ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements. This report contains “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations,
estimates, beliefs, assumptions and predictions of future events and are identified by words such as “anticipates,” “believes,”
“estimates,” “expects,” “projects,” “seek,” “strategy,” “target,”
“intends,” “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, the impact of and our response to the COVID-19 pandemic,
the highly competitive nature of the industries in which we compete and in the nature of our two business segments, cybersecurity risks,
the risk of significant disruptions in our information technology systems, our inability to recruit, train and retain quality employees,
skilled technicians and senior management, fluctuations in our operating results, competition in the rental market, the volatility of
our stock price, our ability to adapt our technology, reliance on our enterprise resource planning system, technology updates, risks related
to our acquisition strategy and the integration of the businesses we acquire, volatility in our customers’ industries, changes in
vendor rebate programs, our vendors’ abilities to provide desired inventory, the risks related to current and future indebtedness,
the relatively low trading volume of our common stock, foreign currency rate fluctuations and the impact of general economic conditions
on our business. These risk factors and uncertainties are more fully described by us under the heading “Risk Factors” in our
reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 27,
2021. 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
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undertake no obligation to update or publicly announce any revisions
to any of the forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to our critical accounting
policies and estimates from the information provided in our Annual Report on Form 10-K for the fiscal year ended March 27, 2021.
RESULTS OF OPERATIONS
During our first quarter of fiscal year 2022, we had consolidated
revenue of $47.8 million. This represented an increase of $8.9 million or 22.8% versus the first quarter of fiscal year 2021. This increase
was due to the economic rebound and the lower customer demand in the prior year first quarter due to the COVID-19 pandemic, especially
in the Distribution segment.
Our first quarter of fiscal year 2022 gross profit was $13.5 million.
This was an increase of $4.1 million or 43.7% versus the first quarter of fiscal year 2021. In addition, consolidated gross margin was
28.3%, an increase of 410 basis points, versus the first quarter of fiscal year 2021. This increase was the result of operating leverage
on our fixed costs and continued productivity improvements in the Service segment, and a favorable mix of products sold in the Distribution
segment.
Total operating expenses were $9.8 million in the first quarter
of fiscal year 2022, an increase of $1.4 million when compared to the prior year first quarter. Included in operating expenses during
the first quarter of fiscal year 2022 were incremental operating expenses related to the acquisition of Upstate Metrology, investments
in technology and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were
20.6% in the first quarter of fiscal year 2022, down 110 basis points from 21.7% in the first quarter of fiscal year 2021. Operating income
increased by $2.7 million and operating margin increased by 520 basis points in the first quarter of fiscal year 2022.
Net income was $3.7 million for the first quarter of fiscal year
2022, up from $0.8 million in the first quarter of fiscal year 2021 primarily due to higher operating income and a higher benefit from
income taxes.
The following table presents, for the first quarter of fiscal
year 2022 and fiscal year 2021, the components of our Consolidated Statements of Income:
|
|
(Unaudited)
First Quarter Ended
|
|
|
June 26,
|
|
June 27,
|
|
|
2021
|
|
2020
|
As a Percentage of Total Revenue:
|
|
|
|
|
|
|
Service Revenue
|
|
57.7
|
%
|
|
59.0
|
%
|
Distribution Sales
|
|
42.3
|
%
|
|
41.0
|
%
|
Total Revenue
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
Gross Profit Percentage:
|
|
|
|
|
|
|
Service Gross Profit
|
|
31.8
|
%
|
|
26.4
|
%
|
Distribution Gross Profit
|
|
23.6
|
%
|
|
21.0
|
%
|
Total Gross Profit
|
|
28.3
|
%
|
|
24.2
|
%
|
|
|
|
|
|
|
|
Selling, Marketing and Warehouse Expenses
|
|
10.5
|
%
|
|
10.5
|
%
|
General and Administrative Expenses
|
|
10.1
|
%
|
|
11.2
|
%
|
Total Operating Expenses
|
|
20.6
|
%
|
|
21.7
|
%
|
|
|
|
|
|
|
|
Operating Income
|
|
7.7
|
%
|
|
2.5
|
%
|
|
|
|
|
|
|
|
Interest and Other Expense, net
|
|
0.4
|
%
|
|
0.6
|
%
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
7.3
|
%
|
|
1.9
|
%
|
Benefit from Income Taxes
|
|
(0.4
|
%)
|
|
(0.2
|
%)
|
|
|
|
|
|
|
|
Net Income
|
|
7.7
|
%
|
|
2.1
|
%
|
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FIRST QUARTER ENDED JUNE 26, 2021 COMPARED TO FIRST QUARTER
ENDED JUNE 27, 2020
(dollars in thousands):
Revenue:
|
|
First Quarter Ended
|
|
Change
|
|
|
June 26,
|
|
June 27,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
$
|
|
%
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
27,557
|
|
|
$
|
22,967
|
|
|
$
|
4,590
|
|
|
20.0%
|
|
Distribution
|
|
|
20,233
|
|
|
|
15,937
|
|
|
|
4,296
|
|
|
27.0%
|
|
Total
|
|
$
|
47,790
|
|
|
$
|
38,904
|
|
|
$
|
8,886
|
|
|
22.8%
|
Total revenue increased $8.9 million, or 22.8%, in our fiscal
year 2022 first quarter compared to the prior fiscal year first quarter.
