TRANSCAT INC 10-Q

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, general economic conditions applicable to our business, the impact of the COVID-19 pandemic, inflationary impacts, 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 regulated and industrial manufacturing industries, tariffs and trade relations, any impairment of our goodwill or intangible assets, 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, 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, supply chain delays or disruptions, the risks related to current and future indebtedness, risks related to our intellectual property, the relatively low trading volume of our common stock, foreign currency rate fluctuations, adverse weather events or other catastrophes or natural disasters, changes in tax rates, and changes in accounting standards, legal requirements and listing standards. 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 26, 2022. 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 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 26, 2022. RESULTS OF OPERATIONS Executive Summary During our first quarter of fiscal year 2023, we had consolidated revenue of $54.7 million. This represented an increase of $6.9 million or 14.4% versus the first quarter of fiscal year 2022. This increase was primarily due to the recently completed acquisitions, strong demand in our Service segment’s highly-regulated end markets and improved market conditions in our Distribution segment. Our first quarter of fiscal year 2023 gross profit was $16.0 million. This was an increase of $2.5 million or 18.6% versus the first quarter of fiscal year 2022. In addition, consolidated gross margin was 29.3%, an increase of 100 basis points, versus the first quarter of fiscal year 2022. This increase was largely the result of operating leverage on our fixed costs and accretive gross margins from recent acquisitions. Total operating expenses were $12.4 million in the first quarter of fiscal year 2023, an increase of $2.6 million or 26.5% when compared to the prior year first quarter. Included in operating expenses during the first quarter of fiscal year 2023 were incremental operating expenses related to the acquisition of Alliance, investments in technology and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were 22.7% in the first quarter of fiscal year 2023, up 210 basis points from 20.6% in the first quarter of fiscal year 2022. Operating income decreased by $0.1 million and operating margin decreased from 7.7% to 6.6% in the first quarter of fiscal year 2023. Net income was $3.1 million for the first quarter of fiscal year 2023, down from $3.7 million in the first quarter of fiscal year 2022 primarily due to a higher provision from income taxes. 16 The following table presents, for the first quarter of fiscal year 2023 and fiscal year 2022, the components of our Consolidated Statements of Income: (Unaudited) First Quarter Ended June 25, June 26, 2022 2021 As a Percentage of Total Revenue: Service Revenue 62.0 % 57.7 % Distribution Sales 38.0 % 42.3 % Total Revenue 100.0 % 100.0 % Gross Profit Percentage: Service Gross Profit 32.0 % 31.8 % Distribution Gross Profit 25.0 % 23.6 % Total Gross Profit 29.3 % 28.3 % Selling, Marketing and Warehouse Expenses 10.6 % 10.5 % General and Administrative Expenses 12.1 % 10.1 % Total Operating Expenses 22.7 % 20.6 % Operating Income 6.6 % 7.7 % Interest and Other Expense, net 0.3 % 0.4 % Income Before Income Taxes 6.3 % 7.3 % Provision for (Benefit from) Income Taxes 0.7 % (0.4 %) Net Income 5.6 % 7.7 % FIRST QUARTER ENDED JUNE 25, 2022 COMPARED TO FIRST QUARTER ENDED JUNE 26, 2021 (dollars in thousands): Revenue: First Quarter Ended Change June 25, June 26, 2022 2021 $ % Revenue: Service $ 33,876 $ 27,557 $ 6,319 22.9 % Distribution 20,785 20,233 552 2.7 % Total $ 54,661 $ 47,790 $ 6,871 14.4 % Total revenue increased $6.9 million, or 14.4%, in our fiscal year 2023 first quarter compared to the prior fiscal year first quarter. Service revenue, which accounted for 62.0% and 57.7% of our total revenue in the first quarter of fiscal years 2023 and 2022, respectively, increased 22.9% from the first quarter of fiscal year 2022 to the first quarter of fiscal year 2023. This year-over-year increase included $3.9 million in revenue from acquisitions, and also included organic revenue growth of 8.6% driven by improvement in end market conditions and continued market share gains. 