See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In Thousands, Except Par Value Amounts)
(Unaudited)

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share and Per Unit Amounts)
(Unaudited)

NOTE 1–GENERAL

Description of Business:Transcat, Inc. (“Transcat” or the “Company”)is a leading provider of accredited calibration and laboratory instrument services and a value-added distributor of professional grade test, measurement and control instrumentation. The Company is focused on providing services and products to highly regulated industries, particularly the life science industry, which includes pharmaceutical, biotechnology, medical device and other FDA-regulated businesses. Additional industries served include industrial manufacturing; energy and utilities, including oil and gas; chemical manufacturing; FAA-regulated businesses, including aerospace and defense and other industries that require accuracy in their processes, confirmation of the capabilities of their equipment, and for which the risk of failure is very costly.

Basis of Presentation:Transcat’s unaudited Consolidated Financial Statements have beenpreparedbeen prepared in accordance withaccountingwith accounting principles generally accepted in the United States (“GAAP”) for interim financial information and inaccordancein accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, alladjustmentsall adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 31, 2018(“30, 2019 (“fiscal year 2018”2019”) contained in the Company’s2018Company’s 2019 Annual Report on Form 10-K filed with the SEC.

Revenue Recognition:Distribution sales are recorded when an order’sthe product’s title and risk of loss transfers to the customer.Thecustomer. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer.Thecustomer. The majority of the Company’s revenue generatingactivities havegenerating activities has a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs inwhichin which the Company recognizes revenue over time. Revenue is measured as the amount of consideration itthe Company expects to receive in exchange for product shipped or services performed. Sales taxes and other taxes billed and collected from customers are excluded from revenue. The Company generally invoices its customers for freight, shipping, and handling charges. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data.

Revenue recognized from prior period performance obligations for the thirdsecond quarter of the fiscal year 2019ending March 28, 2020 (“fiscal year 2020”) was immaterial. As of December 29, 2018,September 28, 2019, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606 (defined below), the Company applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of December 29, 2018September 28, 2019 and March 31, 201830, 2019 were immaterial. Payment terms are generally 30 to 45 days. See Note 4 for disaggregated revenue information.

In 2014, theFinancialthe Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which established principles to report useful information to financial statement users about the nature, timing and uncertainty of revenue from contracts with customers. ASU No. 2014-09 along withvariouswith various related amendments comprise Accounting Standards Codification (“ASC”) Topic 606, Revenue from ContractswithContracts with Customers (“Topic 606”), andprovides and provide guidance that is applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Transcat adopted the new standard for its fiscal year ending March30, 2019, (“fiscal year 2019”), which began April 1, 2018 using the modified retrospective approach to each priorreportingprior reporting period presented. Based on our analysis, the Company concluded that the adoption of the amended guidance did not have a material impact on its net revenue recognition. The cumulative effect adjustment upon adoption of the ASU in the first quarter of fiscal year 2019 was immaterial.

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Fair Value of Financial Instruments:Transcat has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of threelevels.three levels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Company to develop its own assumptions. The carrying amount of debt on the Consolidated Balance Sheets approximates fair value due to variable interest rate pricing, and the carrying amounts for cash, accounts receivable and accounts payable approximate fair value due to their short-termnature.short-term nature. Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds and are valued based on Level 1 inputs. At December 29, 2018September 28, 2019 and March 31, 2018,30, 2019, investment assets totaled $0.6$0.5 million and $0.7 million, respectively and are included as a component of other assets (non-current) on the Consolidated Balance Sheets.

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Stock-Based Compensation:The Company measures the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. The Company records compensation expense related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period of each award. Excess tax benefits for share-based award activity are reflected in the statementConsolidated Statements of incomeIncome as a component of the provision for income taxes. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. The Company did not capitalize any stock-based compensation costs as part of an asset. The Company estimates forfeiture rates based on its historical experience. During the first ninesix months of fiscal year 20192020 and fiscal year 2018,2019, the Company recorded non-cash stock-based compensation expense of $0.8$0.3 million and $1.1$0.5 million, respectively, in the Consolidated Statements of Income.

Foreign Currency Translation and Transactions:The accounts of Transcat Canada Inc., a wholly-owned subsidiary of the Company, are maintained in the local currency and have been translated to U.S. dollars. Accordingly, the amounts representing assets and liabilities have been translated at the period-end rates of exchange and related revenue and expense accounts have been translated at an average rate of exchange during the period. Gains and losses arising from translation of Transcat CanadaInc.’sfinancialCanada Inc.’s financial statements into U.S. dollars are recorded directly to the accumulated other comprehensive loss component of shareholders’ equity.

