Transcat Inc: Form 10-Q for the period ended Dec 23, 2023

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,” “potential,” “outlook,” “seek,” “strategy,” “target,” “could,” “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 our enterprise resource planning system, technology updates, supply chain delays or disruptions, the risks related to current and future indebtedness, foreign currency rate fluctuations, risks related to our intellectual property, geopolitical events, 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 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, 2023. You should not place undue reliance on our forward-looking 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, 2023.

RESULTS OF OPERATIONS

Recent Developments

On September 25, 2023, we closed an underwritten public offering of our common stock for aggregate gross proceeds of $80.5 million (the “Offering”). In the Offering, we sold an aggregate of 847,371 shares at $95.00 per share. We received net proceeds of $75.2 million in the Offering, a portion of which was used during the third quarter of fiscal year 2024 to repay in full our revolving credit facility. See “Liquidity and Capital Resources” below for more information.

Executive Summary

During our third quarter of fiscal year 2024, we had consolidated revenue of $65.2 million. This represented an increase of $7.8 million or 13.5% versus the third quarter of fiscal year 2023. This increase was primarily due to recently completed acquisitions, strong demand in our Service segment’s highly-regulated end markets and increased rental sales, which includes incremental revenue from an acquisition completed in fiscal year 2024. See Note 5 – “Business Acquisitions” to our unaudited consolidated financial statements in this report for more information about the impact of our acquisitions.

Our third quarter of fiscal year 2024 gross profit was $20.9 million. This was an increase of $4.5 million or 27.7% versus the third quarter of fiscal year 2023. In addition, consolidated gross margin was 32.1%, an increase of 350 basis points versus the third quarter of fiscal year 2023. This increase was largely the result of operating leverage on our fixed costs, increased technician productivity and accretive gross margins from our rental business.

Total operating expenses were $16.6 million in the third quarter of fiscal year 2024, an increase of $3.4 million or 25.7% when compared to the prior year third quarter. Included in operating expenses during the third quarter of fiscal year 2024 were incremental operating expenses from the acquisitions of Axiom, SteriQual, TIC-MS, investments in technology and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were 25.5% in the third quarter of fiscal year 2024, up 240 basis points from 23.1% in the third quarter of fiscal year 2023. Operating income was $4.3 million, an increase of $1.1 million, or 35.8% and operating margin increased from 5.5% to 6.6% in the third quarter of fiscal year 2024.

Net income was $3.3 million in the third quarter of fiscal year 2024 versus $1.6 million in the third quarter of fiscal year 2023. The increase was primarily due to higher operating income and lower interest expense associated with the repayment of our revolving credit facility, partially offset by higher provision for income taxes.

The following table presents, for the third quarter and for the first nine months of fiscal year 2024 and fiscal year 2023, the components of our Consolidated Statements of Income:

(Unaudited)

(Unaudited)

Third Quarter Ended December 23, 2023 COMPARED TO Third Quarter Ended December 24, 2022 (dollars in thousands):

Revenue:

Total revenue was $65.2 million, an increase of $7.8 million, or 13.5%, in our fiscal year 2024 third quarter compared to the prior fiscal year third quarter.

Service revenue, which accounted for 63.7% and 62.7% of our total revenue in the third quarter of fiscal years 2024 and 2023, respectively, increased $5.5 million or 15.4% from the third quarter of fiscal year 2023 to the third quarter of fiscal year 2024. This year-over-year increase included $2.2 million in revenue from the acquisitions of TIC-MS, SteriQual and Axiom, and also included organic revenue growth of 9.1% driven by strong end-market demand and continued market share gains.

Our fiscal years 2024 and 2023 Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows:

The growth in Service segment revenue during the third quarter of fiscal year 2024 versus the third quarter of fiscal year 2023 reflected both organic growth and increased revenue from the acquisitions of TIC-MS, SteriQual and Axiom.