17 Our fiscal years 2023 and 2022 Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows: FY 2023 FY 2022 Q1 Q4 Q3 Q2 Q1 Service Revenue Growth 22.9 % 19.6 % 22.1 % 20.4 % 20.0 % The growth in Service segment revenue during the first quarter of fiscal year 2023 versus the first quarter of fiscal year 2022 reflected both organic growth and acquisitions. Within any fiscal year, while we add new customers, we also have customers from the prior fiscal year whose service orders may not repeat for any number of factors. Among those factors are variations in the timing of periodic calibrations and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of Service segment orders can vary on a quarter-to-quarter basis, we believe trailing twelve-month information provides a better indication of the progress of this segment. The following table presents the trailing twelve-month Service segment revenue for each quarter in fiscal years 2023 and 2022 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period: FY 2023 FY 2022 Q1 Q4 Q3 Q2 Q1 Trailing Twelve-Month: Service Revenue $ 128,324 $ 122,005 116,315 110,854 105,864 Service Revenue Growth 21.2 % 20.5 % 19.5 % 17.2 % 13.1 % Our strategy has been to focus our investments in the core electrical, temperature, pressure, physical/dimensional and radio frequency/microwave calibration disciplines. We expect to subcontract approximately 13% to 15% of our Service revenue to third-party vendors for calibration beyond our chosen scope of capabilities. We continually evaluate our outsourcing needs and make capital investments, as deemed necessary, to add more in-house capabilities and reduce the need for third-party vendors. Capability expansion through business acquisitions is another way that we seek to reduce the need for outsourcing. The following table presents the source of our Service revenue and the percentage of Service revenue derived from each source for the first quarter of fiscal year 2023 and for each quarter during fiscal year 2022: FY 2023 FY 2022 Q1 Q4 Q3 Q2 Q1 Percent of Service Revenue: In-House 85.4 % 85.4 % 84.1 % 83.2 % 83.1 % Outsourced 13.2 % 13.1 % 14.4 % 15.3 % 15.4 % Freight Billed to Customers 1.4 % 1.5 % 1.5 % 1.5 % 1.5 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 18 Our Distribution sales accounted for 38.0% of our total revenue in the first quarter of fiscal year 2023 and 42.3% of our total revenue in the first quarter of fiscal year 2022. During the first quarter of fiscal year 2023, Distribution segment sales showed an increase of 2.7% to $20.8 million. This increase was due to strong demand for rental orders. Our fiscal years 2023 and 2022 Distribution sales growth, in relation to prior fiscal year quarter comparisons, was as follows: FY 2023 FY 2022 Q1 Q4 Q3 Q2 Q1 Distribution Sales Growth 2.7 % 7.2 % 7.2 % 22.2 % 27.0 % The change in the first quarter of fiscal year 2023 versus the first quarter of fiscal year 2022 for the Distribution segment reflected organic growth. 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. Backorders are the total dollar value of orders received for which revenue has not yet been recognized. Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in our service centers prior to shipment, orders required by the customer to be shipped complete or at a future date, and other orders awaiting final credit or management review prior to shipment. Management uses pending product shipments and backorders as measures of our future business performance and financial performance within the distribution segment. Our total pending product shipments at the end of the first quarter of fiscal year 2023 were $9.0 million, an increase of $0.9 million versus the end of the first quarter of fiscal year 2022 and an increase of $1.3 million since March 26, 2022. The year-over-year increase in pending product shipments and backorders was a result of the disruption to the supply of products as well as increased orders. The following table presents our total pending product shipments and the percentage of total pending product shipments that were backorders at the end of the first quarter of fiscal year 2023 and each quarter of fiscal year 2022: FY 2023 FY 2022 Q1 Q4 Q3 Q2 Q1 Total Pending Product Shipments $9,034 $7,747 $8,854 $7,612 $8,173 % of Pending Product Shipments that were Backorders 78.1% 83.2% 81.3% 78.1% 78.4% Gross Profit: First Quarter Ended Change June 25, June 26, 2022 2021 $ % Gross Profit: Service $ 10,835 $ 8,752 $ 2,083 23.8 % Distribution 5,203 4,768 435 9.1 % Total $ 16,038 $ 13,520 $ 2,518 18.6 % Total gross profit for the first quarter of fiscal year 2023 was $16.0 million, an increase of $2.5 million or 18.6% versus the first quarter of fiscal year 2022. Total gross margin was 29.3% in the first quarter of fiscal year 2023, up from 28.3% in the first quarter of fiscal year 2022, a 100 basis point increase. Service gross profit in the first quarter of fiscal year 2023 increased $2.1 million, or 23.8%, from the first quarter of fiscal year 2022. Service gross margin was 32.0% in the first quarter of fiscal year 2023, a 20 basis point increase versus the first quarter of fiscal year 2022. This increase in gross margin was the result of operating leverage on our fixed costs and accretive gross margins from recent acquisitions, offset by increased start-up costs from new client-based lab implementations. 