Transcat records foreign currency gains and losses on its Canadian business transactions. The net foreign currency loss was less than $0.1 million during each of the first ninesix months of each of fiscal years 20192020 and 2018.2019. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its earnings will be adversely affected by changes in currency exchange rates. The Company does not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a loss of $0.1 million during each of the first ninesix months of fiscal yearyears 2020 and 2019, and a gain of $0.1 million during the first nine months of fiscal year 2018, was recognized as a component of other expense 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 29, 2018,September 28, 2019, the Company had a foreign exchange contract, which matured in JanuaryOctober 2019, outstanding in the notional amount of $4.2$4.3 million. The foreign exchange contract was renewed in JanuaryOctober 2019 and continues to be in place. The Company does not use hedging arrangements for speculative purposes.

Earnings Per Share:Basic earnings per share of common stock are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of stock options and unvested restricted stock units using the treasury stock method in periods in which they have a dilutive effect. In computing the per share effect of assumed conversion, funds which would have been received from the exercise of options and unvested restricted stock units and the related tax benefits are considered to have been used to purchase shares of common stock at the average market prices during the period, and the resulting net additional shares of common stock are included in the calculation of average shares of common stock outstanding.

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For the thirdsecond quarter of eachfiscal year 2020, the net additional common stock equivalents had no effect on the calculation of diluted earnings per share. For the second quarter of fiscal yearsyear 2019, and 2018, the net additional common stock equivalents had a $0.01($0.01) effect on the calculation of diluted earnings per share. For the first ninesix months of fiscal year 2020, the net additional common stock had a ($0.01) effect on the calculation of diluted earnings per share. For the first six months of fiscal year 2019, the net additional common stock equivalents had a $0.02 effect on the calculation of diluted earnings per share. For the first nine months of fiscal year 2018, the net additional common stock equivalents had a $0.01($0.02) effect on the calculation of diluted earnings per share. The average shares outstanding used to compute basic and diluted earnings per share are as follows:

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Recently Issued Accounting Pronouncements:

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC Topic 842), which requires lessees to recognize substantially all leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right ofto use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard is effective for annual and interim periods beginning after December 15, 2018. ASU 2016-02 requires entities to adopt a modified retrospective transition method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements.

The Company continues to evaluate the impact that adopting ASU 2016-02 will have on its financial statements, but the most significant impact will be to add right to use lease assets and lease liabilities on the consolidated balance sheet by the present value of the Company’s leasing obligations, which are primarily related to facility and vehicle leases, as wellas additional disclosures required. The Company estimates that the value of the assets and liabilities added to the Consolidated Balance Sheets will be approximately $6 million to $8 million. Adopting the new standard will not have a material impact on our Consolidated Statement of Income or Consolidated Statement of Cash Flows.

In July 2018, FASB issued ASU 2018-11, Leases (ASC Topic 842), which provides entities with an additional transition method to adopt the new leases standard. Under this method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the prior comparative period's financials will remain the same as those previously presented. Entities that elect this optional

The Company adopted the new leasing standard on March 31, 2019. The Company adopted the package of practical expedients permitted under the transition method must provideguidance which allowed us to carry forward the disclosures that were previously required.historical lease classification. Upon adoption, the Company used hindsight in determining lease term. The most significant impact of adoption was adding ROU lease assets and lease liabilities on the Consolidated Balance Sheets by the present value of the Company’s leasing obligations, which are primarily related to facility and vehicle leases. The present value of the remaining lease payments is recognized as lease liabilities on the Consolidated Balance Sheets with a corresponding ROU asset. The value of the assets and liabilities added to the Consolidated Balance Sheets was approximately $8 million each. The ROU asset is shown separately on the face of the Consolidated Balance Sheets. $1.7 million of the lease liabilities was included in Accrued Compensation and Other Liabilities on the Consolidated Balance Sheets with the remainder included in Lease Liabilities. Adopting the new standard willdid not have a material impact on our Consolidated Statement of Income or Consolidated Statement of Cash Flows.

NOTE 2–LONG-TERM DEBT

Description:On October 30, 2017, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”), which amended and restated our prior credit facility agreement. The Credit Agreement extended the term of the Company’s $30.0 million revolving credit facility (the “Revolving Credit Facility”) to October 29, 2021. As of September 28, 2019, $30.0 million was available under the Revolving Credit Facility, of which $11.1 million was outstanding and included in long-term debt on the Consolidated Balance Sheets.

