 2017.2023, an increase of 50 basis points.
Provision for
Income Taxes:
| Third Quarter Ended | Change | |||||||||||
| December 23, | December 24, | |||||||||||
| 2017 | 2016 | $ | % | |||||||||
| Provision for Income Taxes | $ | 512 | $ | 895 | $ | (383 | ) | (42.8% | ) | |||
First Quarter Ended | Change | |||||||||||||||
June 24, | June 25, | |||||||||||||||
2023 | 2022 | $ | % | |||||||||||||
Provision for Income Taxes | $ | 813 | $ | 376 | $ | 437 | 116.2 | % | ||||||||
Our effective tax ratesrate for the thirdfirst quarter of fiscal years 20182024 and 2017 were 21.9%2023 was 21.6% and 41.3%10.9%, respectively. The year-over-year decrease largely reflectsincrease in the enactmenttax provision is due to the decreased amount of the Act which was signed into law on December 22, 2017. The Act required a reduction in our U.S. net deferreddiscrete tax liability of approximately $0.2 million, which reduced thebenefit 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 thirdfirst quarter of fiscal years 2024 and 2023 was $0.1 million and $0.5 million, respectively.
Net Income:
First Quarter Ended | Change | |||||||||||||||
June 24, | June 25, | |||||||||||||||
2023 | 2022 | $ | % | |||||||||||||
Net Income | $ | 2,949 | $ | 3,072 | $ | (123 | ) | (4.0 | )% | |||||||
Net income for the first quarter of fiscal year 2018. The Act also required us to use a blended U.S. federal tax rate of2024 decreased from the old rates and the new rates because we are a 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 thirdfirst quarter of fiscal year 2018 by $0.1 million. Due to the Act, we now expect our total fiscal year 2018 effective tax rate to be approximately 28.0% to 29.0%. The impact of the Act may differ from this estimate, possibly materially,2023 primarily due to among other things, changes in interpretationsincreased operating expenses and assumptions we have made, guidance that may be issued and actions we may take as a result of the Act.higher provision for income taxes.
Net Income:
| Third Quarter Ended | Change | |||||||||
| December 23, | December 24, | |||||||||
| 2017 | 2016 | $ | % | |||||||
| Net Income | $ | 1,831 | $ | 1,270 | $ | 561 | 44.2% | |||
Net income for the third quarter of fiscal year 2018 was up 44.2% from the third quarter of fiscal year 2017 for the reasons stated above.
Adjusted EBITDA:
In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, and non-cash stock compensation expense, acquisition related transaction expenses, non-cash loss on sale of building, and restructuring expense), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, and stock-based compensation expense and other items, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.
Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of 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 | |||||||
| December 23, | December 24, | ||||||
| 2017 | 2016 | ||||||
| Net Income | $ | 1,831 | $ | 1,270 | |||
| + Interest Expense | 250 | 184 | |||||
| + Other Expense | 61 | 4 | |||||
| + Tax Provision | 512 | 895 | |||||
| Operating Income | $ | 2,654 | $ | 2,353 | |||
| + Depreciation & Amortization | 1,543 | 1,562 | |||||
| + Other Expense | (61 | ) | (4 | ) | |||
| + Noncash Stock Compensation | 264 | (10 | ) | ||||
| Adjusted EBITDA | $ | 4,400 | $ | 3,901 | |||
First Quarter Ended | ||||||||
June 24, | June 25, | |||||||
2023 | 2022 | |||||||
Net Income | $ | 2,949 | $ | 3,072 | ||||
+ Interest Expense | 814 | 360 | ||||||
+ Other (Income) / Expense | 64 | (204 | ) | |||||
+ Tax Provision | 813 | 376 | ||||||
Operating Income | $ | 4,640 | $ | 3,604 | ||||
+ Depreciation & Amortization | 2,790 | 2,641 | ||||||
+ Transaction Expense | 185 | 30 | ||||||
+ Other Income / (Expense) | (64 | ) | 204 | |||||
+ Noncash Stock Compensation | 930 | 828 | ||||||
Adjusted EBITDA | $ | 8,481 | $ | 7,307 | ||||
Total Adjusted EBITDA for the thirdfirst quarter of fiscal year 20182024 was $4.4$8.5 million, a $0.5an increase of $1.2 million or 12.8% increase16.1% versus the thirdfirst quarter of fiscal year 2017.2023. As a percentage of revenue, Adjusted EBITDA was 10.9%increased to 14.0% for the thirdfirst quarter of fiscal year 2018 and 10.3%2024 from 13.4% for the thirdfirst quarter of fiscal year 2017.2023. The difference between the increase in Adjusted EBITDA and increase in net income during the thirdfirst quarter of fiscal year 2018 is2024 was primarily driven by increased non-cash stock compensation expensethe increase in operating income from gross margin expansion and the impact of the Act on our tax provision.service revenue growth.
