Transcat, Inc. — Form 10-Q Summary
Business and period: Transcat provides accredited calibration and compliance services and distributes test, measurement and control instruments, with a focus on regulated industries. This report covers the second quarter and first six months of fiscal 2016, ended September 26, 2015; comparisons are to the periods ended September 27, 2014. Amounts below are in millions except per-share data.
Financial performance
| Metric | Second quarter 2016 | Second quarter 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Service revenue | $14.19 | $12.60 | $27.73 | $24.73 |
| Distribution sales | $15.29 | $18.52 | $31.42 | $35.50 |
| Total revenue | $29.48 | $31.11 | $59.15 | $60.23 |
| Gross profit / margin | $6.74 / 22.9% | $6.93 / 22.3% | $13.80 / 23.3% | $13.60 / 22.6% |
| Operating income / margin | $1.37 / 4.6% | $1.52 / 4.9% | $2.40 / 4.1% | $2.28 / 3.8% |
| Net income | $0.88 | $0.86 | $1.48 | $1.30 |
| Diluted EPS | $0.12 | $0.12 | $0.21 | $0.18 |
- Segment trends: Second-quarter Service revenue rose 12.7%, reflecting organic and acquisition-related growth; Service operating income was $0.84 million versus $0.67 million. Distribution sales fell 17.4%, primarily due to weaker oil and gas-related demand and the strong U.S. dollar; Distribution operating income declined to $0.53 million from $0.85 million. For the six months, Service revenue increased 12.1% and Distribution sales declined 11.5%.
- Cash flow and liquidity: Six-month operating cash flow was $5.31 million, versus cash used of $0.41 million a year earlier. Investing used $5.64 million, including $2.72 million of capital expenditures and $2.92 million for acquisitions. Cash was $0.16 million at quarter-end. Accounts receivable was $15.00 million and inventory $6.27 million.
- Debt: Long-term debt was $11.98 million, compared with $12.17 million at March 28, 2015. The revolving facility matures September 2018; the company reported $29.5 million available and $12.0 million outstanding. The first-half borrowing rate ranged from 1.7% to 1.8%. Transcat reported compliance with its loan covenants.
- Balance sheet: Total assets were $64.44 million and shareholders’ equity $36.00 million at September 26, 2015.
Changes, outlook and risks
- Revenue declined 5.3% in the quarter and 1.8% for the six months as service growth was outweighed by lower distribution sales. Six-month gross margin improved, supported in part by higher vendor rebates; quarterly operating margin declined.
- Transcat completed three acquisitions during the first six months for an aggregate purchase price of approximately $3.6 million, net of cash acquired. The acquisitions expand service capabilities and geographic reach. Acquisition costs of $0.2 million were recorded in administrative expenses; unpaid contingent consideration and other holdbacks totaled approximately $0.7 million.
- Management expected double-digit Service segment revenue growth for fiscal 2016 and revised its expectation for consolidated operating income growth to the low double-digits, citing challenging Distribution market conditions. Longer-term priorities included service growth, the instrument rental program, the web platform and cross-selling. No specific numerical revenue or earnings guidance was provided.
- Management said cash and available credit should be sufficient for foreseeable working capital, capital expenditure and lease needs. Key risks identified include dependence on a significant inventory vendor, indebtedness, acquisition execution and integration, economic conditions, competition, cybersecurity, and foreign-currency fluctuations.
- Foreign-currency translation reduced comprehensive income: other comprehensive loss was $0.35 million in the quarter and $0.24 million for the six months. The company used short-term currency forwards, with a $5.3 million notional contract outstanding at quarter-end. Management also noted that vendor rebates materially supported Distribution margins; their timing and amount can vary.
- Disclosure controls were judged effective, and the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Service growth, including acquisition contributions, continues at the pace needed to meet management’s fiscal-year expectations.
- Whether Distribution demand recovers from weakness in oil and gas-related markets and the effects of the strong U.S. dollar.
- How much reported margin performance depends on vendor rebates and whether those rebates are sustainable.
- Acquisition integration, purchase-price allocation, contingent consideration and holdback payments, and the returns on acquisition and capital spending.
- Cash generation, debt availability and covenant headroom; the filing reports both $29.5 million available and $12.0 million outstanding under the facility.
- Exposure to interest rates, foreign exchange, major-vendor concentration and the other risks identified in the filing.