Transcat, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2015, ended December 27, 2014; comparisons are to the periods ended December 28, 2013. Dollar amounts below are in millions unless stated otherwise. Transcat provides accredited calibration and compliance services and distributes professional test, measurement and control instruments, particularly to regulated industries.
Financial results
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $31.05 | $30.51 | $91.28 | $88.11 |
| Gross profit / margin | $6.99 / 22.5% | $7.14 / 23.4% | $20.59 / 22.6% | $21.17 / 24.0% |
| Operating income / margin | $1.38 / 4.4% | $1.34 / 4.4% | $3.65 / 4.0% | $3.78 / 4.3% |
| Net income | $0.81 | $0.79 | $2.12 | $2.28 |
| Diluted EPS | $0.11 | $0.11 | $0.30 | $0.31 |
- Q3 revenue grew 1.8%; service revenue rose 9.4% to $12.60 million, while distribution sales fell 2.9% to $18.45 million. Q3 service gross margin improved to 24.5% from 23.4%; distribution gross margin declined to 21.2% from 23.4%.
- For nine months, revenue increased 3.6%, led by service growth of 7.5%; distribution sales grew 1.1%. Gross profit fell 2.8%, primarily because lower distribution vendor rebates reduced total gross margin by 140 basis points. Operating expenses declined 2.6%, helping offset the gross-profit decline.
- Nine-month operating cash flow was $1.22 million, down from $4.15 million. Investing used $9.34 million, including $6.68 million for the Ulrich acquisition and $2.71 million of capital expenditures. Financing provided $7.57 million, mainly from revolving-credit borrowings. Ending cash was $19,000.
- At December 27, 2014, total assets were $61.36 million, current assets $25.98 million, current liabilities $10.81 million, long-term debt $14.84 million, and shareholders’ equity $32.65 million. Inventory was $7.22 million, up from $6.18 million at fiscal year-end; accounts receivable was $15.30 million. Days sales outstanding increased to 42 from 39.
Material changes and notable items
- Ulrich Metrology, a Montreal-based calibration provider, was acquired effective August 31, 2014, for approximately $6.7 million net of cash acquired. The preliminary allocation included $3.98 million of goodwill and $2.29 million of identifiable intangible assets. Acquisition-related costs of $0.1 million were expensed. The filing’s unaudited nine-month pro forma results showed revenue of $92.95 million and net income of $2.22 million for FY2015.
- Service-segment growth reflected organic and acquisition-related contributions. Management says trailing twelve-month service revenue growth is a better indicator than individual-quarter comparisons because service-order timing varies.
- Distribution gross margin pressure stemmed chiefly from lower vendor rebates; in Q3, rebates reduced the segment margin by 190 basis points year over year. Pending product shipments reached $3.84 million, with 73.9% classified as backorders.
- Cash from operations was affected by working-capital movements, including higher inventory and $2.4 million of annual incentive-plan payments, versus $0.5 million in the prior-year period. The company also reported increased payment terms, including those offered by acquired businesses.
Outlook, risks, and liquidity
- Management said it expects continued organic and acquisition-related growth in calibration services and expects Ulrich to augment growth through the remainder of FY2015 and beyond. The C3 metrology-management system, new e-commerce platform, and expanded Los Angeles laboratory were identified as strategic initiatives.
- Management expected distribution vendor rebates to continue negatively affecting segment gross margin in fiscal Q4, but did not expect further rebate declines in the next fiscal year. No numerical earnings or revenue guidance was provided.
- The revolving facility matures September 20, 2018, has a stated $30 million maximum, and restricts acquisition borrowings to $15 million per fiscal year. The company reported $14.8 million outstanding and said $8.3 million remained available for acquisitions under the fiscal-year limit. It also reported $27.5 million “available under” the facility; because this wording is difficult to reconcile with the stated facility limit and outstanding balance, the exact meaning should be verified. The company said it complied with all covenants and believed available credit and cash would meet foreseeable needs.
- Borrowing rates ranged from 1.1% to 2.2% during the first nine months. Management estimated a 1% rate change would affect annual interest expense by approximately $0.2 million at constant average borrowings; no interest-rate hedge was in place. Foreign-exchange forward contracts had a $7.3 million notional amount; the company reported a $0.4 million contract fair-value gain for the nine-month period, offset by changes in the hedged receivables.
- Disclosed risks include dependence on a significant inventory supplier, indebtedness, acquisition integration and execution, economic conditions, competition, and cybersecurity. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- Whether service growth and Ulrich integration sustain revenue and margins, given variable service-order timing.
- Whether distribution vendor rebates recover as anticipated and whether the rising backorder balance converts into shipments and sales.
- The drivers of lower operating cash flow, higher receivables days, and increased inventory, and their effect on future working-capital needs.
- The exact revolver availability and borrowing-base position, debt covenants, acquisition capacity, and sensitivity to interest-rate increases.
- The final Ulrich purchase-price allocation, integration costs, and acquisition contribution relative to the pro forma presentation.