NINE MONTHS ENDED DECEMBER
Revenue:
| Nine Months Ended | Change | |||||||||
| December 23, | December 24, | |||||||||
| 2017 | 2016 | $ | % | |||||||
| Revenue: | ||||||||||
| Service | $ | 55,490 | $ | 51,577 | $ | 3,913 | 7.6% | |||
| Distribution | 57,199 | 53,868 | 3,331 | 6.2% | ||||||
| Total | $ | 112,689 | $ | 105,445 | $ | 7,244 | 6.9% | |||
Adjusted Diluted Earnings Per Share:
Service revenue, which accounted for 49.2% of our total revenue during the first nine months of fiscal year 2018 and 48.9% of our total revenue during the first nine months of fiscal year 2017, increased $4.0 million, or 7.6%, from the first nine months of fiscal year 2017 to the first nine months of fiscal year 2018. The year-over-year increase was all organic as we took market share in the life science sector and general industrial manufacturing sector which includes both the defense and aerospace markets and raised prices where appropriate.
Our Distribution sales accounted for 50.8% and 51.1% of our total revenue in the first nine months of fiscal years 2018 and 2017, respectively. For the first nine months of fiscal year 2018, Distribution sales increased $3.3 million, or 6.2%, compared to the first nine months of fiscal year 2017. This year-over-year increase in sales reflects higher demand from industrial customers, including those sold through our independent representative network and increased rental revenues.
Gross Profit:
| Nine Months Ended | Change | |||||||||
| December 23, | December 24, | |||||||||
| 2017 | 2016 | $ | % | |||||||
| Gross Profit: | ||||||||||
| Service | $ | 13,655 | $ | 13,175 | $ | 480 | 3.6% | |||
| Distribution | 12,891 | 12,013 | 878 | 7.3% | ||||||
| Total | $ | 26,546 | $ | 25,188 | $ | 1,358 | 5.4% | |||
Total gross profit increased $1.4 million or 5.4% for the first nine months of fiscal year 2018 versus the first nine months of fiscal year 2017. Total gross margin was 23.6%, a 30 basis points reduction compared to 23.9% in 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.
Operating Expenses:
| Nine Months Ended | Change | |||||||||||
| December 23, | December 24, | |||||||||||
| 2017 | 2016 | $ | % | |||||||||
| Operating Expenses: | ||||||||||||
| Selling, Marketing and Warehouse | $ | 12,247 | $ | 12,612 | $ | (365 | ) | (2.9% | ) | |||
| General and Administrative | 8,776 | 7,207 | 1,569 | 21.8% | ||||||||
| Total | $ | 21,023 | $ | 19,819 | $ | 1,204 | 6.1% | |||||
The year-over-year increase in operating expenses was primarily due to incremental general and administrative expenses related to 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 2018 were 18.7%, compared to 18.8% in the first nine months of fiscal year 2017.
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%) | |||
Our effective tax rates for the first nine months of fiscal years 2018 and 2017 were 25.7% and 35.9%, 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 reduced the provision for income taxes during the third quarter of fiscal year 2018. The Act also required us 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 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 now expect our total fiscal year 2018 effective tax rate to be approximately 28.0% to 29.0%. 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% | |||
Net income for the first nine months of fiscal year 2018 was up 12.1% from the first nine months of fiscal year 2017 as increased interest and other expense more than offset a lower provision for income taxes.
