Business context and reporting period
Transcat, Inc. provides calibration and laboratory instrument services and distributes test, measurement and control instruments, with a focus on regulated industries. This Form 10-Q covers the first quarter of fiscal 2022, ended June 26, 2021; comparisons are with the quarter ended June 27, 2020. Results are unaudited.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $47.790 million | $38.904 million |
| Gross profit / margin | $13.520 million / 28.3% | $9.409 million / 24.2% |
| Operating income / margin | $3.689 million / 7.7% | $0.964 million / 2.5% |
| Net income | $3.688 million | $0.798 million |
| Diluted EPS | $0.49 | $0.11 |
| Adjusted EBITDA (non-GAAP) | $6.110 million | $3.488 million |
| Cash from operations | $2.055 million | $4.042 million |
Revenue grew 22.8%. Service revenue rose 20.0% to $27.557 million, including 16.6% organic growth and $0.6 million from acquisitions. Distribution sales increased 27.0% to $20.233 million. Gross profit rose 43.7%; management cited Service productivity and operating leverage, and a favorable Distribution product mix. Operating expenses increased 16.4% to $9.831 million but fell to 20.6% of revenue from 21.7%.
The reported income tax benefit was $0.194 million, producing a negative 5.6% effective tax rate. Management attributed the benefit primarily to discrete share-based compensation tax benefits of $1.1 million, compared with $0.3 million a year earlier. Adjusted EBITDA increased 75.2% and was 12.8% of revenue, versus 9.0%.
Liquidity, debt and cash flows
At June 26, 2021, cash was $0.254 million, current assets were $48.739 million and current liabilities were $20.604 million. Long-term debt was $22.196 million, comprising $12.1 million drawn on the revolver and $10.0 million outstanding on the term loan; $2.089 million of term debt was classified as current. The company reported $40.0 million available on its then-existing revolving facility. Operating cash flow declined to $2.055 million, primarily reflecting working-capital movements, including annual incentive payments and reductions in accrued liabilities. Capital expenditures were $1.203 million; investing cash use also included $0.931 million for the Upstate Metrology acquisition. Financing included $3.243 million of net revolver borrowings and $3.377 million of share repurchases/withholdings. Ending cash decreased by $0.306 million.
On July 7, 2021, after quarter-end, Transcat amended and restated its credit facility: the revolver commitment rose from $40 million to $80 million and was extended to June 2026; the letter-of-credit subfacility increased to $10 million. The agreement also expanded permitted acquisition and restricted-payment capacity, modified covenants, and reduced the term-loan fixed rate from 4.15% to 3.90%. The lender waived the fixed-charge ratio requirement for the quarter; the company said it complied with other loan covenants and reported a 0.96 leverage ratio.
Material changes, outlook and risks
Management said the year-over-year rebound reflected improved economic conditions and a particularly weak, COVID-19-affected comparison quarter in 2020. Rental revenue rose 61.3% to $1.6 million. Pending product shipments were $8.2 million, up $4.3 million year over year; 78.4% were backorders. The company cited pandemic-related supply disruptions and increased wind-power orders.
Transcat acquired substantially all assets of New York calibration-services provider Upstate Metrology on April 29, 2021, for approximately $0.9 million. It reported a $0.483 million goodwill allocation to Service. The filing also describes the prior BioTek acquisition, completed in December 2020.
For Q2 FY2022, management expected Service organic growth similar to Q1, more modest Service gross-margin improvement, and high-teens Distribution sales growth. It forecast a FY2022 effective tax rate of 16%–18% and capital expenditures of approximately $7.5–$8.5 million. It expressed confidence in organic growth prospects and an active M&A pipeline; no full-year revenue or earnings guidance was provided.
Risks discussed include COVID-19 effects, competition, technician recruitment and retention, supply availability and backorders, acquisition integration, cybersecurity and IT disruption, customer-industry volatility, indebtedness, interest-rate exposure and foreign-exchange movements. Management identified no material change in critical accounting policies, and concluded disclosure controls were effective.
Investor verification points
- Assess how much of the revenue and margin rebound is sustainable versus pandemic-affected comparisons, acquisitions and product mix.
- Monitor whether elevated backorders convert to sales and whether supply constraints affect Distribution growth.
- Review the July 2021 credit agreement, covenant terms, borrowing capacity and implications of the larger acquisition and repurchase limits.
- Separate recurring earnings from the unusually large share-based compensation tax benefit and compare GAAP results with non-GAAP Adjusted EBITDA.
- Track cash conversion, incentive-related working-capital movements, capital spending and acquisition integration.