Service revenue, which accounted for 57.7% and 59.0% of our total
revenue in the first quarter of fiscal years 2022 and 2021, respectively, increased 20.0% from the first quarter of fiscal year 2021 to
the first quarter of fiscal year 2022. This year-over-year increase included $0.6 million in revenue from acquisitions and organic revenue
growth of 16.6% and was driven by improvement in end market conditions, continued market share gains and an easier comparison versus the
first quarter of fiscal year 2021 which was the quarter most significantly impacted by the COVID-19 pandemic.
Our fiscal years 2022 and 2021 Service revenue growth, in relation
to prior fiscal year quarter comparisons, was as follows:
|
FY 2022
|
|
|
FY 2021
|
|
Q1
|
|
|
Q4
|
Q3
|
Q2
|
Q1
|
Service Revenue Growth
|
20.0%
|
|
|
15.8%
|
12.2%
|
4.5%
|
2.5%
|
The growth in Service segment revenue during the first quarter
of fiscal year 2022 versus the first quarter of fiscal year 2021 reflected both organic growth and acquisitions, and the growth in the
first quarter of fiscal year 2021 versus the first quarter of fiscal year 2020 was also both organic and from 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 each quarter
in fiscal years 2021 and 2020 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period:
|
FY 2022
|
|
|
FY 2021
|
|
Q1
|
|
|
Q4
|
Q3
|
Q2
|
Q1
|
Trailing Twelve-Month:
|
|
|
|
|
|
|
|
|
Service Revenue
|
$105,864
|
|
|
$101,274
|
$97,225
|
$94,624
|
$93,572
|
|
Service Revenue Growth
|
13.1%
|
|
|
8.9%
|
5.4%
|
4.3%
|
7.4%
|
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
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revenue and the percentage of Service revenue derived from each
source for each quarter during fiscal years 2022 and 2021:
|
|
FY 2022
|
|
|
FY 2021
|
|
|
Q1
|
|
|
Q4
|
Q3
|
Q2
|
Q1
|
Percent of Service Revenue:
|
|
|
|
|
|
|
|
|
In-House
|
83.1%
|
|
|
83.6%
|
83.1%
|
83.7%
|
82.9%
|
|
Outsourced
|
15.4%
|
|
|
14.9%
|
15.3%
|
14.7%
|
15.6%
|
|
Freight Billed to Customers
|
1.5%
|
|
|
1.5%
|
1.6%
|
1.6%
|
1.5%
|
|
|
100.0%
|
|
|
100.0%
|
100.0%
|
100.0%
|
100.0%
|
Our Distribution sales accounted for 42.3% of our total revenue
in the first quarter of fiscal year 2022 and 41.0% of our total revenue in the first quarter of fiscal year 2021. During the first quarter
of fiscal year 2022, Distribution segment sales showed an increase of 27.0% to $20.2 million. This increase was due to increased orders
in the first quarter of fiscal year 2022 and an easier comparison to the first quarter of fiscal year 2021, which was the quarter most
significantly impacted by the COVID-19 pandemic. In addition, rental revenue increased by 61.3% to $1.6 million.
Our fiscal years 2022 and 2021 Distribution sales growth (decline),
in relation to prior fiscal year quarter comparisons, was as follows:
|
FY 2022
|
|
|
FY 2021
|
|
Q1
|
|
|
Q4
|
Q3
|
Q2
|
Q1
|
Distribution Sales Growth (Decline)
|
27.0%
|
|
|
(4.6%)
|
(8.6%)
|
(6.6%)
|
(20.3%)
|
The change in the first quarter of fiscal year 2022 versus the
first quarter of fiscal year 2021 for the Distribution segment reflected just organic growth and the change in the first quarter of fiscal
year 2021 versus the first quarter of fiscal year 2020 for the Distribution segment reflected both organic growth and acquisitions.