19 The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue: FY 2023 FY 2022 Q1 Q4 Q3 Q2 Q1 Service Gross Margin 32.0% 33.1% 29.7% 32.9% 31.8% 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 2023 FY 2022 Q1 Q4 Q3 Q2 Q1 Distribution Gross Margin 25.0% 24.5% 22.5% 23.5% 23.6% Distribution segment gross margin was 25.0% in the first quarter of fiscal year 2023 versus 23.6% in the first quarter of fiscal year 2022, a 140 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 25, June 26, 2022 2021 $ % Operating Expenses: Selling, Marketing and Warehouse $ 5,820 $ 4,997 $ 823 16.5 % General and Administrative 6,614 4,834 1,780 36.8 % Total $ 12,434 $ 9,831 $ 2,603 26.5 % Total operating expenses were $12.4 million in the first quarter of fiscal year 2023 versus $9.8 million during the first quarter of fiscal year 2022. The year-over-year increase in selling, marketing and warehouse expenses is due to increased expenses related to recent acquisition, especially acquisition related amortization expense. 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 22.7% in the first quarter of fiscal year 2023 and 20.6% in the first quarter of fiscal year 2022, an increase of 210 basis points. Income Taxes: First Quarter Ended Change June 25, June 26, 2022 2021 $ % Provision for (Benefit from) Income Taxes $ 376 $ (194 ) $ 570 293.8 % Our effective tax rates for the first quarter of fiscal years 2023 and 2022 were 10.9% and (5.6%), respectively. The increase in the tax provision is due to the decreased 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 period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the first quarter of fiscal years 2023 and 2022 was $0.5 million and $1.1 million, respectively. 20 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 2023 effective tax rate to be approximately 22.0% to 24.0%. Net Income: First Quarter Ended Change June 25, June 26, 2022 2021 $ % Net Income $ 3,072 $ 3,688 $ (616 ) (16.7 %) Net income for the first quarter of fiscal year 2023 decreased $0.6 million from the first quarter of fiscal year 2022 primarily due to the increased operating expenses and a higher provision for 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, 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. First Quarter Ended June 25, June 26, 2022 2021 Net Income $ 3,072 $ 3,688 + Interest Expense 360 189 + Other (Income) / Expense (204 ) 6 + Tax Provision 376 (194 ) Operating Income $ 3,604 $ 3,689 + Depreciation & Amortization 2,641 1,990 + Transaction Expense 30 - + Other Income / (Expense) 204 (6 ) + Noncash Stock Compensation 828 437 Adjusted EBITDA $ 7,307 $ 6,110 Total Adjusted EBITDA for the first quarter of fiscal year 2023 was $7.3 million, an increase of $1.2 million or 19.6% versus the first quarter of fiscal year 2022. As a percentage of revenue, Adjusted EBITDA increased to 13.4% for the first quarter of fiscal year 2023 from 12.8% for the first quarter of fiscal year 2022. The increase in Adjusted EBITDA during the first quarter of fiscal year 2023 was primarily driven by the increase in depreciation and amortization expense and noncash stock compensation expense. 21 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, on a diluted per share basis), 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. First Quarter Ended June 25, June 26, 2022 2021 Net Income $ 3,072 $ 3,688 + Amortization of Intangible Assets 1,084 620 + Acquisition Deal Costs 299 - + Income Tax Effect @ 25% (346 ) (155 ) Adjusted Net Income 4,109 4,153 Average Diluted Shares Outstanding 7,629 7,593 Diluted Earnings Per Share – GAAP $ 0.40 $ 0.49 Adjusted Diluted Earnings Per Share $ 0.54 $ 0.55 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 $65.0 million during fiscal year 2022 and $50.0 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. 22 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 London Interbank Offered Rate (“LIBOR”) floor from 1.0% to 0.25% and included a mechanism for adoption of a different benchmark rate upon the discontinuation of LIBOR. The 2021 Credit Agreement also reduced the fixed interest rate on our term loan in the amount of $15.0 million (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 $40.0 million. Amendment Two 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 fiscal year 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. As of June 25, 2022, $80.0 million was available under the revolving credit facility, of which $43.7 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. During the first quarter of fiscal year 2023 and 2022, we used $4.0 million and $0.9 million, respectively, for business acquisitions. As of June 25, 2022, $8.0 million was outstanding on the 2018 Term Loan, of which $2.2 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. Pursuant to the Prior Credit Agreement, we were required to comply with a fixed charge ratio covenant and a leverage ratio covenant, which were modified by the 2021 Credit Agreement. The allowable leverage ratio under the Prior Credit Agreement for the first quarter of fiscal year 2022 was a maximum multiple of 4.0 of total debt outstanding compared to EBITDA and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. 