Adjusted EBITDA:
In addition to reporting net income,Diluted Earnings Per Share, a GAAP measure, we present Adjusted EBITDA (earnings before interest,Diluted Earnings Per Share (net income taxes, depreciationplus acquisition related amortization expense, acquisition related transaction expenses, acquisition related stock-based compensation, acquisition amortization of backlog and amortization, and non-cash stock compensation expense)restructuring expense, on a diluted per share basis), which is a non-GAAP measure. Our management believes Adjusted EBITDADiluted Earnings Per Share is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of its 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 asprovides a basis for planningcomparison of our business operations between current, past and forecasting. Adjusted EBITDA is also commonly usedfuture periods by rating agencies, lenders and other parties to evaluateexcluding items that we do not believe are indicative of our credit worthiness.core operating performance.
Adjusted EBITDADiluted Earnings Per Share 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 incomeDiluted Earnings Per Share and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA,Diluted Earnings Per Share, 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 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, Adjusted EBITDA was $11.1 million, an increase of $0.8 million or 7.3% versus the first nine months of fiscal year 2017. As a percentage of revenue, Adjusted EBITDA was 9.8% for each of the first nine months of fiscal year 2018 and 2017. The difference between the increase in Adjusted EBITDA and increase in net income during the first nine months of fiscal year 2018 is primarily driven by increased non-cash stock compensation expense and the impact of the Act on our tax provision.
First Quarter Ended | ||||||||
June 24, | June 25, | |||||||
2023 | 2022 | |||||||
Net Income | $ | 2,949 | $ | 3,072 | ||||
+ Amortization of Intangible Assets | 1,093 | 1,084 | ||||||
+ Acquisition Deal Costs | 367 | 299 | ||||||
+ Income Tax Effect @ 25% | (365 | ) | (346 | ) | ||||
Adjusted Net Income | 4,044 | 4,109 | ||||||
Average Diluted Shares Outstanding | 7,762 | 7,629 | ||||||
Diluted Earnings Per Share – GAAP | $ | 0.38 | $ | 0.40 | ||||
Adjusted Diluted Earnings Per Share | $ | 0.52 | $ | 0.54 | ||||
LIQUIDITY AND CAPITAL RESOURCES
On October 30, 2017, the Company entered into an
We expect that foreseeable liquidity and capital resource requirements will be met through anticipated cash flows from operations and borrowings from our revolving credit facility. We believe that these sources of financing will be adequate to meet our future requirements.
Under our Second Amended and Restated Credit Facility Agreement (the “2017“Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), which amended and restatedwe have access to a revolving credit commitment (the “Revolving Credit Commitment”) of $80.0 million through June 2026, with a letter of credit subfacility of $10.0 million. Our 2018 term loan, with an original principal amount of $15.0 million (the “2018 Term Loan”), is also provided for under the Credit Agreement.
The Credit Agreement allows us to use up to $50.0 million under the Revolving Credit Commitment for acquisitions in any single fiscal year. The Credit Agreement restricts our prior credit facility agreement. The 2017 Agreement extendedability to complete acquisitions of businesses with a principal place of business located in the United Kingdom or the European Union to an aggregate purchase price of $40.0 million during the term of the Company’s $30.0Credit Agreement, if the acquisition is financed directly or indirectly with the Revolving Credit Commitment. Under the Credit Agreement, we may make restricted payments up to $25.0 million in the aggregate over the term of the Credit Agreement and $10.0 million in any single fiscal year to repurchase shares and pay dividends.
Interest on outstanding borrowings under the revolving credit facility (the “Revolving Credit Facility”) to October 29, 2021. As of December 23, 2017, $30.0 million was available under the Revolving Credit Facility, of which $11.6 million was outstanding and included in long-term debt on the Consolidated Balance Sheet.