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, second and third quarter of fiscal year 2024 and each quarter in fiscal year 2023 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period:

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, second and third quarter of fiscal year 2024 and for each quarter during fiscal year 2023:

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Our Distribution sales accounted for 36.3% of our total revenue in the third quarter of fiscal year 2024 and 37.3% of our total revenue in the third quarter of fiscal year 2023. During the third quarter of fiscal year 2024, Distribution segment sales were $23.7 million which was an increase of 10.4% or $2.2 million . This increase was due to $2.9 million of incremental revenue from the acquisition of Axiom offset by slower demand for our non-rental products.

The following table presents the quarterly historical trend of Distribution sales in fiscal years 2024 and 2023 compared to the prior year fiscal quarter:

The Distribution segment sales increase for the third quarter of fiscal year 2024 versus the third quarter of fiscal year 2023 was due to sales from the acquisition of Axiom.

Distribution sales 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. Product 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.

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, second and third quarter of fiscal year 2024 and each quarter of fiscal year 2023:

Our total pending product shipments at the end of the third quarter of fiscal year 2024 were $4.7 million, a decrease of $4.9 million versus the end of the third quarter of fiscal year 2023 and a decrease of $3.5 million since March 25, 2023. The decrease in pending product shipments and backorders was a result of improved fulfillment of existing orders.

Gross Profit:

Total gross profit for the third quarter of fiscal year 2024 was $20.9 million, an increase of $4.5 million or 27.7% versus the third quarter of fiscal year 2023. Total gross margin was 32.1% in the third quarter of fiscal year 2024, up from 28.6% in the third quarter of fiscal year 2023, a 350 basis point increase.

Service gross profit in the third quarter of fiscal year 2024 increased $2.7 million, or 25.0%, from the third quarter of fiscal year 2023. Service gross margin was 32.5% in the third quarter of fiscal year 2024, a 250 basis point increase versus the third quarter of fiscal year 2023. This increase in gross margin was the result of increased revenue, which allows us to leverage our fixed-costs, and continued increases in technician productivity.

The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:

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:

Distribution segment gross margin was 31.5% in the third quarter of fiscal year 2024 versus 26.2% in the third quarter of fiscal year 2023, a 530 basis point increase. The increase in segment gross margin was primarily due to increased margins from rental revenue, which now includes Axiom and a favorable mix of higher margin products sold.

Operating Expenses:

Total operating expenses were $16.6 million in the third quarter of fiscal year 2024 versus $13.2 million during the third quarter of fiscal year 2023. The year-over-year increase in selling, marketing and warehouse expenses is due to increased expenses related 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 25.5% in the third quarter of fiscal year 2024 and 23.1% in the third quarter of fiscal year 2023, an increase of 240 basis points.

Income Taxes:

Our effective tax rate for the third quarter of fiscal years 2024 and 2023 was 21.6% and 24.6%, respectively. The increase in the tax provision is due to higher operating income and lower interest expense associated with the repayment of our revolving credit facility. The decrease in effective tax rate is due to the mix of net income by country. Our quarterly provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the third quarter of fiscal years 2024 and 2023 was less than $0.1 million.

Net Income:

Net income for the third quarter of fiscal year 2024 increased from the third quarter of fiscal year 2023 primarily due to higher operating income and lower interest expense associated with the repayment of our revolving credit facility, partially offset by a higher provision for income taxes.

Adjusted EBITDA:

Total Adjusted EBITDA, a non-GAAP measure, for the third quarter of fiscal year 2024 was $9.1 million, an increase of $2.5 million or 38.5% versus the third quarter of fiscal year 2023. See “Non-GAAP Financial Measures” below for a description of the non-GAAP measures we use and a reconciliation to the most directly comparable GAAP measures. As a percentage of revenue, Adjusted EBITDA increased to 14.0% for the third quarter of fiscal year 2024 from 11.5% for the third quarter of fiscal year 2023. The increase in Adjusted EBITDA during the third quarter of fiscal year 2024 was primarily driven by increases in operating income, depreciation and amortization expense and non-cash stock compensation.