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. Pending product
shipments are primarily backorders, but also include products that are requested to be calibrated in our service centers prior to shipment,
orders required by the customer to be shipped complete or at a future date, and other orders awaiting final credit or management review
prior to shipment. Our total pending product shipments at the end of the first quarter of fiscal year 2022 were $8.2 million, an increase
of $4.3 million versus the end of the first quarter of fiscal year 2021 and an increase of $1.9 million since March 27, 2021. The year-over-year
increase in pending product shipments and backorders was a result of the COVID-19 pandemic and its disruption to the supply of products
as well as increased orders for the wind power generation market. The following table presents our total pending product shipments and
the percentage of total pending product shipments that were backorders at the end of each quarter of fiscal years 2022 and 2021:
|
FY 2022
|
|
|
FY 2021
|
|
Q1
|
|
|
Q4
|
Q3
|
Q2
|
Q1
|
Total Pending Product Shipments
|
$8,173
|
|
|
$6,287
|
$5,533
|
$4,251
|
$3,890
|
% of Pending Product
|
|
|
|
|
|
|
|
Shipments that were Backorders
|
78.4%
|
|
|
77.6%
|
79.3%
|
76.6%
|
75.8%
|
Gross Profit:
|
|
|
First Quarter Ended
|
|
Change
|
|
|
|
June 26,
|
|
June 27,
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
$
|
|
%
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
8,752
|
|
|
$
|
6,069
|
|
|
$
|
2,683
|
|
|
44.2%
|
|
Distribution
|
|
|
4,768
|
|
|
|
3,340
|
|
|
|
1,428
|
|
|
42.8%
|
|
Total
|
|
$
|
13,520
|
|
|
$
|
9,409
|
|
|
$
|
4,111
|
|
|
43.7%
|
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Total gross profit for the first quarter of fiscal year 2022 was
$13.5 million, an increase of $4.1 million or 43.7% versus the first quarter of fiscal year 2021. Total gross margin was 28.3% in the
first quarter of fiscal year 2022, up from 24.2% in the first quarter of fiscal year 2021, a 410 basis point increase.
Service gross profit in the first quarter of fiscal year 2022
increased $2.7 million, or 44.2%, from the first quarter of fiscal year 2021. Service gross margin was 31.8% in the first quarter of fiscal
year 2022, a 540 basis point increase versus the first quarter of fiscal year 2021. This increase in gross margin was primarily due to
operating leverage on our fixed cost base and continued strong technician productivity.
The following table presents the quarterly historical trend of our Service
gross margin as a percent of Service revenue:
|
FY 2022
|
|
|
FY 2021
|
|
Q1
|
|
|
Q4
|
Q3
|
Q2
|
Q1
|
Service Gross Margin
|
31.8%
|
|
|
33.9%
|
27.9%
|
32.2%
|
26.4%
|
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 2022
|
|
|
FY 2021
|
|
Q1
|
|
|
Q4
|
Q3
|
Q2
|
Q1
|
Distribution Gross Margin
|
23.6%
|
|
|
21.0%
|
22.5%
|
21.1%
|
21.0%
|
Distribution segment gross margin was 23.6% in the first quarter
of fiscal year 2022 versus 21.0% in the first quarter of fiscal year 2021, a 260 basis point increase. The increase in segment gross margin
was primarily due to a favorable mix of higher margin products sold and rented.
Operating Expenses:
|
|
|
First Quarter Ended
|
|
Change
|
|
|
|
June 26,
|
|
June 27,
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
$
|
|
%
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, Marketing and Warehouse
|
|
$
|
4,997
|
|
|
$
|
4,074
|
|
|
$
|
923
|
|
|
22.7%
|
|
General and Administrative
|
|
|
4,834
|
|
|
|
4,371
|
|
|
|
463
|
|
|
10.6%
|
|
Total
|
|
$
|
9,831
|
|
|
$
|
8,445
|
|
|
$
|
1,386
|
|
|
16.4%
|
Total operating expenses were $9.8 million in the first quarter
of fiscal year 2022 versus $8.4 million during the first quarter of fiscal year 2021. The year-over-year increase in selling, marketing
and warehouse expenses is due to higher performance-based sales incentives and direct marketing costs. The increase in general and administrative
expenses includes incremental expenses related to acquired companies, increased payroll costs from new employees and continued investments
in technology.
