Transcat, Inc. — Form 10-Q Summary
Business and period: Transcat distributes professional test, measurement and control instruments and provides calibration and related compliance services. This report covers the fiscal second quarter and six months ended September 29, 2012, compared with the periods ended September 24, 2011. Financial amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Product revenue | $16.948 | $16.969 | $33.313 | $34.151 |
| Service revenue | $9.840 | $8.214 | $18.572 | $16.637 |
| Total revenue | $26.788 | $25.183 | $51.885 | $50.788 |
| Gross profit / margin | $6.078 / 22.7% | $6.153 / 24.4% | $12.285 / 23.7% | $12.451 / 24.5% |
| Operating income | $1.180 | $1.241 | $1.774 | $1.811 |
| Net income | $0.745 | $0.746 | $1.106 | $1.071 |
| Diluted EPS | $0.10 | $0.10 | $0.15 | $0.14 |
- Q2 revenue grew 6.4%; six-month revenue grew 2.2%. Service growth more than offset weaker product sales.
- Product gross margin fell to 22.0% in Q2 from 25.4%, mainly due to lower manufacturer rebates; six-month product margin was 23.8% versus 25.1%, reflecting lower rebates and increased customer discounts.
- Service revenue rose 19.8% in Q2 and 11.6% for six months, from organic growth and acquisitions. Service gross margin was 23.9% in Q2 and 23.4% for six months.
- Operating expenses were $4.898 million in Q2, roughly flat year over year, and $10.511 million for six months, down from $10.640 million. Six-month operating expenses as a share of revenue declined to 20.3% from 20.9%.
Cash, debt and liquidity
- Six-month operating cash flow was $0.654 million, versus $0.892 million a year earlier. Investing used $4.475 million, including $3.129 million for acquisitions and $1.346 million for property and equipment; financing provided $3.987 million, primarily to fund acquisitions.
- At September 29, cash was $0.194 million; current assets were $23.575 million and current liabilities were $11.481 million. Inventory was $7.082 million.
- Long-term debt was $7.242 million, compared with $3.365 million at March 31, 2012. The company entered a new three-year, $20 million revolving credit facility on September 20; it reported compliance with loan covenants. Borrowings bear LIBOR-based or designated-period rates plus a leverage-based margin.
- Management said cash and facility availability were sufficient for expected working capital, capital spending and lease needs for the foreseeable future.
Developments, outlook and risks
- On July 16, Transcat acquired substantially all assets of Anacor Compliance Services for approximately $3.1 million. The purchase included $1.9 million of goodwill and $0.6 million of identifiable intangible assets. Acquisition costs of $0.1 million were expensed. The filing did not provide pro forma results because the acquisition was deemed not significant.
- Q2 product sales were nearly flat year over year; management noted that the prior-year comparison included one-time opportunistic orders. For the first six months, product sales declined 2.5%, partly reflecting unusually strong prior-year orders.
- Outlook: Management expected product growth to remain challenged by economic uncertainty and competitive pricing to pressure margins. It expected service revenue, including the acquisition, to continue double-digit growth and aimed to improve service operating income by leveraging existing infrastructure. No specific financial guidance was provided.
- Other considerations include variable-rate borrowing exposure (a 1% rate move was estimated to change annual interest expense by less than $0.1 million at unchanged borrowing levels), Canadian-dollar exposure, and quarter-to-quarter variability in calibration orders. A one-time service sales-organization restructuring charge affected six-month expenses; its amount is not clearly stated in the filing text.
Important facts for investors to verify
- Whether service growth and acquired revenue translate into sustained operating-income and cash-flow improvement.
- Whether product rebates, discounting and competitive pricing continue to pressure product margins.
- The Anacor acquisition’s contribution, integration progress and subsequent goodwill or intangible-asset developments.
- Revolver borrowings, available capacity, interest costs and ongoing covenant compliance.
- Working-capital trends, particularly inventory levels and cash conversion.