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. After the first quarter of fiscal 2022, pursuant to the 2021 Credit Agreement, the allowable leverage ratio is a maximum multiple of 3.0. We were in compliance with all loan covenants and requirements during the first quarter of fiscal year 2023. Our leverage ratio, as defined in the 2021 Credit Agreement, was 1.83 at June 25, 2022, compared with 1.74 at March 26, 2022 Interest on the revolving credit facility continues to accrue, at our election, at either the variable one-month LIBOR or a fixed rate for a designated period at the LIBOR corresponding to such period (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods), in each case, plus a margin. Interest on outstanding borrowings under the 2018 Term Loan accrued at a fixed rate of 4.15% during the first quarter of fiscal year 2022 and accrue at a fixed rate of 3.90% during the second quarter of fiscal year 2022 and over the term of the loan for subsequent periods. 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 the Company’s 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 25, June 26, 2022 2021 Cash Provided by (Used in): Operating Activities $ 2,043 $ 2,055 Investing Activities $ (6,429 ) $ (2,134 ) Financing Activities $ 3,110 $ (43 ) 23 Operating Activities : Net cash provided by operations was $2.0 million during the first quarter of fiscal year 2023 compared to $2.1 million of net cash provided by operating activities during the first quarter of fiscal year 2022. 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 $1.7 million during the first quarter of fiscal year 2023 inclusive of $0.3 million of accounts receivable acquired as part of the Alliance acquisition completed during the period. During the first quarter of fiscal year 2022, 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. The year-over-year variation reflects changes in the timing of collections. The following table illustrates our “days sales outstanding” as of June 25, 2022 and June 26, 2021 (dollars in thousands): June 25, June 26, 2022 2021 Net Sales, for the last two fiscal months $ 38,321 $ 33,502 Accounts Receivable, net $ 38,031 $ 33,324 Days Sales Outstanding 60 60 ● Inventory: Our inventory strategy includes making appropriate large quantity, high dollar purchases with key manufacturers for various reasons, including maximizing on-hand availability of key products, expanding the number of SKU’s stocked in anticipation of customer demand, reducing backorders for products with long lead times and optimizing vendor purchase and sales volume discounts. As a result, inventory levels may vary from quarter-to-quarter based on the timing of these large orders in relation to our quarter end. Our inventory balance increased $2.2 million during the first quarter of fiscal year 2023. Our inventory balance remained flat during the first quarter of fiscal year 2022. ● 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 $1.2 million during the first quarter of fiscal year 2023. Accounts payable decreased $1.1 million during the first quarter of fiscal year 2022. 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, 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 2023, accrued compensation and other current liabilities decreased by $2.8 million. During the first quarter of fiscal year 2022, accrued compensation and other current liabilities decreased by $3.1 million. The change from the first quarter of 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 2023 income tax payable remained flat. During the first quarter of fiscal year 2022, income taxes payable decreased by $0.3 million. The year-over-year difference is due to timing of income tax payments. 24 Investing Activities: During the first quarter of fiscal year 2023, we invested $2.4 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 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 2023, we used $4.0 million for business acquisitions. During the first quarter of fiscal year 2022, we used $0.9 million for business acquisitions. During each of the first quarters of fiscal year 2023 and fiscal year 2022, no contingent consideration or other holdback amounts were paid related to business acquisitions. Financing Activities : During the first quarter of fiscal year 2023, $3.8 million was borrowed from our revolving line of credit and $0.2 million in cash was generated from the issuance of common stock. In addition, we used $0.5 million for 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. 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. OUTLOOK As we head into a more uncertain economic environment, we are pleased with the strong demand levels we experienced in our first quarter of fiscal year 2023. We continue to demonstrate our ability to drive growth through various economic cycles as can be seen over the past ten years and we are confident that will continue. The business continues to benefit from a predominately life science-oriented market, driven by regulation and recurring revenue streams. In the fiscal year ahead, we expect organic Service revenue growth in the high-single digit range and gross margin improvement to continue. We expect our income tax rate to range between 22% and 24% for full fiscal year 2023. This estimate includes Federal, various state, Canadian and Irish income taxes and reflects the discrete tax accounting associated with share-based payment awards.