Transcat, Inc. — Q1 FY2018 Form 10-Q
Reporting period: First quarter ended June 24, 2017; comparative period ended June 25, 2016. Dollar amounts are in thousands unless otherwise noted. Transcat provides calibration and laboratory instrument services and distributes test, measurement and control equipment, primarily to regulated and industrial markets.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Service revenue | $18,482 | $17,175 | +7.6% |
| Distribution sales | $17,797 | $15,972 | +11.4% |
| Total revenue | $36,279 | $33,147 | +9.4% |
| Gross profit / margin | $8,691 / 24.0% | $8,246 / 24.9% | +5.4%; margin down 0.9 pts |
| Operating income / margin | $1,411 / 3.9% | $1,438 / 4.3% | Down 1.9% |
| Net income | $856 | $906 | Down 5.5% |
| Diluted EPS | $0.12 | $0.13 | Down $0.01 |
| Adjusted EBITDA (non-GAAP) | $3,361; 9.3% of revenue | $3,105; 9.4% of revenue | Up $256 |
Gross profit growth came from Distribution. Distribution gross margin improved to 22.8% from 22.0%, while Service gross margin fell to 25.1% from 27.5%, reflecting technician capacity constraints, lower productivity during staffing ramp-up, and service mix. Operating expenses rose 6.9% to $7,280, mainly from infrastructure and operational-excellence spending and $499 of non-cash stock compensation, versus $149. The effective tax rate was 24.8%, compared with 28.7%; management attributed the reduction largely to tax benefits from stock-based awards.
Cash flow, liquidity and debt
- Operating cash use was $2,882, versus $140 used in the prior-year quarter. Working-capital outflows included reductions in accounts payable and accrued liabilities and a $1,373 inventory increase; receivables provided cash as collections reduced balances.
- Investing cash use was $2,128, including capital expenditures of $2,128; no acquisition was completed in the quarter. Prior-year investing cash use was $7,890, including a $6,923 acquisition.
- Financing provided $4,826, including $5,007 net revolver borrowings, $610 from common-stock issuance, and repayments and repurchases. Cash declined $241 to $601.
- Total debt was approximately $32.0 million: $23.6 million drawn on the revolving facility and $8.3 million on the term loan. The balance sheet reports $1.429 million current and $30.532 million long-term debt. The $30 million revolver had $6.4 million unused availability. Credit agreement maturity is September 20, 2018; management reported compliance with covenants.
- Current assets were $35.5 million and current liabilities $14.1 million at June 24, 2017. Receivables were $20.4 million; days sales outstanding were 49, up from 43 a year earlier.
Changes, outlook and risks
- Management characterized revenue growth as organic, with gains in both segments, market-share gains and some improvement in U.S. industrial markets. Distribution also benefited from rental and used-equipment activity and a stronger end-user mix.
- Management expects Service segment revenue growth in the mid- to high-single digits and anticipates Service margin improvement in the second half of FY2018 as technician capacity and productivity improve. It expressed measured optimism about Distribution, without providing a consolidated revenue or earnings forecast.
- Full-year FY2018 tax-rate guidance is 34%–36%; planned capital expenditures remain $6.0–$6.5 million, versus $2.1 million in Q1, primarily for IT, Service capabilities and rental assets.
- Reported risks include dependence on a significant inventory vendor, indebtedness and refinancing, acquisition execution and integration, economic and oil-and-gas volatility, competition, foreign exchange and cybersecurity. The company uses short-term currency forwards; a $5.6 million notional contract was renewed in July. A 1% interest-rate move was estimated to change annual interest expense by about $0.3 million, assuming borrowings remain constant.
- Other notable items: stock-based compensation rose sharply, including a $0.3 million one-off non-cash charge identified by management; the company increased debt and spent more on capital expenditures. Management said the temporary Service labor constraints should ease, but this remains an execution assumption.
Key investor verification points
- Track whether Service technician hiring translates into the expected second-half productivity and margin recovery, and whether targeted Service growth is sustained.
- Monitor cash conversion and working-capital movements, especially payables, accrued compensation, inventory and the elevated days-sales-outstanding figure.
- Assess debt capacity, covenant headroom, variable-rate exposure and refinancing needs ahead of the September 2018 credit-agreement maturity.
- Compare actual FY2018 capital spending and tax rate with management’s stated ranges; distinguish recurring costs from non-cash stock compensation and other unusual items.
- Evaluate whether Distribution growth and margins persist as end-market conditions, vendor rebates, equipment mix and rental activity change.