Transcat(TRNS) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Transcat, Inc.'s unaudited consolidated financial statements, including income, comprehensive income, balance sheets, cash flows, and shareholders' equity, along with detailed notes on business operations and key accounting policies Item 1. Consolidated Financial Statements This section presents Transcat, Inc.'s unaudited consolidated financial statements, including statements of income, comprehensive income, balance sheets, cash flows, and changes in shareholders' equity for the third quarter and nine months ended December 24, 2022, and December 25, 2021, along with detailed notes on business operations, accounting policies, long-term debt, stock-based compensation, segment information, and recent business acquisitions Consolidated Statements of Income This section provides the consolidated statements of income, detailing revenue, net income, and earnings per share for the specified periods | Metric | 3Q FY23 (Dec 24, 2022) (in thousands) | 3Q FY22 (Dec 25, 2021) (in thousands) | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | | :----------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Total Revenue | $57,402k | $50,902k | $168,502k | $149,079k | | Net Income | $1,601k | $1,629k | $7,030k | $8,332k | | Basic EPS | $0.21 | $0.22 | $0.93 | $1.11 | | Diluted EPS | $0.21 | $0.21 | $0.92 | $1.10 | Consolidated Statements of Comprehensive Income This section presents the consolidated statements of comprehensive income, including net income and currency translation adjustments | Metric | 3Q FY23 (Dec 24, 2022) (in thousands) | 3Q FY22 (Dec 25, 2021) (in thousands) | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | | :----------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net Income | $1,601k | $1,629k | $7,030k | $8,332k | | Currency Translation Adjustment | $393k | $(233)k | $(878)k | $(314)k | | Comprehensive Income | $2,002k | $1,414k | $6,140k | $8,066k | Consolidated Balance Sheets This section outlines the consolidated balance sheets, detailing assets, liabilities, and shareholders' equity at specific fiscal year-ends | Metric | Dec 24, 2022 (in thousands) | Mar 26, 2022 (in thousands) | | :-------------------------- | :----------- | :----------- | | Total Current Assets | $60,697k | $59,704k | | Total Assets | $188,469k | $177,762k | | Total Current Liabilities | $25,084k | $27,710k | | Total Liabilities | $93,185k | $91,586k | | Total Shareholders' Equity | $95,284k | $86,176k | Consolidated Statements of Cash Flows This section presents the consolidated statements of cash flows, categorizing cash activities into operating, investing, and financing | Metric | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | | :-------------------------------- | :--------------------- | :--------------------- | | Net Cash Provided by Operating Activities | $13,975k | $12,378k | | Net Cash Used in Investing Activities | $(15,445)k | $(26,759)k | | Net Cash Provided by Financing Activities | $782k | $16,900k | | Net Increase in Cash | $197k | $2,219k | | Cash at End of Period | $1,593k | $2,779k | Consolidated Statements of Changes in Shareholders' Equity This section details changes in shareholders' equity, including retained earnings and common stock shares issued | Metric | Dec 24, 2022 (in thousands) | Mar 26, 2022 (in thousands) | Dec 25, 2021 (in thousands) | | :-------------------------- | :----------- | :----------- | :----------- | | Total Shareholders' Equity | $95,284k | $86,176k | $82,898k | | Retained Earnings | $65,504k | $58,744k | $56,403k | | Common Stock Shares Issued | 7,560k | 7,529k | 7,521k | Notes to Consolidated Financial Statements This section provides detailed notes explaining the company's business, accounting policies, debt, compensation, segment performance, and business acquisitions NOTE 1 – GENERAL This note provides an overview of Transcat's business, its basis of financial statement presentation, revenue recognition policies, fair value measurements of financial instruments, stock-based compensation accounting, foreign currency translation, earnings per share calculations, and policies for goodwill and intangible assets, also mentioning the anticipated non-material impact of a recently issued accounting pronouncement - Transcat, Inc. is a leading provider of accredited calibration services, enterprise asset management services, and a value-added distributor of professional-grade test, measurement, and control instrumentation, primarily serving highly regulated industries like life sciences[21] - Non-cash stock-based compensation expense increased to $2.8 million for the first nine months of fiscal year 2023, up from $1.7 million in the prior year period[27] - The Company uses short-term foreign exchange forward contracts to reduce the risk of adverse effects from changes in Canadian dollar exchange rates on future earnings, with a gain of $0.3 million recognized in 9M FY23[29] Average Shares