nine months ended December 23, 2023 COMPARED TO nine months ended December 24, 2022 (dollars in thousands):

Revenue:

(dollars in thousands)

Service revenue, which accounted for 65.1% and 62.4% of our total revenue in the first nine months of fiscal years 2024 and 2023, respectively, increased $17.7 million, or 16.8%, from the first nine months of fiscal year 2023 to the first nine months of fiscal year 2024. This year-over-year increase included $7.1 million of incremental revenue from the acquisitions of TIC-MS, SteriQual and Axiom, and also included organic revenue growth of 10.0% driven by strong end-market demand and continued market share gains.

Distribution revenue, which accounted for 34.9% and 37.6% of our total revenue in the first nine months of fiscal years 2024 and 2023, respectively, increased $2.4 million, or 3.8%, from the first nine months of fiscal year 2023 to the first nine months of fiscal year 2024. This year-over-year increase is primarily due to $4.2 million of incremental revenue from the acquisition of Axiom offset by slower demand for our non-rental products.

Gross Profit:

(dollars in thousands)

Total gross profit for the first nine months of fiscal year 2024 was $59.8 million, an increase of $10.6 million or 21.5% versus the first nine months of fiscal year 2023. Total gross margin was 31.7% in the first nine months of fiscal year 2024, up from 29.2% in the first nine months of fiscal year 2023, a 250 basis point increase. This increase in gross margin was primarily due to increased revenue in our Service segment, which allows us to leverage our fixed costs, continued technician productivity improvements, and a favorable sales mix driven by increases in rental sales in the Distribution segment.

Operating Expenses:

(dollars in thousands)

Total operating expenses were $49.2 million in the first nine months of fiscal year 2024 versus $38.8 million during the first nine months of fiscal year 2023, an increase of $10.4 million or 26.7%. The year-over-year increase in selling, marketing and warehouse expenses is due to increased expenses related to recent acquisitions and higher incentive-based employee costs due to higher sales. The increase in general and administrative expenses includes the non-cash charge related to the NEXA earn-out, 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 26.1% in the first nine months of fiscal year 2024 and 23.0% in the first nine months of fiscal year 2023, an increase of 310 basis points.

Income Taxes:

(dollars in thousands)

Our effective tax rate for the first nine months of fiscal years 2024 and 2023 was 23.5% and 18.8%, respectively. The increase in the effective rate and tax provision is due to the discrete tax treatment of the non-cash charge related to the NEXA earn-out. Our provision for income taxes is 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 first nine months of fiscal years 2024 and 2023 was $0.7 million and $0.5 million, respectively.

Net Income:

Net income for the first nine months of fiscal year 2024 was $6.8 million, a decrease of $0.3 million versus the first nine months of fiscal year 2023. The year over year decrease in net income was primarily due to flat operating income and a higher provision for income taxes.

Adjusted EBITDA:

Total Adjusted EBITDA, a non-GAAP measure, for the first nine months of fiscal year 2024 was $26.9 million, an increase of $5.5 million or 25.7% versus the first nine months of fiscal year 2023. See “Non-GAAP Financial Measures” below for a description of the non-GAAP measures we use and a reconciliation to the most directly comparable GAAP measures. As a percentage of revenue, Adjusted EBITDA increased to 14.3% for the first nine months of fiscal year 2024 from 12.7% for the first nine months of fiscal year 2023. The increase in Adjusted EBITDA during the first nine months of fiscal year 2024 was primarily driven by the NEXA earn-out adjustment and increases in depreciation and amortization expense and non-cash stock compensation.

Non-GAAP Financial Measures

Adjusted EBITDA

In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, 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, 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 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.