On December 10, 2018, the Company entered into an Amended and Restated Credit Agreement Amendment 1(the1 (the “2018 Agreement”),. The 2018 Agreement has a term loan (the “2018 Term Loan”) in the amount of $15.0 million which replaced the previous term loan (the “2017 Term Loan”)which had an outstanding balance of $12.5 million as of such date. The 2018 Agreement has a term loan (the“2018Term Loan”) inthe amount of $15.0 million.December 10, 2018. As of December 29, 2018, $15.0September 28, 2019, $13.6 million was outstanding on the 2018 Term Loan, of which $1.9 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. Interest on the 2018 Term Loan accrues at a fixed interest rate

Table of 4.15% over the term of the agreement.Contents

On October 30, 2017, the Company entered into an Amended and Restated Credit Agreement (the“CreditAgreement”), which amended and restated our prior credit facility agreement. The Credit Agreement extended the term of theCompany’s $30.0 millionrevolving credit facility (the “Revolving Credit Facility”)to October 29, 2021. As of December 29, 2018, $30.0 million was available under the Revolving Credit Facility, of which $9.5 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. The Credit Agreement also replaced the previous term loan with the 2017 Term Loan of $15.0 million. The 2017 Term Loan required principal repayments of $0.2 million per month plus interest through September 2022 with a $4.3 million repayment required on October 29, 2022. As stated above, the 2017 Term Loan was replaced by the 2018 Term Loan. Under the Credit Agreement, borrowings that may be used for business acquisitions are limited to $20.0 million per fiscal year. During the first ninesix months of fiscal year 2019, $3.62020, $0.5 million was used for a business acquisition.acquisitions.

The allowable leverage ratio under the Credit Agreement remains atis a maximum multiple of 3.0 of total debt outstanding compared to earnings before income taxes, depreciation and amortization, and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. The excess funds ofquarters, as defined in the 2018 Term Loan and 2017 Term Loan over the previous term loans were used to pay down amounts outstanding under the Revolving Credit Facility.Agreement.

Interest and Other Costs:Interest on outstanding borrowings undertheunder the Revolving Credit Facility accrue,accrues, at Transcat’selection,Transcat’s election, at either the variable one-month London Interbank Offered Rate (“LIBOR”)or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case, plus a margin. Interest on outstanding borrowings under the 2018 Term Loan accrueaccrues at a fixed rate of 4.15% over the term of the loan. Commitment fees accrue based on the average daily amount of unused credit available on the Revolving Credit Facility. Interest rate margins and commitment fees are determined on a quarterly basis based upon the Company’s calculated leverage ratio, as defined in the Credit Agreement. The one-month LIBOR at December 29, 2018as of September 28, 2019 was 2.5%2.0%. The Company’s interest rate for the Revolving Credit Facility duringfor the first ninesix months of fiscal year 20192020 ranged from 3.2%3.3% to 3.8%3.7%.

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Covenants:The Credit Agreement has certain covenants with which the Company has tomust comply, including a fixed charge coverage ratio covenant and a leverage ratio covenant. The Company was in compliance with all loan covenants and requirements during the thirdsecond quarter of fiscal year 2020. Our leverage ratio, as defined in the Credit Agreement, was 1.32 at September 28, 2019, compared with 1.12 at the end of fiscal year 2019.

Other Terms:The Company has pledged all of its U.S. tangible and intangible personal property, the equity interests of its U.S.-based subsidiaries, and a majority of the common stock of Transcat Canada Inc. as collateral security for the loans made under the Revolving Credit Facility.

NOTE 3–STOCK-BASED COMPENSATION

The Transcat, Inc. 2003 Incentive Plan, as Amended and RestatedCompany has a share-based incentive plan (the “2003 Plan”), that provides for, among other awards,grants of restricted stock units and stock options to directors, officers and key employees at the fair market value at the date of grant. At December 29, 2018, 1.1September 28, 2019, 1.0 million sharesrestricted stock units or stock options were available for future grant under the 2003 Plan.

The Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete tax benefits related to share-based compensation activity during the six months of fiscal year 2020 and 2019 were $0.8 million and $0.1 million, respectively.

Restricted Stock Units:The Company generally grants time-based and performance-based restricted stock units as a primary component of executive and key employee compensation. In previous years,Expense for restricted stock grants is recognized on a straight-line basis for the service period of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock grants is the quoted market price for the Company’s common stock on the date of grant. These restricted stock units generallyare either time vested or vest following the third fiscal year from the date of grant subject to certain cumulative diluted earnings per share growth targets over the eligible period.