Outstanding | Metric | 3Q FY23 (Dec 24, 2022) (in thousands) | 3Q FY22 (Dec 25, 2021) (in thousands) | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Average Shares Outstanding – Basic | 7,559k | 7,519k | 7,547k | 7,487k | | Average Shares Outstanding – Diluted | 7,666k | 7,653k | 7,644k | 7,599k | Goodwill and Intangible Assets | Metric | Goodwill (Dec 24, 2022) (in thousands) | Intangible Assets (Dec 24, 2022) (in thousands) | Goodwill (Mar 26, 2022) (in thousands) | Intangible Assets (Mar 26, 2022) (in thousands) | | :-------------------------- | :---------------------- | :------------------------- | :---------------------- | :------------------------- | | Net Book Value | $68,826k | $14,843k | $65,074k | $14,692k | | Additions | $4,496k | $3,576k | - | - | | Amortization | - | $(3,411)k | - | - | - The Company anticipates that the adoption of ASU 2016-13, which changes how entities measure credit losses, will not have a material impact on its consolidated financial statements[33] NOTE 2 – LONG-TERM DEBT This note details the 2021 Credit Agreement, which significantly increased the revolving credit commitment to $80.0 million and extended its term, also modifying permitted acquisition limits, restricted payment allowances, and adjusting interest rates and covenants, with the Company in compliance with all loan covenants as of December 24, 2022 - The 2021 Credit Agreement increased the revolving credit commitment from $40.0 million to $80.0 million and extended its term to June 2026[35][139] - Permitted acquisitions limits were increased to $65.0 million for fiscal year 2022 and $50.0 million for subsequent fiscal years, with an additional $40.0 million for UK/EU acquisitions[35][139] - Restricted payments for share repurchases and dividends were increased to $25.0 million in aggregate and $10.0 million in any single fiscal year[36][140] - The LIBOR floor was reduced from 1.0% to 0.25%, and the fixed interest rate on the $15.0 million term loan was reduced from 4.15% to 3.90%[36][140] - As of December 24, 2022, $42.2 million was outstanding on the revolving credit facility and $7.0 million on the 2018 Term Loan[39][40][143][144] - The Company was in compliance with all loan covenants, including a leverage ratio of 1.66 at December 24, 2022, down from 1.74 at March 26, 2022[42][145] NOTE 3 – STOCK-BASED COMPENSATION This note outlines the Company's stock-based compensation plans, including the 2021 Stock Incentive Plan, restricted stock units (RSUs), and stock options, detailing the valuation methods, vesting schedules, and associated expenses for these awards - The 2021 Stock Incentive Plan replaced the 2003 Plan, with 0.7 million shares available for future grant as of December 24, 2022[45] - Total expense for restricted stock units was $1.7 million for the first nine months of fiscal year 2023, up from $1.2 million in the prior year period[50] - Unearned compensation related to restricted stock units totaled $2.7 million as of December 24, 2022[50] - The expense related to all stock option awards was $1.1 million for the first nine months of fiscal year 2023, compared to $0.4 million in the prior year period[55] - Total unrecognized compensation cost related to non-vested stock options as of December 24, 2022, was $2.2 million, expected to be recognized over three years[58] NOTE 4 – SEGMENT INFORMATION This note disaggregates the Company's financial performance into its two reportable segments: Service and Distribution, and provides geographic revenue data, highlighting the revenue, gross profit, and operating income contributions from each segment Segment Performance | Metric | 3Q FY23 Service (in thousands) | 3Q FY22 Service (in thousands) | 3Q FY23 Distribution (in thousands) | 3Q FY22 Distribution (in thousands) | 9M FY23 Service (in thousands) | 9M FY22 Service (in thousands) | 9M FY23 Distribution (in thousands) | 9M FY22 Distribution (in thousands) | | :---------------- | :-------------- | :-------------- | :------------------- | :------------------- | :-------------- | :-------------- | :------------------- | :------------------- | | Revenue | $35,977k | $30,237k | $21,425k | $20,665k | $105,120k | $87,338k | $63,382k | $61,741k | | Gross Profit | $10,793k | $8,983k | $5,607k | $4,653k | $33,115k | $27,447k | $16,090k | $14,320k | | Operating Income | $1,836k | $1,661k | $1,327k | $700k | $6,875k | $7,282k | $3,518k | $2,346k | Geographic Revenue | Metric | 3Q FY23 (Dec 24, 2022) (in thousands) | 3Q FY22 (Dec 25, 2021) (in thousands) | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | US Revenue | $51,209k | $46,005k | $151,242k | $136,359k | | Canada Revenue | $4,221k | $3,749k | $12,075k | $10,849k | | Other International Revenue | $1,972k | $1,148k | $5,185k | $1,871k | NOTE 5 – BUSINESS ACQUISITIONS This note details several business acquisitions made by Transcat, Inc., including Complete Calibrations, e2b, Alliance, Tangent, NEXA, and Upstate Metrology, outlining the purchase