(dollars in thousands)

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Adjusted Diluted Earnings Per Share

In addition to reporting Diluted Earnings Per Share, a GAAP measure, we present Adjusted Diluted Earnings Per Share (net income plus acquisition related amortization expense, acquisition related transaction expenses, acquisition related stock-based compensation, acquisition amortization of backlog and restructuring expense; divided by the average diluted shares outstanding during the period), which is a non-GAAP measure. Our management believes Adjusted Diluted Earnings Per Share is an important measure of our operating performance because it provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.

Adjusted Diluted 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 Diluted Earnings Per Share and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted 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.

LIQUIDITY AND CAPITAL RESOURCES

We expect that foreseeable liquidity and capital resource requirements will be met through cash and cash equivalents, 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 “Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), we 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 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 Credit 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.

Effective July 1, 2023, interest on outstanding borrowings under the revolving credit facility accrue, at our election, at either the variable Daily Simple SOFR or a fixed rate for a designated period at the SOFR corresponding to such period (subject to a 0.25% floor), in each case, plus a margin. Unused fees accrue based on the average daily amount of unused credit available on the revolving credit facility. Interest rate margins and unused fees are determined on a quarterly basis based upon our calculated leverage ratio. Our interest rate for the revolving credit facility for the first nine months of fiscal year 2024 ranged from 6.4% to 7.1%. 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 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 nine months of fiscal year 2024. Our leverage ratio, as defined in the Credit Agreement, was 0.12 at December 23, 2023, compared with 1.60 at March 25, 2023.

As of December 23, 2023, $80.0 million was available for borrowing under the revolving credit facility. As of December, 23, 2023, there were no amounts outstanding under the revolving credit facility. After the closing of the Offering, we used approximately $50.0 million of the net proceeds to repay in full the amounts outstanding under the revolving credit facility. During the first nine months of fiscal year 2024 and 2023, we used $12.9 million and $4.0 million, respectively, drawn from the revolving credit facility for business acquisitions.

As of December 23, 2023, $4.7 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 (dollars in thousands):

Operating Activities: Net cash provided by operations was $26.9 million during the first nine months of fiscal year 2024 compared to $14.0 million of net cash provided by operating activities during the first nine months of fiscal year 2023. The year-over-year increase in cash provided by operations was 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 decreased $1.4 million during the first nine months of fiscal year 2024 inclusive of $2.6 million of accounts receivable acquired during the period. During the first nine months of fiscal year 2023, accounts receivable increased $2.0 million inclusive of $0.7 million of accounts receivable acquired during the period. The year-over-year variation reflects changes in the timing of collections. The following table illustrates our “days sales outstanding” as of December 23, 2023 and December 24, 2022 (dollars in thousands):

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• 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 SKUs 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 decreased $0.8 million during the first nine months of fiscal year 2024 inclusive of $1.8 million of inventory acquired during the period. Our inventory balance increased by $4.2 million during the first nine months of fiscal year 2023 due to strategic inventory purchases during the first nine months of the fiscal year.
• 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 $4.5 million during the first nine months of fiscal year 2024. Accounts payable decreased $0.3 million during the first nine months of fiscal year 2023. The variances are largely due to the timing of inventory and capital expenditures and other payments in the respective periods.
• Accrued Compensation and Other Current Liabilities: Accrued compensation and other current liabilities include, among other things, amounts paid to employees for non-equity performance-based compensation. At the end of any particular period, the amounts accrued for such compensation may vary due to many factors including changes in expected performance levels, the performance measurement period, and timing of payments to employees. During the first nine months of fiscal year 2024, accrued compensation and other current liabilities increased by $5.5 million, inclusive of $4.0 million from assumed liabilities, contingent consideration and purchase price holdbacks from acquisition transactions. During the first nine months of fiscal year 2023, accrued compensation and other current liabilities decreased by $2.4 million. The change from the first nine months of fiscal year 2023 was largely due to the inclusion of the acquisition related transactions, partially offset by the annual payment of incentive based compensation accruals.
• Income Taxes Payable: In any given period, net working capital may be affected by the timing and amount of income tax payments. During the first nine months of fiscal years 2024 and 2023, income taxes payable remained flat.