As a percentage of total revenue, operating expenses were 20.6%
in the first quarter of fiscal year 2022 and 21.7% in the first quarter of fiscal year 2021, a decrease of 110 basis points.
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Income Taxes:
|
|
First Quarter Ended
|
|
Change
|
|
|
June 26,
|
|
June 27,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
$
|
|
%
|
Benefit from Income Taxes
|
|
$
|
(194
|
)
|
|
$
|
(77
|
)
|
|
$
|
(117
|
)
|
|
(151.9%)
|
Our effective tax rates for the first quarter of fiscal years
2022 and 2021 were (5.6%) and (10.7%), respectively. The increase in the tax benefit is due to the increased amount of discrete tax benefit
from share-based compensation activity. Our quarterly provision for income taxes is affected by discrete items that may occur in any given
year but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the first quarter
of fiscal years 2022 and 2021 was $1.1 million and $0.3 million, respectively. We continue to evaluate our tax provision on a quarterly
basis and adjust, as deemed necessary, our effective tax rate given changes in facts and circumstances expected for the entire fiscal
year. We expect our total fiscal year 2022 effective tax rate to be approximately 16% to 18%.
Net Income:
|
|
First Quarter Ended
|
|
Change
|
|
|
June 26,
|
|
June 27,
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
$
|
|
%
|
Net Income
|
|
$
|
3,688
|
|
|
$
|
798
|
|
|
$
|
2,890
|
|
|
362.2%
|
Net income for the first quarter of fiscal year 2022 increased
$2.9 million from the first quarter of fiscal year 2021 primarily due to the increased operating income and a higher benefit from income
taxes.
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, 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.
|
|
First Quarter Ended
|
|
|
June 26,
|
|
June 27,
|
|
|
2021
|
|
2020
|
Net Income
|
|
$
|
3,688
|
|
|
$
|
798
|
|
+ Interest Expense
|
|
|
189
|
|
|
|
224
|
|
+ Other Expense / (Income)
|
|
|
6
|
|
|
|
19
|
|
+ Tax Provision
|
|
|
(194)
|
|
|
|
(77)
|
|
Operating Income
|
|
$
|
3,689
|
|
|
$
|
964
|
|
+ Depreciation & Amortization
|
|
|
1,990
|
|
|
|
1,871
|
|
+ Restructuring Expense
|
|
|
-
|
|
|
|
360
|
|
+ Other (Expense) / Income
|
|
|
(6)
|
|
|
|
(19)
|
|
+ Noncash Stock Compensation
|
|
|
437
|
|
|
|
312
|
|
Adjusted EBITDA
|
|
$
|
6,110
|
|
|
$
|
3,488
|
|
Total Adjusted EBITDA for the first quarter of fiscal year 2022
was $6.1 million, an increase of $2.6 million or 75.2% versus the first quarter of fiscal year 2021. As a percentage of revenue, Adjusted
EBITDA increased to
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12.8% for the first quarter of fiscal year 2022 from 9.0% for
the first quarter of fiscal year 2021. The increase in Adjusted EBITDA during the first quarter of fiscal year 2022 was primarily driven
by the increase in net income.
LIQUIDITY AND CAPITAL RESOURCES
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.
On July 7, 2021, we entered into the Second Amended and Restated
Credit Facility Agreement (the “2021 Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”),
that amended and restated in its entirety the Company’s Amended and Restated Credit Facility Agreement dated as of October 30, 2017,
as amended by Amended and Restated Credit Facility Agreement Amendment 1 dated December 10, 2018 and Amended and Restated Credit Facility
Agreement Amendment 2 (“Amendment Two”) dated May 18, 2020 (as amended, the “Prior Credit Agreement”).
The 2021 Credit Agreement increased the revolving credit commitment
(the “Revolving Credit Commitment”) from $40.0 million to $80.0 million, with a letter of credit subfacility increased from
$2.0 million to $10.0 million, and extended the term of the Revolving Credit Commitment to June 2026. The 2021 Credit Agreement amended
the definition of Applicable Margin (formerly Applicable Rate under the Prior Credit Agreement), which is based upon the Company’s
then current leverage ratio and is used to determine interest charges on outstanding and unused borrowings under the revolving credit
facility; the amendments reduced the Applicable Margins payable at the two highest leverage ratio levels. The 2021 Credit Agreement also
amended the definition of Permitted Acquisitions, that is, acquisitions which are permitted under, and may be financed with proceeds of,
the revolving credit facility, including increasing the aggregate purchase price for acquisitions consummated in any fiscal year from
$1.0 million to $65 million during the current fiscal year and $50 million during any subsequent fiscal year, and adding an aggregate
purchase price of $40.0 million for acquisitions consummated at any time during the term of the 2021 Credit Agreement related to businesses
with a principal place of business located in the United Kingdom or the European Union.