Beginning in fiscal year 2020, the annual performance-based award for our non-employee directors was replaced with thean annual grant of restricted stock units granted in May 2018, 50% of the units willvalued at $50,000 that vest subject to certain cumulative diluted earnings per share growth targets over the eligible period and 50% of the restricted units will be time vested over a three-year period.after one year. The restricted stock units grantedunit grants to non-employee directors were made in June 2017, April 2018 and October 2018 were time vested. September 2019.

Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the unitnumber of units that coincides with the actual outcome of the performance conditions. On an interim basis, the Company records compensation cost based on the estimated level of achievement of the performance conditions. The expense relating to the time vested restricted stock units is recognized on a straight-line basis over the requisite service period for the entire award.

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The Company achieved 50%131% of the target level for the performance-based restricted stock units granted in the fiscal year ended March 26, 201625, 2017 and as a result, issued 32108 shares of common stock to executive officers and certain key employees during the first quarter of fiscal year 2019.2020. The following table summarizes the non-vested restricted stock units outstanding as of December 29, 2018:September 28, 2019:

Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $0.8$0.3 million and $0.6$0.5 million, respectively, in the first ninesix months of fiscal years 20192020 and 2018.2019. As of December 29, 2018,September 28, 2019, unearned compensation to be recognized over the grants’ respective service periodstotaled $1.4periods totaled $1.6 million.

Stock Options:The Company grants stock options to employees and directors equal to the quoted market price of the Company’s stock at the date of the grant. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Expense for stock options is recognized on a straight-line basis over the requisite service period for each award. Options vest either immediately or over a period of up to five years using a straight-line basis and expire either five years or ten years from the date of grant. The expense relating to options is recognized on a straight-line basis over the requisite service period for the entire award.

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The following table summarizes the Company’s options as of and for the first ninesix months of fiscal year 2019:2020:

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between theCompany’sthe Company’s closing stock price on the last trading day of the thirdsecond quarter of fiscal year 20192020 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all holders exercised their options on December 29, 2018.September 28, 2019. The amount of aggregate intrinsic value will change based on thefairthe fair market value of the Company’s common stock.

Total expense related to stock options was less than $0.1 million during the first ninesix months of fiscal year 20192020. There was less than $0.1 million. Totalno expense related to stock options forduring the first ninesix months of fiscal year 2018 was $0.4 million.2019. Total unrecognized compensation cost related to non-vested stock options as of December 29, 2018September 28, 2019 was $0.1 million, which is expected to be recognized over a weighted average period of ninefive years. There were no stock options exercised during the first nine months of fiscal year 2019. The aggregate intrinsic value of stock options exercised in the first ninesix months of fiscal year 20182020 was $0.6$2.2 million. Cash received from the exercise of options in the first ninesix months of fiscal year 20182020 was $0.6$1.2 million. There were no stock options exercised during the first six months of fiscal year 2019.

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NOTE 4–SEGMENT INFORMATION

Transcat has two reportable segments: DistributionService and Service.Distribution. The Company has no inter-segment sales. The following table presents segment information for the thirdsecond quarter and first ninesix months of fiscal years 20192020 and 2018:2019:

Certain of the Company’s acquisition agreements, including Angel’sincludeAngel’s, include provisions for contingent consideration and other holdback amounts. The Company accrues for contingent consideration and holdback provisions based on their estimated fair value at the date of acquisition. As of December 29, 2018, $0.6September 28, 2019, $0.4 million of contingent consideration and $0.5 million of other holdback amounts werewas unpaid and reflected in current liabilities on the Consolidated Balance Sheets. DuringThis $0.4 million contingent consideration was paid subsequent to September 28, 2019. $0.5 million of holdback amounts were paid during the first ninesix months of fiscal year 2019, $0.1 million of contingent consideration or other holdbacks were paid. As of March 31, 2018, no contingent consideration or other holdback amounts were outstanding related to past acquisitions.2020.

The results of the acquired businesses are included in Transcat’s consolidated operating results as of the datesthe businessesweredates the businesses were acquired. The following unaudited pro forma information presents the Company’s results of operations as if theacquisitionofthe acquisition of Angel’s had occurred at the beginning of fiscal year 2019 and fiscal year 2018.2019. The pro forma results do notpurportnot purport to represent what the Company’s results of operations actually would have been if the transaction hadoccurredhad occurred at the beginning of theperiodthe period presented or what the Company’s operating results will be in future periods.

