Transcat, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, ended June 25, 2011; comparisons are with the quarter ended June 26, 2010. Dollar amounts are in thousands unless otherwise noted. Transcat distributes professional test and measurement instruments and provides calibration, repair, and related services.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Product sales | $17,182 | $12,975 |
| Service revenue | $8,423 | $7,653 |
| Net revenue | $25,605 | $20,628 |
| Gross profit | $6,298 | $5,358 |
| Operating income | $570 | $451 |
| Net income | $325 | $278 |
| Diluted EPS | $0.04 | $0.04 |
- Revenue rose 24.1%: product sales increased 32.4% and service revenue increased 10.1%.
- Gross margin fell to 24.6% from 26.0%; product gross margin declined to 24.8% from 27.0%, while service gross margin was 24.1% versus 24.3%.
- Operating expenses increased 16.7% to $5,728, but declined as a share of revenue to 22.4% from 23.8%. Operating margin was 2.2% in both periods; net margin was 1.2% versus 1.3%.
- Effective tax rate was 38.1%, compared with 37.4%.
Cash flow, debt, and liquidity
- Operating cash flow was negative $565, versus negative $211. Investing cash use was $735, including $610 for property and equipment and $125 for the CMC acquisition. Financing provided $1,308, principally from a net $1,296 increase in revolver borrowings.
- Cash was $42 at quarter-end. Current assets were $23,144 and current liabilities were $11,646.
- Long-term debt was $6,543, up from $5,253 at March 26, 2011. The company reported a $15.0 million revolving credit facility and said it was in compliance with all covenants. Interest rates during the quarter ranged from 1.1% to 2.8%.
- Management said cash and credit-facility availability were sufficient for expected working capital, capital expenditures, and lease commitments for the foreseeable future.
Material changes and business developments
- Product growth reflected sales and marketing efforts, market-share gains, wind-energy sales, and reseller orders. Wind-energy customers accounted for 8.8% of product sales, versus 3.3% a year earlier; sales to this industry also benefited from the January 2011 Wind Turbine Tools acquisition.
- Service growth came from customer-base expansion and acquisitions. Transcat acquired substantially all assets of CMC Instrument Services on April 5, 2011; the company said the acquisition was not significant enough to provide pro forma results.
- Higher reseller volume and a larger reseller sales mix, overseas-product shipping and customs costs, inflation, and acquisition-related costs weighed on margins. Operating expenses rose with employee compensation, acquisition costs, and sales and marketing investment.
- Inventory increased $1.0 million from March 26, 2011, reflecting advance purchases of selected high-demand products after the Japanese earthquake. Pending product shipments increased $0.8 million year over year to $3.0 million; 67.9% were backorders.
- Year-end-quarter accounts-receivable days sales outstanding were 39, up from 36 a year earlier; management described collections as strong.
Outlook, risks, and other items
- Management said its outlook was unchanged, but remained cautious about the challenging macroeconomic environment and wind-energy industry cyclicality. It gave no quantified revenue or earnings guidance.
- Transcat expects to outsource 15%–20% of service revenue over the long term for calibration work outside its selected capabilities; actual quarterly levels may vary.
- A 1% interest-rate move was estimated to change annual interest expense by less than $0.1 million, assuming constant average borrowings. More than 90% of quarterly revenue was U.S.-dollar denominated; a 10% Canadian-dollar move would affect revenue by less than 1%. A $0.9 million foreign-exchange forward contract was outstanding and due to mature in July 2011.
- Unpaid acquisition-related amounts included $0.2 million of earn-out consideration and $0.1 million of contingent consideration. The filing reported no material subsequent events and no material change in internal control; management concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether strong product growth, including wind-energy and reseller sales, is sustainable and whether elevated backorders convert to shipments.
- Whether product-margin pressure from channel mix and import-related costs persists, and whether service margins recover as acquisition and inflation costs are absorbed.
- Whether operating cash flow improves after inventory investment and other working-capital movements, and how capital spending and acquisition costs affect borrowing needs.
- Revolver availability, debt covenant headroom, and the effect of variable rates; the filing states the facility size and amount drawn but does not clearly state remaining undrawn capacity.
- Performance and integration of recent acquisitions, including CMC, and the ultimate payments under earn-out and contingent-consideration provisions.