price, strategic rationale, goodwill allocation, and contributions to revenue and operating income for each acquisition, along with pro forma financial information - Transcat acquired Complete Calibrations (Ireland) for $1.2 million cash on September 28, 2022, contributing $0.1 million revenue and < $0.1 million operating income since acquisition[62][64][65] - e2b Calibration (Ohio) was acquired for $3.1 million cash on September 27, 2022, contributing $0.9 million revenue and $0.2 million operating income since acquisition[66][68][70] - Alliance Calibration (Ohio) was acquired for $4.7 million ($4.0 million cash, $0.1 million stock) on May 31, 2022, contributing $1.3 million revenue and $0.1 million operating income since acquisition[71][73][74] - Tangent Labs, LLC was acquired for $8.9 million cash on December 31, 2021, contributing $1.7 million revenue and < $0.1 million operating loss for the first nine months of fiscal year 2023[75][77][79] - NEXA Enterprise Asset Management (Ireland/US) was acquired for $26.2 million ($23.9 million cash, $2.4 million stock) on August 31, 2021, contributing $9.8 million revenue and $0.2 million operating income for the first nine months of fiscal year 2023[80][82][83] Pro Forma Financial Information | Metric | 3Q FY23 Pro Forma (in thousands) | 3Q FY22 Pro Forma (in thousands) | 9M FY23 Pro Forma (in thousands) | 9M FY22 Pro Forma (in thousands) | | :----------------------- | :---------------- | :---------------- | :---------------- | :---------------- | | Total Revenue | $57,402k | $52,760k | $170,648k | $158,848k | | Net Income | $1,601k | $1,648k | $7,245k | $9,749k | | Basic Earnings Per Share | $0.21 | $0.22 | $0.96 | $1.30 | | Diluted Earnings Per Share | $0.21 | $0.22 | $0.95 | $1.28 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, liquidity, and capital resources for the third quarter and nine months ended December 24, 2022, highlighting revenue growth driven by acquisitions and strong demand, gross margin improvements, and the impact of increased operating and interest expenses on net income, also discussing cash flow dynamics and the Company's future outlook Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to various risks and uncertainties - The report contains forward-looking statements regarding future events, subject to risks and uncertainties such as economic conditions, competition, acquisitions, and foreign currency fluctuations[91] CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section confirms no material changes to critical accounting policies and estimates since the last annual report - There have been no material changes to the Company's critical accounting policies and estimates since the Annual Report on Form 10-K for the fiscal year ended March 26, 2022[92] RESULTS OF OPERATIONS This section analyzes the company's financial performance, including revenue, gross profit, operating expenses, and net income for the periods presented Executive Summary In the third quarter of fiscal year 2023, Transcat achieved consolidated revenue of $57.4 million, a 12.8% increase, driven by acquisitions and strong demand, with gross profit rising 20.3% to $16.4 million and gross margin expanding to 28.6%, operating income increased 34.0% to $3.2 million, but net income remained flat at $1.6 million due to higher interest expense - Consolidated revenue for 3Q FY23 increased by $6.5 million (12.8%) to $57.4 million, primarily due to recent acquisitions, strong Service segment demand, and improved Distribution segment rentals[93] - Gross profit for 3Q FY23 increased by $2.8 million (20.3%) to $16.4 million, with consolidated gross margin rising 180 basis points to 28.6%[94] - Operating income for 3Q FY23 increased by $0.8 million (34.0%) to $3.2 million, with operating margin improving from 4.6% to 5.5%[95] - Net income for 3Q FY23 remained flat at $1.6 million, as higher operating income was offset by increased interest expense[96] THIRD QUARTER ENDED DECEMBER 24, 2022 COMPARED TO THIRD QUARTER ENDED DECEMBER 25, 2021 In the third quarter of fiscal year 2023, total revenue grew 12.8% to $57.4 million, driven by strong Service segment performance (19.0% growth) and increased Distribution sales (3.7%), gross profit increased 20.3% to $16.4 million, with both segments showing margin expansion, operating expenses rose 17.4% due to acquisitions and higher employee costs, and despite higher operating income, net income remained flat at $1.6 million due to increased interest expense Revenue This section details the revenue performance for the third quarter, highlighting growth drivers for Service and Distribution segments | Metric | 3Q FY23 (Dec 24, 2022) (in thousands) | 3Q FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Service Revenue | $35,977k | $30,237k | $5,740k | 19.0% | | Distribution Sales | $21,425k | $20,665k | $760k | 3.7% | | Total Revenue | $57,402k | $50,902k | $6,500k | 12.8% | - Service revenue growth for 3Q FY23 was 