The 2017 Agreement also increased the amount of the Company’s outstanding term loan to $15.0 million (the “2017 Term Loan”), replacing the previous term loan. As of December 23, 2017, $14.6 million was outstanding on the 2017 Term Loan, of which $2.1 million was included in current liabilities on the Consolidated Balance Sheet with the remainder included in long-term debt. The 2017 Term Loan requires principal repayments of $0.2 million per month plus interest through September 2022 with a $4.3 million repayment required on October 29, 2022. Under the 2017 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 were used for business acquisitions.
The allowable leverage ratio under the 2017 Agreement remains at 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, 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.
The 2017 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. Our leverage ratio, as defined in the 2017 Agreement, was 1.72 at December 23, 2017, compared with 1.88 at fiscal 2017 year-end.
Interest on the 2017 Agreement and 2017 Term Loan 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 (subject to a 0.25% floor), in each case, plus a margin. CommitmentUnused fees accrue based on the average daily amount of unused credit available underon the 2017 Agreement.revolving credit facility. Interest rate margins and commitmentunused fees are determined on a quarterly basis based upon our calculated leverage ratio. Our interest rate for the revolving credit facility for the first quarter of fiscal year 2024 ranged from 6.4% to 6.9%. Interest on outstanding borrowings under the 2018 Term Loan accrue at a fixed rate of 3.90% over the term of the loan. The Credit Agreement includes a mechanism for the adoption of a different benchmark rate upon the discontinuance of LIBOR. The Company was notified by M&T that effective July 1, 2023, LIBOR was discontinued and replaced with the Daily Simple SOFR plus applicable Benchmark Replacement Adjustment.
The Credit Agreement has certain covenants with which we must comply, including a fixed charge ratio covenant, which prohibits our fixed charge coverage ratio from being less than 1.15 to 1.00, and a leverage ratio covenant, which prohibits our leverage ratio from exceeding 3.00 to 1.00. We were in compliance with all loan covenants and requirements during the first quarter of fiscal year 2024. Our leverage ratio, as defined in the 2017 Agreement.Credit Agreement, was 1.50 at June 24, 2023, compared with 1.60 at March 25, 2023.
As of June 24, 2023, $37.5 million was available for borrowing under the revolving credit facility, with $42.5 million outstanding and included in long-term debt on the Consolidated Balance Sheets. During the first quarter of fiscal year 2024 and 2023, we used $2.9 million and $4.0 million, respectively, for business acquisitions.
As of June 24, 2023, $5.9 million was outstanding on the 2018 Term Loan, of which $2.3 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $0.2 million per month through December 2025.
Cash Flows:The following table is a summary of our Consolidated Statements of Cash Flows:Flows (dollars in thousands):
| Nine Months Ended | ||||||||
| December 23, | December 24, | |||||||
| 2017 | 2016 | |||||||
| Cash (Used in) Provided by: | ||||||||
| Operating Activities | $ | 5,817 | $ | 3,874 | ||||
| Investing Activities | $ | (5,073 | ) | $ | (11,052 | ) | ||
| Financing Activities | $ | (678 | ) | $ | 6,934 | |||
Three Months Ended | ||||||
June 24, | June 25, | |||||
2023 | 2022 | |||||
Cash Provided by (Used in): | ||||||
Operating Activities | $ | 7,536 | $ | 2,043 | ||
Investing Activities | $ | (5,636 | ) | $ | (6,429 | ) |
Financing Activities | $ | (859 | ) | $ | 3,110 | |
Operating Activities: Net cash provided by operating activitiesoperations was $5.8$7.5 million during the first nine monthsquarter of fiscal year 20182024 compared to $3.9$2.0 million of net cash provided by operating activities during the first nine monthsquarter of fiscal year 2017.2023. The year-over-year increase in cash provided by operations iswas 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 | ||||
June 24, | June 25, | |||||||
2023 | 2022 | |||||||
Net Sales, for the last two fiscal months | $ | 43,430 | $ | 38,321 | ||||
Accounts Receivable, net | $ | 42,356 | $ | 38,031 | ||||
Days Sales Outstanding | 61 | 60 | ||||||
● | 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 |
● | 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 Current 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 |
Investing Activities:During the first nine monthsquarter of fiscal year 2018,years 2024 and 2023, we invested $5.1$2.7 million and $2.4 million, respectively, in capital expenditures including $1.0 million spent for expanded Service segment capabilities, specifically for our mobile calibration truck fleet and radio-frequency asset capabilities, and $1.5 million spent for rental assets. During the first nine months of fiscal year 2017, we invested $4.1 million in capital expenditures,that was used primarily for additionalcustomer-driven expansion of Service segment capabilities and our rental assets. business.