In addition, the 2021 Credit Agreement provides that, assuming
no event of default, restricted payments up to $25.0 million (increased from $10.0 million in the Prior Credit Agreement) in the aggregate
and $10.0 million (increased from $3.0 million in the Prior Credit Agreement) in any single fiscal year may be used by us to repurchase
our shares and pay dividends. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which
we are required to comply. The 2021 Credit Agreement also reduced the LIBOR floor from 1.0% to 0.25% and included a mechanism for adoption
of a different benchmark rate in the event LIBOR is discontinued. Pursuant to the 2021 Credit Agreement, the fixed interest rate on our
term loan (the “2018 Term Loan”) was reduced from 4.15% to 3.90%.
The 2021 Credit Agreement superseded in its entirety, the Prior
Credit Agreement. Amendment Two to the Prior Credit Agreement had previously extended the term of the revolving credit facility to October
20, 2022 and increased the revolving credit commitment to $40 million.
Amendment Two also had modified the definition of the applicable
rate used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and it amended the definition
of permitted acquisitions to amend borrowings available under the revolving credit facility for acquisitions. In addition, Amendment Two
had amended the definition of restricted payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain employee
tax obligations associated with share-based payment and stock option activity, and modified certain restrictions to the Company’s
ability to repurchase its shares and pay dividends. Amendment Two also had modified the leverage ratio and fixed charge coverage ratio
covenants with which the Company was required to comply and limited capital expenditures to $5.5 million for the fiscal year ending March
27, 2021. Amendment Two also had established a LIBOR floor of 1.0% and included a mechanism for adoption of a different benchmark rate
in the event LIBOR was discontinued.
We have a term loan, the 2018 Term Loan, in the amount of $15.0
million. As of June 26, 2021, $10.0 million was outstanding on the 2018 Term Loan, of which $2.1 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.
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As of June 26, 2021, $40.0 million was available under the revolving
credit facility, of which $12.1 million was outstanding and included in long-term debt on the Consolidated Balance Sheets.
During the first quarter of fiscal year 2021, we used $0.9 million
for a business acquisition.
The allowable leverage ratio under the Prior Credit Agreement
for the second, third and fourth fiscal quarter of fiscal year 2021 and the first quarter of fiscal year 2022 was a maximum multiple of
5.0, 5.5, 7.0 and 4.0, respectively, of total debt outstanding compared to EBITDA and non-cash stock-based compensation expense for the
preceding four consecutive fiscal quarters. After the first quarter of fiscal 2022, pursuant to the July 2021 Facility, the allowable
leverage ratio is a maximum multiple of 3.0. The Prior Credit Agreement also had provided that the trailing twelve-month pro forma EBITDA
of an acquired business was included in the allowable leverage calculation.
Pursuant to the Prior Credit Agreement, we were required to comply
with a fixed charge ratio covenant and a leverage ratio covenant. M&T waived the requirement for the fixed charge ratio for the first
fiscal quarter ending June 26, 2021. We were in compliance with all other loan covenants and requirements during the first quarter of
fiscal year 2022. Our leverage ratio, as defined in the Prior Credit Agreement, was 0.96 at June 26, 2021, compared with 0.94 at March
27, 2021. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to
comply.
Interest on the revolving credit facility continues to accrue,
at our election, at either the variable one-month LIBOR (subject to a 1% floor during the first quarter of fiscal year 2022) or a fixed
rate for a designated period at the LIBOR corresponding to such period, in each case, plus a margin. Interest on outstanding borrowings
of the 2018 Term Loan accrues at a fixed rate of 4.15% over the term of the loan during the first quarter of fiscal year 2022 with principal
and interest payments made monthly. Unused fees accrued based on the average daily amount of unused credit available under the Prior Credit
Agreement. Interest rate margins and unused fees were determined on a quarterly basis based upon our calculated leverage ratio.
