Transcat, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 24, 2011; comparisons are with the corresponding periods ended September 25, 2010. Amounts below are in U.S. dollars. Transcat distributes test and measurement instruments and provides calibration, repair, and related services.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net revenue | $25.2 million, up 20.4% | $50.8 million, up 22.2% |
| Product sales | $17.0 million, up 26.0% | $34.2 million, up 29.1% |
| Service revenue | $8.2 million, up 10.3% | $16.6 million, up 10.2% |
| Gross profit / margin | $6.2 million / 24.4% | $12.5 million / 24.5% |
| Operating income | $1.2 million | $1.8 million |
| Net income / diluted EPS | $0.75 million / $0.10 | $1.07 million / $0.14 |
| Operating cash flow | Not stated separately | $0.9 million |
Quarterly gross margin improved 70 basis points year over year, while the six-month margin declined 30 basis points. Product gross margin was 25.4% for the quarter and 25.1% year to date; service gross margin was 22.4% and 23.3%, respectively. Operating expenses rose 21.3% in the quarter and 18.8% for the six months, driven by employee compensation, acquisition-related costs, and sales and marketing investment. The six-month effective tax rate was 38.0%.
Balance sheet, cash flow, and debt
- At September 24, cash was $0.07 million, current assets $22.5 million, current liabilities $10.9 million, and total assets $45.0 million. Working capital was approximately $11.6 million.
- Long-term debt was $8.2 million, up from $5.3 million at March 26, 2011. The company reported a $15.0 million revolving credit facility and compliance with its covenants throughout the six-month period. The filing states $15.0 million was available under the agreement, of which $8.2 million was outstanding; the precise meaning of availability is not clear from the filing text.
- Six-month investing cash use was $4.0 million, including $3.1 million for acquisitions and $0.9 million for property and equipment. Financing provided $3.2 million, primarily through net revolver borrowings. Cash increased $0.04 million to $0.07 million.
- Management said cash on hand and amounts available under the credit facility were sufficient for expected working capital, capital expenditures, and lease commitments for the foreseeable future.
Changes, acquisitions, and outlook
- Growth reflected market-share gains and acquisitions. Product sales benefited from the January 2011 Wind Turbine acquisition, portfolio expansion, sales initiatives, and improved economic conditions; service growth reflected modest organic gains and acquired revenue.
- During the period, Transcat acquired CMC Instrument Services and Newark Corporation’s calibration services division for approximately $3.1 million. The acquisitions added $1.7 million of goodwill and $1.2 million of customer-related intangible assets. Acquisition costs of $0.2 million were expensed.
- Management expected robust Product segment growth for the balance of the fiscal year, supported by Wind Turbine, organic growth, and reseller programs; absent those factors, it expected long-term Product growth in the mid-single digits. It expected double-digit Service growth and improved Service margins as infrastructure is leveraged. No specific full-year financial guidance was provided.
- Management noted that Product margins may fluctuate with vendor rebate programs. Service margins faced inflation and incremental lab costs related to acquisitions. It expects to outsource 15%–20% of Service revenue over the long term, while noting quarterly levels may vary.
Risks and unusual items
- Pending product shipments rose 43.5% year over year to $3.37 million; 73.6% were backorders. Shipment timing, manufacturer production issues, and order mix may affect conversion to revenue.
- Quarterly Product margin benefited from a $0.3 million year-over-year increase in vendor rebates and cooperative advertising income. Reseller sales included large orders of typically low-volume products, with lower channel margins.
- Acquisition-related earn-out payments of $0.2 million were earned during the six months; $0.3 million remained unpaid. Unpaid contingent holdback consideration was $0.1 million.
- Debt bears variable interest. The company estimated a 1% rate change would affect annual interest expense by less than $0.1 million at constant borrowing levels. A $1.3 million foreign-exchange forward contract was outstanding at quarter-end and matured in October 2011.
Important facts for investors to verify
- Whether elevated backorders are shipped promptly and translate into recognized sales.
- How much reported growth is organic versus acquisition-driven, and whether acquired businesses meet performance expectations.
- Whether rebate-related Product margin benefits recur and whether Service margins recover as management anticipated.
- The actual borrowing availability under the revolving facility, covenant headroom, and debt repayment requirements.
- The future cash requirements for acquisitions, capital investment, earn-outs, and contingent holdbacks.