During the first nine monthsquarter of fiscal years 2024 and 2023, we used $2.9 million and $4.0 million, respectively, for business acquisitions.
During the first quarter of fiscal year 2018,2024, we had nopaid $0.3 million of other holdback amounts relating to business acquisitions. During the first nine monthsquarter of fiscal year 2017, we used $7.0 million for a2023, no contingent consideration or other holdback amounts were paid related to business acquisition. We generally fund capital expenditures with cash flow from operations and our Revolving Credit Facility.acquisitions.
Financing Activities:During the first nine monthsquarter of fiscal year 2018, we received $7.1 million from the proceeds of the 2017 Term Loan and $0.82024, $0.2 million in cash was generated from the issuance of common stock. In addition, we used $7.0$0.6 million for scheduled repayments of our term loan, $0.2 million was repaid to repay our Revolving Credit Facility, we used $1.2revolving line of credit and $0.3 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in fiscal year 2024, which are shown as a repurchase of shares of our common stock.
During the first quarter of fiscal year 2023, $3.8 million was borrowed from our revolving line of credit and $0.2 million in cash was generated from the issuance of common stock. In addition, we used $0.5 million for repaymentscheduled repayments of our term loan and $0.3$0.4 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in the quarter, which are shown as a repurchase of shares of our common stock.
OUTLOOK
We have demonstrated our ability to drive growth through various economic cycles as can be seen over the past decade and a half, and we believe that will continue. During the first nine months of fiscal year 2017,2024, we received $9.0 millionexpect organic Service revenue growth in net proceeds fromthe high-single digit to low double-digit range and gross margin expansion. We believe our unique value proposition drives a term loansustainable competitive advantage in the highly regulated markets that we serve, particularly the Life Science, Aerospace, and used approximately $1.9 million in cash for repaymentDefense markets. Strategic, accretive acquisitions that drive synergistic growth opportunities will be a key component 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 revisedgo-forward strategy.
We expect 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.
OUTLOOK
The fourth quarter of our fiscal year is an important one as we usually generate approximately one third of our annual operating income in the fourth quarter. We believe we are well positioned and on track for a record year in fiscal 2018. Although still early, we believe 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 range between 21% and 23% for full fiscal year 2024. This estimate includes Federal, various state, Canadian and Irish income taxes and reflects the discrete tax accounting associated with share-based payment awards. Although the tax rate is consistent with recent years, there will be approximately 26%.a difference in calendarization of the tax benefit from vesting of share-based payments in fiscal year 2024. The Company expectstax benefits are normally realized in the fiscal first quarter, but we expect to invest any windfall fromsee the Actbenefit in its people, processes and technology.
The Company tightened its capital expenditures expectations for the fullsecond quarter of fiscal year fiscal 20182024, due to a rangetiming difference of $6.0 millionwhen the awards were granted. This benefit is expected to $6.3 million, which is being used primarily for technology infrastructure investments to drive operational excellence, specific customer-opportunity driven Service capabilities and additional assets forpositively impact the Company’s growing rental business.tax rate by approximately 13% in the second quarter of fiscal year 2024.
