Transcat, Inc. — Form 10-Q summary
Reporting period: Third quarter and nine months ended December 28, 2013; comparative periods ended December 29, 2012. Amounts are in millions of dollars, except per-share data. Transcat provides calibration, repair, inspection and compliance services and distributes test and measurement instruments.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Revenue | $30.5 | $29.3 | $88.1 | $81.2 |
| Gross profit / margin | $7.1 / 23.4% | $6.6 / 22.6% | $21.2 / 24.0% | $18.9 / 23.3% |
| Operating income / margin | $1.3 / 4.4% | $1.2 / 4.2% | $3.8 / 4.3% | $3.0 / 3.7% |
| Net income | $0.8 | $0.8 | $2.3 | $1.9 |
| Diluted EPS | $0.11 | $0.10 | $0.31 | $0.25 |
- Q3 revenue rose 4.1%; service revenue grew 16.5% to $11.5 million, while distribution sales declined 2.3% to $19.0 million. For nine months, revenue increased 8.5%, led by 22.0% service growth; distribution sales increased 1.2%.
- Q3 service gross margin improved to 23.4% from 21.5%. Nine-month service gross margin rose to 24.7% from 22.8%, reflecting operating leverage and organic growth. Distribution gross margin was 23.4% in Q3 and 23.6% for nine months.
- Operating expenses increased 7.2% in Q3 and 9.3% for nine months, including increased sales and marketing investment in the Service segment.
- Nine-month operating cash flow was $4.2 million, compared with $2.4 million. Investing cash outflow was $0.9 million, versus $5.3 million, including a $3.1 million acquisition in the prior-year period. Financing used $3.7 million, including share repurchases partly funded by revolving-credit borrowing.
- At December 28, cash was $0.2 million; current assets were $26.7 million and current liabilities $13.8 million. Long-term debt was $10.6 million, up from $8.0 million at March 30, 2013. The revolving facility has a $20.0 million limit and matures in December 2015. The company reported compliance with its covenants.
Material changes and notable items
- Service revenue growth reflected expansion of the existing customer base and contributions from recent acquisitions. Trailing-twelve-month service revenue increased 19.9% to $46.9 million.
- Distribution results remained pressured by challenges in wind energy and a competitive market. Nine-month distribution sales increased despite a $1.7 million decline in wind-energy-related product sales. Q3 pending product shipments were $2.9 million, 71.2% of which were backorders.
- On October 4, 2013, Transcat repurchased and retired approximately 696,000 shares from an unaffiliated shareholder for $5.6 million ($8.10 per share). Nine-month cash-flow reporting shows $6.4 million of total repurchases, including this transaction. Shares outstanding declined from about 7.4 million at March 30 to 6.7 million at December 28.
- Nine-month effective tax rate increased to 37.0% from 34.0%; Q3 rates were 37.3% and 34.0%, respectively. Foreign-exchange forward contracts produced a $0.3 million fair-value gain during the nine months, offset by changes in hedged Canadian-dollar receivables; the company does not apply hedge accounting.
Outlook, risks and contingencies
- Management continued to expect double-digit Service revenue growth and Service operating income to grow faster than revenue, supported by organic and acquisitive growth. It intends to defend Distribution market share; no specific consolidated revenue or earnings guidance was provided.
- Management said cash and available revolving-facility capacity should meet foreseeable working-capital, capital-expenditure and lease needs. The filing reports $10.6 million outstanding against a $20.0 million facility; the implied undrawn capacity is approximately $9.4 million.
- Service demand can vary with calibration timing, customer capital spending and outsourcing decisions. Distribution faces competitive pressure, wind-energy challenges, product backorders and manufacturer production delays. Management expects to outsource 10%–20% of Service revenue over the long term for work outside its core capabilities.
- A 1% interest-rate movement would change annual interest expense by approximately $0.1 million, assuming borrowing levels remain constant; no interest-rate hedging was in place. Over 90% of revenue was U.S.-dollar denominated, and management estimated a 10% Canadian-dollar movement would affect total revenue by less than 1%.
- The filing states that interim results are not necessarily indicative of full-year results. Management identified no material changes to critical accounting policies, and reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification points
- Confirm the sustainability and organic-versus-acquired sources of Service growth, including its effect on margins and operating income.
- Track Distribution sales trends, wind-energy exposure, channel margins, discounts and the level and composition of pending shipments.
- Review cash conversion and working-capital movements, especially inventory and accrued liabilities, alongside the share repurchase’s impact on debt and liquidity.
- Verify the remaining borrowing capacity, covenant terms and compliance, and monitor floating-rate exposure before the facility’s December 2015 maturity.
- Assess the effective tax rate and the treatment and offsetting impact of foreign-exchange contract gains.