19.0% year-over-year, including $2.1 million from acquisitions and 12.0% organic growth[99] - Trailing twelve-month Service revenue growth was 20.2% for 3Q FY23, indicating sustained segment progress[102] - Distribution sales increased 3.7% in 3Q FY23, primarily driven by strong demand for rental orders[103] - Total pending product shipments at the end of 3Q FY23 were $9.5 million, an increase of $0.6 million year-over-year, attributed to supply chain disruption and increased orders[106] Gross Profit This section analyzes gross profit and margin trends for the Service and Distribution segments in the third quarter | Metric | 3Q FY23 (Dec 24, 2022) (in thousands) | 3Q FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Service Gross Profit | $10,793k | $8,983k | $1,810k | 20.1% | | Distribution Gross Profit | $5,607k | $4,653k | $954k | 20.5% | | Total Gross Profit | $16,400k | $13,636k | $2,764k | 20.3% | - Total gross margin increased 180 basis points to 28.6% in 3Q FY23[108] - Service gross margin increased 30 basis points to 30.0% in 3Q FY23, driven by improved productivity[109] - Distribution segment gross margin increased 370 basis points to 26.2% in 3Q FY23, primarily due to a favorable mix of higher margin products sold and rented[111] Operating Expenses This section reviews operating expenses, including selling, marketing, warehouse, and general and administrative costs for the third quarter | Metric | 3Q FY23 (Dec 24, 2022) (in thousands) | 3Q FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Selling, Marketing and Warehouse | $6,595k | $5,051k | $1,544k | 30.6% | | General and Administrative | $6,642k | $6,224k | $418k | 6.7% | | Total Operating Expenses | $13,237k | $11,275k | $1,962k | 17.4% | - The increase in operating expenses was due to recent acquisitions, higher incentive-based employee costs, and continued investments in technology[112] - As a percentage of total revenue, operating expenses increased 90 basis points to 23.1% in 3Q FY23[113] Income Taxes This section presents the provision for income taxes and the effective tax rate for the third quarter | Metric | 3Q FY23 (Dec 24, 2022) (in thousands) | 3Q FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :-------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Provision for Income Taxes | $523k | $596k | $(73)k | (12.2)% | | Effective Tax Rate | 24.6% | 26.8% | - | - | - The decrease in the tax provision and effective tax rate was due to the mix of net income by country[114] Net Income This section details the net income performance for the third quarter, noting factors impacting its change | Metric | 3Q FY23 (Dec 24, 2022) (in thousands) | 3Q FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :--------- | :--------------------- | :--------------------- | :--------- | :--------- | | Net Income | $1,601k | $1,629k | $(28)k | (1.7)% | - Net income remained flat year-over-year, as higher operating income was offset by increased interest expense[115] Adjusted EBITDA This section provides Adjusted EBITDA and its percentage of revenue for the third quarter, explaining key drivers | Metric | 3Q FY23 (Dec 24, 2022) (in thousands) | 3Q FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :--------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Adjusted EBITDA | $6,585k | $5,466k | $1,119k | 20.5% | | % of Revenue | 11.5% | 10.7% | 0.8% | - | - The increase in Adjusted EBITDA was primarily driven by higher depreciation and amortization expense and interest expense[118] Adjusted Diluted Earnings Per Share This section presents both GAAP and Adjusted Diluted Earnings Per Share for the third quarter | Metric | 3Q FY23 (Dec 24, 2022) | 3Q FY22 (Dec 25, 2021) | | :-------------------------- | :--------------------- | :--------------------- | | Diluted EPS – GAAP | $0.21 | $0.21 | | Adjusted Diluted EPS | $0.35 | $0.36 | NINE MONTHS ENDED DECEMBER 24, 2022 COMPARED TO NINE MONTHS ENDED DECEMBER 25, 2021 For the first nine months of fiscal year 2023, total revenue increased 13.0% to $168.5 million, with Service revenue growing 20.4% and Distribution sales up 2.7%, gross profit rose 17.8% to $49.2 million, and total gross margin improved to 29.2%, operating expenses increased 20.8% due to acquisitions and higher costs, and net income decreased 15.6% to $7.0 million, primarily due to higher operating expenses, interest expense, and income taxes, despite higher operating income Revenue This section details the revenue performance for the nine-month period, highlighting growth drivers for Service and Distribution segments | Metric | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Service Revenue | $105,120k | $87,338k | $17,782k | 20.4% | | Distribution Sales | $63,382k | $61,741k | $1,641k | 2.7% | | Total Revenue | $168,502k | $149,079k | $19,423k | 13.0% | - Service revenue growth included $9.0 million of incremental revenue from acquisitions[123] - Distribution sales increase was due to increased orders and strong demand for rental