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$0.4 million assuming our average borrowing levels remained constant.constant under the revolving credit facility. As of December 23, 2017, $30.0June 24, 2023, $37.5 million was available for borrowing under our Revolving Credit Facility, of which $11.6the revolving credit facility, with $42.5 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.loan. The term loan2018 Term Loan is considered a LIBORfixed interest rate loan. As of December 23, 2017, $14.6June 24, 2023, $5.9 million was outstanding onunder the term loan2018 Term Loan and was included in long-term debt and current portion of long-term debt on the Consolidated Balance Sheet.Sheets. The term loan2018 Term Loan requires principaltotal (principal and interest) repayments of $0.2 million per month plus interest.month.
At our option, we may borrow from our Revolving Credit Facility and term loanrevolving credit facility at the variable one-month LIBOR or at a fixed rate for a designated period at the LIBOR corresponding to such period (subject to a 0.25% floor), 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, the one-month LIBOR was 1.6%. Our interest rate forduring the first nine monthsquarter of fiscal year 20182024 for our revolving credit facility ranged from 3.2%6.4% to 3.4%6.9%. Interest on outstanding borrowings of the 2018 Term Loan accrued at a fixed rate of 3.90% over the term of the loan. Our revolving credit facility includes a mechanism for adoption of a different benchmark rate upon the discontinuance of LIBOR. On December 23, 2017,June 24, 2023, we had no hedging arrangements in place for our revolving credit facility to limit our exposure to upward movements in interest rates. The Company was notified by M&T that effective July 1, 2023, LIBOR was discontinued and replaced with the Daily Simple SOFR plus applicable Benchmark Replacement Adjustment.
FOREIGN CURRENCY
Approximately 90% of our total revenues for each of the first nine monthsquarter of fiscal years 2018year 2024 and 20172023 were denominated in U.S. dollars, with the remainder denominated in Canadian dollars.dollars and Euros. A 10% change in the value of the Canadian dollar to the U.S. dollar and the Euro to the U.S. dollar would impact our revenue by approximately 1%. We monitor the relationship between the U.S. dollar and the Canadian currenciesdollar and the U.S. dollar and the Euro on a monthly basis and adjust sales prices for products and services sold in Canadian dollars or Euros as we believe to be appropriate.
We continually utilize short-term foreign exchange forward contracts to reduce the risk that future earnings denominated in Canadian dollars 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 the first nine monthsquarter of each of the fiscal year 2018years 2024 and a gain of $0.1 million for the first nine months of fiscal year 2017,2023, was recognized as a component of other expenseInterest and Other Expense, net 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,June 24, 2023, we had a foreign exchange contract, which matured in January 2018,July 2023, outstanding in the notional amount of $5.4$2.5 million. The foreign exchange contract was renewed in January 2018July 2023 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 thirdfirst quarter of fiscal year 2018)2024) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 6. EXHIBITS2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Index to Exhibits
ISSUER PURCHASES OF EQUITY SECURITIES
(a) | (b) | (c) | (d) | ||||||||||||
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |||||||||||
03/26/23 - 04/22/23 | 721 | (2) | $ | 88.00 | (2) | - | - | ||||||||
04/23/23 - 05/20/23 | - | (2) | - | (2) | - | - | |||||||||
05/21/23 - 06/24/23 | 2,650 | (2) | $ | 89.60 | (2) | - | - | ||||||||
Total | 3,371 | $ | 89.26 | - | - | ||||||||||
(1) |
INDEX TO EXHIBITS
Exhibit | Description | ||
(31) | Rule 13a-14(a)/15d-14(a) Certifications | ||
31.1* | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2* | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
(32) | Section 1350 Certifications | ||
32.1** | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
(101) | Interactive Data File | ||
| 101.INS* | Inline XBRL Instance Document | ||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | ||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | ||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
| (104) | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||
* | Exhibit filed with this report. |
** | Exhibit furnished with this report. |
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: | /s/ Lee D. Rudow | ||
Lee D. Rudow | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: August 2, 2023 | /s/ Thomas L. Barbato | ||
Thomas L. Barbato | |||
Senior Vice President of Finance and Chief Financial Officer | |||
(Principal Financial Officer) |
23