Transcat, Inc. — Form 10-Q Summary
Business context and period: Transcat provides accredited calibration and laboratory instrument services and distributes test, measurement and control equipment, with a focus on regulated industries. This report covers the second quarter and first six months of fiscal 2017, ended September 24, 2016; comparisons are with the corresponding fiscal 2016 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $34.485 | $29.476 | $67.632 | $59.146 |
| Gross profit / margin | $8.027 / 23.3% | $6.737 / 22.9% | $16.273 / 24.1% | $13.799 / 23.3% |
| Operating income / margin | $1.578 / 4.6% | $1.370 / 4.6% | $3.016 / 4.5% | $2.397 / 4.1% |
| Net income / margin | $0.896 / 2.6% | $0.878 / 3.0% | $1.730 / 2.6% | $1.479 / 2.5% |
| Diluted EPS | $0.12 | $0.12 | $0.24 | $0.21 |
- Q2 revenue grew 17.0%; Service rose 19.4% to $16.947 million and Distribution rose 14.7% to $17.538 million. For the six months, revenue increased 14.3%, with Service up 23.1% and Distribution up 6.6%.
- Six-month segment operating income was $1.835 million for Service and $1.181 million for Distribution, versus $1.485 million and $0.912 million, respectively, in the prior-year period.
- Six-month Adjusted EBITDA, a non-GAAP measure, was $6.405 million, or 9.5% of revenue, versus $4.387 million, or 7.4%.
- Cash from operations was $5.009 million for the six months, compared with $5.314 million. Investing used $9.463 million, including $6.977 million for acquisitions and $2.496 million of capital expenditures. Financing provided $4.480 million; cash declined $0.043 million to $0.598 million.
- At September 24, current assets were $28.768 million and current liabilities $19.606 million. Long-term debt was $22.362 million, plus $1.429 million current debt; total debt was approximately $23.8 million. The revolving facility had a $30 million maximum and approximately $15.6 million undrawn.
Material changes and notable items
- Revenue growth reflected organic and acquisition-related Service growth and a Distribution rebound, including Excalibur’s used-equipment and rental business, growth in equipment rental, and higher alternative-energy demand.
- Excalibur was acquired in April 2016 for approximately $7.6 million, net of cash acquired. The acquisition added rental and used-equipment operations; preliminary allocation included $3.440 million of goodwill and $2.090 million of identifiable intangible assets. Goodwill increased to $32.680 million from $29.112 million at fiscal year-end.
- Gross margin improved year over year by 40 basis points in Q2 and 80 basis points for the six months. Distribution margin benefited from rental sales and improved customer mix. Q2 Service margin was unchanged at 24.4%.
- Operating expenses rose 20.2% in Q2 and 16.3% for the six months, largely from acquisition-related selling, marketing and warehouse costs. Interest and other expense also increased, to $0.359 million for the six months from $0.131 million.
- Unpaid acquisition consideration and holdbacks totaled $2.8 million at quarter-end: $0.5 million contingent consideration and $2.3 million other holdbacks.
Outlook, risks and contingencies
- Management described fiscal 2017 momentum, expected Service margins to improve as acquisitions are integrated and synergies are realized, and identified organic growth as a continued focus. It anticipated solid Q3 results, but said year-over-year comparison would be muted by prior-year performance-compensation adjustments; it expected strong Q4 and full-year consolidated results. No specific revenue or earnings guidance was provided.
- Management estimated a fiscal 2017 effective tax rate of approximately 34%–36%.
- The credit agreement matures September 20, 2018. The company reported compliance with its covenants and expected continued compliance through fiscal 2017. Borrowings bear variable or LIBOR-based rates; management estimated that a 1% rate change would affect annual interest expense by approximately $0.2 million. The filing reported no interest-rate hedges at quarter-end.
- Disclosed risks include reliance on a significant inventory vendor, debt and covenant risks, acquisition execution and integration, economic conditions, oil-and-gas volatility, competition, foreign-exchange fluctuations and cybersecurity. Canadian-market softness, particularly aerospace, weighed on Service operating income. Pending product shipments were $3.530 million, up from $3.124 million a year earlier; 74.9% were backorders.
- The company used short-term foreign-exchange forwards; a $5.9 million notional contract outstanding at quarter-end was renewed in October 2016. No material change in critical accounting policies was reported, and management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of revenue growth and expected future growth is organic versus acquired, and whether Excalibur integration delivers projected synergies and profitability.
- Whether gross-margin gains persist as acquisition-related costs, service mix and Distribution product mix change.
- Cash conversion and working-capital trends, including receivables, inventory, payables and pending product shipments.
- Debt levels, available borrowing capacity, interest-rate exposure, covenant headroom and scheduled term-loan repayments.
- Acquisition holdback and contingent-consideration obligations, and the final purchase-price allocation for Excalibur.
- The fiscal-year tax-rate estimate and the effects of Canadian market conditions, currency movements and key-vendor dependence.