orders[124] Gross Profit This section analyzes gross profit and margin trends for the Service and Distribution segments over the nine-month period | Metric | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :---------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Service Gross Profit | $33,115k | $27,447k | $5,668k | 20.7% | | Distribution Gross Profit | $16,090k | $14,320k | $1,770k | 12.4% | | Total Gross Profit | $49,205k | $41,767k | $7,438k | 17.8% | - Total gross margin increased 120 basis points to 29.2%, driven by operating leverage in the Service segment and a favorable product mix in the Distribution segment[125] Operating Expenses This section reviews operating expenses, including selling, marketing, warehouse, and general and administrative costs for the nine-month period | Metric | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :-------------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Selling, Marketing and Warehouse | $18,315k | $15,022k | $3,293k | 21.9% | | General and Administrative | $20,497k | $17,117k | $3,380k | 19.7% | | Total Operating Expenses | $38,812k | $32,139k | $6,673k | 20.8% | - The increase in operating expenses was due to recent acquisitions, higher incentive-based employee costs, new employees, and continued investments in technology[126] - As a percentage of total revenue, operating expenses increased 140 basis points to 23.0% for the first nine months of fiscal year 2023[126] Provision for Income Taxes This section presents the provision for income taxes and the effective tax rate for the nine-month period | Metric | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :-------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Provision for Income Taxes | $1,631k | $715k | $916k | 128.1% | | Effective Tax Rate | 18.8% | 7.9% | - | - | - The increase in the effective tax rate was due to decreased discrete tax benefits from share-based compensation activity[127] Net Income This section details the net income performance for the nine-month period, noting factors impacting its change | Metric | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :--------- | :--------------------- | :--------------------- | :--------- | :--------- | | Net Income | $7,030k | $8,332k | $(1,302)k | (15.6)% | - The year-over-year decrease in net income was due to higher operating expenses, increased interest expense, and a higher provision for income taxes, despite higher operating income[129] Adjusted EBITDA This section provides Adjusted EBITDA and its percentage of revenue for the nine-month period, explaining key drivers | Metric | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | Change ($ thousands) | Change (%) | | :--------------- | :--------------------- | :--------------------- | :--------- | :--------- | | Adjusted EBITDA | $21,423k | $18,655k | $2,768k | 14.8% | | % of Revenue | 12.7% | 12.5% | 0.2% | - | - The increase in Adjusted EBITDA was primarily driven by higher interest expense, tax provision, depreciation and amortization expense, and non-cash stock compensation expense[132] Adjusted Diluted Earnings Per Share This section presents both GAAP and Adjusted Diluted Earnings Per Share for the nine-month period | Metric | 9M FY23 (Dec 24, 2022) | 9M FY22 (Dec 25, 2021) | | :-------------------------- | :--------------------- | :--------------------- | | Diluted EPS – GAAP | $0.92 | $1.10 | | Adjusted Diluted EPS | $1.33 | $1.48 | LIQUIDITY AND CAPITAL RESOURCES The Company expects to meet its liquidity and capital resource requirements through anticipated cash flows from operations and its revolving credit facility, with the 2021 Credit Agreement significantly increasing the revolving credit commitment to $80.0 million and modifying various terms, including permitted acquisitions and restricted payments, and as of December 24, 2022, the Company had $42.2 million outstanding on the revolving credit facility and $7.0 million on the 2018 Term Loan, and was in compliance with all loan covenants - The Company expects to meet foreseeable liquidity and capital resource requirements through anticipated cash flows from operations and borrowings from its $80.0 million revolving credit facility[137][139] - As of December 24, 2022, $42.2 million was outstanding on the revolving credit facility and $7.0 million on the 2018 Term Loan[143][144] - The Company was in compliance with all loan covenants and requirements during the third quarter of fiscal year 2023, with a leverage ratio of 1.66 at December 24, 2022[145] Cash Flows For the first nine months of fiscal year 2023, net cash provided by operating activities increased to $14.0 million, primarily due to changes in net working capital, net cash used in investing activities decreased to $15.4 million, mainly due to lower business acquisition spending, and net cash provided by financing activities significantly decreased to $0.8 million, driven by reduced revolving credit facility borrowings and common stock issuance