Investing Activities: During the first nine months of fiscal years 2024 and 2023, we invested $9.1 million and $7.1 million, respectively, in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and our rental business.

During the first nine months of fiscal years 2024 and 2023, we used $12.9 million and $8.3 million, respectively, for business acquisitions.

During the first nine months of fiscal year 2024, we paid $0.8 million of other holdback amounts relating to business acquisitions. During the first nine months of fiscal year 2023, no contingent consideration or other holdback amounts were paid related to business acquisitions.

Financing Activities: During the first nine months of fiscal year 2024, $75.7 million in cash was generated from the issuance of common stock, net of direct costs of the Offering. In addition, we used $42.7 million to repay our revolving line of credit, $1.7 million for scheduled repayments of our term loan and $2.2 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 nine months of fiscal year 2023, $2.3 million was borrowed from our revolving line of credit and $0.5 million in cash was generated from the issuance of common stock. In addition, we used $1.6 million for scheduled repayments of our term loan and $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 are proud of our dedicated team, which has consistently delivered exceptional results through various economic cycles as can be seen over the past decade and a half of profitable growth. During this fiscal year, we expect organic Service revenue growth in the high-single digit to low double-digit range and gross margin expansion. Automation of our calibration processes and overall process improvement will be key enablers to future margin expansion in the Service segment. We believe the Service segment has substantial runway ahead for growth, both organically and through acquisition. Our robust and diverse acquisition pipeline enables strategic, accretive acquisitions that drive synergistic growth opportunities and will be a key component of our future strategy. We believe our unique value proposition drives a sustainable competitive advantage in the highly regulated markets that we serve, particularly the Life Science, Aerospace, and Defense markets, along with a growing Rentals business. We have a long history of generating sustainable value for our shareholders and providing a dynamic, rewarding workplace for our team.

We expect our income tax rate to range between 24% and 26% 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.

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 $0.5 million assuming our average borrowing levels during the first nine months of fiscal year 2024 remained constant under the revolving credit facility. As of December 23, 2023, $80.0 million was available for borrowing under the revolving credit facility. As of December 23, 2023, there were no amounts outstanding under the revolving credit facility. As described above under “Liquidity and Capital Resources,” we also have a $15.0 million (original principal) term loan. The 2018 Term Loan is considered a fixed interest rate loan. As of December 23, 2023, $4.7 million was outstanding under the 2018 Term Loan and was included in long-term debt and current portion of long-term debt on the Consolidated Balance Sheets. The 2018 Term Loan requires total (principal and interest) repayments of $0.2 million per month.

Effective July 1, 2023, at our option, we may borrow from our revolving credit facility at the variable one-month Daily Simple SOFR or at a fixed rate for a designated period at the SOFR 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. Our interest rate during the first nine months of fiscal year 2024 for our revolving credit facility ranged from 6.4% to 7.1%. Interest on outstanding borrowings of the 2018 Term Loan accrued at a fixed rate of 3.90% over the term of the loan. On December 23, 2023, we had no hedging arrangements in place for our revolving credit facility to limit our exposure to movements in interest rates.

FOREIGN CURRENCY

Approximately 90% of our total revenues for each of the first nine months of fiscal year 2024 and 2023 were denominated in U.S. dollars, with the remainder denominated in Canadian 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 dollar 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 and a gain of $0.3 million during the first nine months of the fiscal years 2024 and 2023, respectively, was recognized as a component of Interest 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 fair value on the underlying accounts receivables denominated in Canadian dollars being hedged. On December 23, 2023, we had a foreign exchange contract, which matured in January 2024, outstanding in the notional amount of $2.0 million. The foreign exchange contract was renewed in January 2024 and continues to be in place. We do not use hedging arrangements for speculative purposes.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Our principal executive officer and our principal financial officer evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of such date.

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this quarterly report (our third quarter of fiscal year 2024) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.