Cash Flows: The following table is a summary of our Consolidated
Statements of Cash Flows (dollars in thousands):
|
|
First Quarter Ended
|
|
|
June 26,
|
|
June 27,
|
|
|
2021
|
|
2020
|
Cash Provided by (Used in):
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
2,055
|
|
|
$
|
4,042
|
|
Investing Activities
|
|
$
|
(2,134
|
)
|
|
$
|
(1,261
|
)
|
Financing Activities
|
|
$
|
(43
|
)
|
|
$
|
(2,721
|
)
|
Operating Activities: Net cash provided by operations was
$2.1 million during the first quarter of fiscal year 2022 compared to $4.0 million of net cash provided by operating activities during
the first quarter of fiscal year 2021. The year-over-year decrease 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 by a net amount of $0.6 million during the first quarter
of fiscal year 2022 inclusive of $0.2 million of accounts receivable acquired as part of the Upstate Metrology acquisition completed during
the period. During the first quarter of fiscal year 2021, accounts receivable decreased by a net amount of $3.1 million. The year-over-year
variation reflects changes in the timing of collections. The following table illustrates our “days sales outstanding” as of
June 26, 2021 and June 27, 2020 (dollars in thousands):
|
|
June 26,
|
|
June 27,
|
|
|
2021
|
|
2020
|
Net Sales, for the last two fiscal months
|
|
$
|
33,502
|
|
$
|
27,464
|
Accounts Receivable, net
|
|
$
|
33,324
|
|
$
|
27,849
|
Days Sales Outstanding
|
|
|
60
|
|
|
61
|
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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 SKU’s stocked in anticipation of customer demand, reducing backorders for products with long lead times and optimizing
vendor 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 remained flat during both the first quarter of fiscal year 2022 and fiscal year 2021.
|
|
·
|
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 $1.1 million during the first quarter of fiscal year
2022. Accounts payable decreased $2.6 million during the first quarter of fiscal year 2021. The decreases are largely due to the timing
of inventory and other payments in the respective periods.
|
|
·
|
Accrued Compensation and Other Liabilities: Accrued compensation and other liabilities
include, among other things, amounts to be 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, but not limited to, changes in expected performance
levels, the performance measurement period, and timing of payments to employees. During the first quarter of fiscal year 2022, accrued
compensation and other liabilities decreased by $3.1 million. During the first quarter of fiscal year 2021, accrued compensation and other
liabilities decreased by $0.3 million. The change in fiscal year 2022 was largely due to the one-time annual payments 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 quarter of fiscal year 2022 and fiscal year 2021, income taxes payable
decreased by $0.3 million and $0.1 million, respectively. The year-over-year difference is due to timing of income tax payments.
|
Investing Activities: During the first quarter of fiscal
year 2022, we invested $1.2 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities
and the Company’s rental business.
During the first quarter of fiscal year 2021, we invested $1.3
million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and the Company’s
rental business.
Financing Activities:
During the first quarter of fiscal year 2022, $3.2 million was borrowed from our revolving line of credit
and $0.7 million in cash was generated from the issuance of common stock. In addition, we used $0.6 million for scheduled repayments of
our term loan and $3.4 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.
During the first quarter of fiscal year 2021, $0.4 million in
cash was generated from the issuance of common stock. In addition, we used $1.3 million to reduce the balance on our revolving line of
credit, $0.5 million for scheduled repayments of our term loan and $1.3 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
The results of the first quarter of fiscal year 2022 were strong
and we are pleased with the continued strong performance of our Service segment and improving trends in our Distribution segment. We have
a strong balance sheet, sustainable Service segment gross margins and an active M&A pipeline. We are confident that the strength of
our unique value proposition and our new customer pipeline positions us well for continued strong organic growth.
For the second quarter of fiscal year 2022, we expect Service
organic growth to be similar to what we achieved in the first quarter of fiscal year 2022. We expect more modest improvement in Service
gross margin than we have experienced over the last several quarters, largely due to a more difficult technician productivity comparison
versus
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the second quarter of fiscal year 2021. Distribution sales are
expected to achieve high teens growth in the second quarter of fiscal year 2022 on improved order trends and a prior-year comparison that
includes lower levels of demand due to the COVID-19 pandemic.
We revised our fiscal year 2022 income tax rate to range between
16% and 18% from the previous estimated range of 20% to 22%. This estimate includes Federal, various state, and Canadian income taxes
and reflects the discrete tax benefit associated with share-based payment awards and stock option activity.
We anticipate total capital expenditures to be approximately $7.5
million to $8.5 million in fiscal year 2022, with the majority of the capital expenditures planned for technology and growth-oriented
opportunities within both of our operating segments.