compared to the prior year | Metric | 9M FY23 (Dec 24, 2022) (in thousands) | 9M FY22 (Dec 25, 2021) (in thousands) | | :-------------------------------- | :--------------------- | :--------------------- | | Net Cash Provided by Operating Activities | $13,975k | $12,378k | | Net Cash Used in Investing Activities | $(15,445)k | $(26,759)k | | Net Cash Provided by Financing Activities | $782k | $16,900k | - The year-over-year increase in cash provided by operations was primarily the result of changes in net working capital, including a $2.0 million decrease in accounts receivable and a $4.2 million increase in inventory[147][148] - Cash used for business acquisitions decreased to $8.3 million in 9M FY23 from $20.9 million in 9M FY22[150] - Net cash provided by financing activities decreased significantly due to lower proceeds from the revolving credit facility ($2.3 million in 9M FY23 vs. $22.8 million in 9M FY22) and reduced common stock issuance[151][152] OUTLOOK Transcat anticipates continued double-digit organic Service growth, driven by its unique value proposition in highly regulated markets and differentiation strategies, with acquisitions remaining a key growth component, projecting high-single digit organic Service revenue growth for Q4 FY23 and FY24, along with ongoing gross margin improvement, and an estimated full fiscal year 2023 income tax rate between 21% and 23% - The Company expects continued double-digit organic Service growth, driven by its unique value proposition in highly regulated markets, particularly Life Science and Aerospace and Defense[153][154] - Acquisitions will continue to be an important component of Service growth, with an active acquisition pipeline[155] - Organic Service revenue growth is expected to remain in the high-single digit range for Q4 FY23 and fiscal year 2024, accompanied by continued gross margin improvement[155] - The estimated income tax rate for full fiscal year 2023 is expected to range between 21% and 23%[156] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses Transcat's exposure to market risks, specifically interest rate and foreign currency fluctuations, quantifying the potential impact of interest rate changes on debt and outlining the Company's strategy for managing foreign currency risk through hedging instruments INTEREST RATES This section analyzes the company's exposure to interest rate fluctuations and their potential impact on interest expense - A 1% change in interest rates would impact the Company's yearly interest expense by approximately $0.4 million, assuming constant average borrowing levels[157] - The revolving credit facility has a variable interest rate (LIBOR plus margin), while the $15.0 million 2018 Term Loan has a fixed rate of 3.90%[158] - The Company had no hedging arrangements in place for its revolving credit facility to limit exposure to upward interest rate movements as of December 24, 2022[158] FOREIGN CURRENCY This section discusses the company's exposure to foreign currency fluctuations and its hedging strategies - Approximately 90% of total revenues are denominated in U.S. dollars, with the remainder in Canadian dollars and Euros; a 10% currency fluctuation would impact revenue by about 1%[159] - The Company uses short-term foreign exchange forward contracts to reduce the risk of Canadian dollar fluctuations, recognizing a gain of $0.3 million in 9M FY23[160] - As of December 24, 2022, a foreign exchange contract with a notional amount of $3.0 million was outstanding and subsequently renewed in January 2023[160] Item 4. Controls and Procedures This section confirms the effectiveness of Transcat's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the third quarter of fiscal year 2023 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of the reporting date - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of December 24, 2022[161] Changes in Internal Control over Financial Reporting This section reports no material changes in internal control over financial reporting during the third fiscal quarter - There were no material changes in internal control over financial reporting during the third quarter of fiscal year 2023[162] PART II. OTHER INFORMATION This section includes additional information and exhibits required for the Form 10-Q filing Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various certifications and interactive data files - The exhibits include Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and Interactive Data Files (XBRL)[164] SIGNATURES This section contains the official certifications and signatures of the company's executive officers Signatures This section contains the official signatures of the registrant's principal executive officer and principal financial officer, certifying the report - The report was signed by Lee D. Rudow, President and Chief Executive Officer, and Thomas L. Barbato, Senior Vice President of Finance and Chief Financial Officer, on February 1, 2023[170]