Transcat, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 25, 2021 (fiscal 2022); comparisons are to periods ended September 26, 2020. Transcat provides calibration and laboratory instrument services and distributes test, measurement and control instruments, with a focus on regulated industries.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $50.4m | $41.6m | $98.2m | $80.5m |
| Gross profit / margin | $14.6m / 29.0% | $11.5m / 27.6% | $28.1m / 28.7% | $20.9m / 26.0% |
| Operating income / margin | $3.6m / 7.1% | $3.1m / 7.4% | $7.3m / 7.4% | $4.0m / 5.0% |
| Net income | $3.0m | $2.0m | $6.7m | $2.8m |
| Diluted EPS | $0.40 | $0.27 | $0.88 | $0.38 |
Q2 revenue rose 21.1% year over year: Service revenue increased 20.3% (including $1.6m from acquisitions and 14.0% organic growth), and Distribution sales increased 22.2%. Gross margin expanded 140 basis points in Q2 and 270 basis points for the six-month period. Management attributed improvement to fixed-cost leverage, technician productivity and a favorable Distribution product mix. Q2 operating expenses rose 31.1%, faster than revenue, reflecting acquisition-related costs, technology investment, payroll and incentive costs. Operating margin consequently declined 30 basis points in Q2 despite higher operating income.
Net income growth also benefited from lower tax expense. Effective tax rates were 9.4% for Q2 and 1.7% for the six months, versus 26.7% and 19.0%, respectively, mainly because of discrete share-based compensation tax benefits. Adjusted EBITDA, a non-GAAP measure, was $7.1m in Q2 (14.0% of revenue), up 35.5%; for six months it was $13.2m (13.4%), up 51.4%.
Cash flow, debt and liquidity
For the six months, operating cash flow was $7.5m, down from $12.5m. Investing cash use was $24.7m, including $20.9m for acquisitions and $3.8m of capital expenditures. Financing provided $19.1m, including $24.5m net revolver borrowings; cash ended at $2.6m, versus $0.6m at fiscal year-end. Working-capital movements included lower accrued compensation liabilities and timing-related changes in receivables and payables; days sales outstanding was 64, up from 55 a year earlier.
At September 25, total debt was approximately $43.1m, comprising $33.4m drawn on the revolving facility and $9.6m on the term loan. The term loan rate was reduced to 3.90%; its scheduled payments continue through December 2025. The July 2021 credit agreement increased the revolving commitment to $80m and extended it to June 2026. Leverage ratio was 1.54, versus 0.94 at March 27, 2021; the company reported compliance with covenants. The filing states both that $80m was available under the revolver and that $33.4m was outstanding, so the actual undrawn availability is unclear from the text.
Acquisitions, outlook and risks
Transcat acquired NEXA, an Irish provider of calibration optimization and asset-management solutions, effective August 31, for approximately $26.5m, funded with $24.1m cash and $2.4m in shares. Additional earn-outs of up to $7.5m may be payable over four years, subject to performance goals. NEXA contributed $0.6m revenue and a $0.1m operating loss after acquisition. The company also acquired Upstate Metrology in April; BioTek, acquired in December 2020, was included in the reported results. Acquisition integration and the preliminary NEXA purchase-price allocation remain relevant considerations.
For Q3 FY2022, management expected Service revenue growth similar to Q2, about half organic and half from acquisitions, and Service gross-margin expansion similar to Q2’s year-over-year improvement. Distribution revenue was expected to grow in the low teens. The estimated FY2022 effective tax rate was revised to 14%–15% from 16%–18%. No broader full-year revenue or earnings guidance is provided in the filing.
Management cited COVID-19 effects, product supply disruption and elevated pending shipments as operating considerations. Pending product shipments were $7.6m, up $3.4m year over year, with 78.1% backorders. Disclosed risks include potential vaccine or testing mandates and related workforce attrition or costs, supply availability, acquisition integration, competition, cybersecurity and IT disruption, hiring and retention, customer-industry volatility, indebtedness, interest rates and foreign exchange. A 1% interest-rate move was estimated to change annual interest expense by about $0.2m, assuming average borrowings were unchanged. Disclosure controls were assessed as effective, with no material change in internal control reported.
Key facts for investors to verify
- Clarify actual undrawn revolver availability: the filing reports an $80m commitment and $33.4m drawn, but also describes $80m as available.
- Track whether Service and Distribution growth and margins persist as pandemic comparisons normalize; monitor the $7.6m pending-shipment balance and supplier constraints.
- Assess NEXA integration, earn-out exposure, acquisition-related costs and final purchase-price allocation.
- Separate recurring tax performance from the unusually large share-based compensation tax benefits; compare results with the revised 14%–15% full-year tax estimate.
- Monitor cash conversion, receivables/DSO, debt and covenant headroom as acquisition spending and share-award tax withholding affect liquidity.