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During each of the first nine months of fiscal year 2019 and fiscal yearEffective June 12, 2018, acquisition costs of less than $0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.

During the first quarter of fiscal year 2019, Transcat acquired substantially all of the assets of NBS Calibration, Inc. (“NBS”), an Arizona-based provider of calibration services. This transaction aligned with the Company’s acquisitionstrategyacquisition strategy of targeting businesses that expand the Company’s geographic reach and leverage its infrastructure while also increasing the depth and breadth of the Company’s service capabilities.Duecapabilities. Due to the immaterial amount of the purchase price of the NBS assets, it has been included in the purchases of property and equipment net, in the consolidated statementConsolidated Statement of cash flows.Cash Flows.

During each of the first six months of fiscal year 2020 and fiscal year 2019, acquisition costs of less than $0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

Forward-Looking Statements.This reportcontainsreport 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,” “intends,” “could,” “plans,” “may”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 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 oneour 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 supply a significant amount ofprovide desired inventory, purchases, the risks related to current and future indebtedness, the relatively low trading volume of our common stock, risks related to our acquisition strategy and the integration of the businesses we acquire, the impact of economic conditions, risks related to the accuracy of the estimates and assumptions we use to revalue our U.S. deferred tax assets and liabilities in accordance with the Tax Cuts and Jobs Act of 2017 (the“Tax Act”), volatility in the oil and gas industry, the highly competitive nature of our two business segments, foreign currency rate fluctuations and cybersecurity risks.the impact of general economic conditions on our business. These risk factors and uncertainties are more fully described by usunderus 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 31, 2018.30, 2019. You should not place undue reliance on our forward-looking statements.statements, which speak only as of the date they are made. Except as required by law, we undertake no obligation to update 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 31, 2018.30, 2019.

RESULTS OF OPERATIONS

During the thirdour second quarter of fiscal year 2019,2020, we recordedachieved consolidated revenue of $40.9$41.8 million. This represented an increase of $0.47.4% or $2.9 million or 1.0% versus the thirdsecond quarter of fiscal year 2018. Revenue2019. There was strong revenue growth was due to ourin the Service segment, which increased 9.2% or $1.7 million to $20.5 million. Ourgrew 18.1%. Excluding acquired revenue, organic Service revenue growth was 15.1%. Sales in our Distribution segment showed a sales decrease of 6.2%declined by $0.7 million or 3.8% compared to $20.4 million. Revenue in the thirdsecond quarter of fiscal year 2019 included acquired revenue from Angel’s.2019.

Gross profit in the thirdSecond quarter of fiscal year 20192020 gross profit was $9.5$10.4 million, a decreasean increase of $0.2$1.3 million or 1.6%14.3% versus the thirdsecond quarter of fiscal year 2018.2019. Gross margin decreasedexpanded by 60150 basis points.points from 23.5% to 25.0%. Gross profit and gross margin were negativelyimpactedpositively affected by lower sales in Canada, the mix of Service work performedimproved productivity in the quarterService segment and lower technician productivity dueproduct mix changes within the Distribution segment.

Total operating expenses were $7.4 million, an increase of $0.4 million or 6.1% as compared to the increased numbersecond quarter of new staff hired withinfiscal year 2019, as the quarter.Company continued to invest in its operating infrastructure. As a percentage of total revenue, operating expenses were 17.7%, down 20 basis points from 17.9% in the second quarter of fiscal year 2019.

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Total operating expenses were $7.2Net income was $2.4 million, an increase of $0.1 million or 1.5%up 59.9% as compared to $1.5 million in the thirdsecond quarter of fiscal year 2018.2019. The increasegrowth in selling, marketing and warehouse expenses was a result of acquisition related amortization expense. Operating expenses as a percentage of total revenue were 17.5%, up from 17.4% in the third quarter of fiscal year 2018, an increase of 10 basis points.

Netnet income was $1.6 million foraided by higher operating income and the third quarter of fiscal year 2019, down from $1.8 million in the third quarter of fiscal year 2018 dueincreased discrete income tax benefits related to decreased gross profit and increased operating expenses.share-based awards.

The following table presents, for the thirdsecond quarter and first ninesix months of fiscal years 20192020 and 2018,2019, the components of our Consolidated Statements of Income:

THIRDSECOND QUARTER ENDED DECEMBERSEPTEMBER 28, 2019 COMPARED TO SECOND QUARTER ENDED SEPTEMBER 29, 2018 COMPARED TO THIRD QUARTER ENDED DECEMBER 23, 2017(dollars in thousands):

Revenue: