Transcat, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, ended June 29, 2013; comparisons are with the quarter ended June 30, 2012. Financial statement amounts below are in thousands of dollars, except per-share data. Transcat provides calibration, repair, inspection and compliance services, and distributes test and measurement instruments.
Financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $28,710 | $25,097 | +14.4% |
| Gross profit | $7,214 | $6,207 | +16.2% |
| Operating income | $1,152 | $594 | +$558 |
| Net income | $721 | $361 | +$360 |
| Diluted EPS | $0.09 | $0.05 | +$0.04 |
| Cash from operations | $(505) | $(2,094) | Use decreased $1,589 |
Total gross margin was 25.1%, up from 24.7%; operating margin was 4.0%, up from 2.4%; and net margin was 2.5%, up from 1.4%. The effective tax rate rose to 37.2% from 34.0%.
- Revenue mix: Distribution sales were $16,971, up 3.7%; Service revenue was $11,739, up 34.4%. Management attributed service growth to acquisitions and organic growth.
- Segment performance: Service gross profit rose 60.0% to $3,196, and gross margin increased to 27.2% from 22.9%. Distribution gross profit fell 4.6% to $4,018; gross margin declined to 23.7% from 25.7% amid competitive pricing and direct-versus-reseller sales mix.
- Costs: Operating expenses increased 8.0% to $6,062, but fell to 21.1% of revenue from 22.3%. The increase reflected service sales and marketing investment, acquisition costs and performance-based compensation changes.
Cash flow, balance sheet and liquidity
Operating activities used $505 of cash, versus $2,094 a year earlier. Cash flow benefited from receivables collections and other working-capital movements, but included a $2,409 reduction in accounts payable. Investing activities used $136, including $354 of capital expenditures, partly offset by $218 in proceeds from selling an idle warehouse. Financing activities provided $689, primarily from net revolving-credit borrowings.
At June 29, 2013, cash was $577, total assets were $53,689, and shareholders’ equity was $32,537. Long-term debt was $8,653, up from $8,017 at March 30, 2013; net debt after cash was approximately $8,076. The revolving facility has a stated capacity of $20.0 million and matures in September 2015. The filing reports $8.7 million outstanding; the remaining availability is approximately $11.3 million based on facility capacity, subject to its terms. The company was in compliance with its loan covenants. Its first-quarter borrowing rate was 1.15%.
Accounts receivable was $13,626, inventory was $7,025, and current liabilities were $10,363. Days sales outstanding was 40, versus 39 a year earlier. Management said cash on hand and the credit facility were sufficient for expected working capital, capital expenditure and lease needs for the foreseeable future.
Outlook, risks and notable items
- Management was optimistic about growth in revenue and income and expected year-over-year operating-income improvement for the rest of fiscal 2014, citing sales and marketing investments and acquisition contributions. No numerical earnings or revenue guidance was provided.
- Management expected continued competitive pressure in Distribution while seeking to maintain its market position. Distribution sales per business day were $265, versus $260 a year earlier.
- Pending product shipments increased 22.3% year over year to $3,433; 68.7% were backorders. The filing cites timing, specialized orders and manufacturer production issues as factors that can affect shipments.
- Management noted that service demand and expenses can fluctuate by quarter and considers trailing-twelve-month trends a better indicator. It expects to outsource 15%–20% of service revenue over the long term; 14.2% was outsourced this quarter.
- The company had $8.7 million of variable-rate debt and no interest-rate hedging arrangements. Management estimated a 1% rate change would affect annual interest expense by less than $0.1 million, assuming unchanged average borrowing.
- More than 90% of revenue was denominated in U.S. dollars. The company had two foreign-exchange forward contracts, with notionals of $4.1 million and $2.0 million; it reported a $0.2 million fair-value gain in the quarter. These contracts were not for speculative purposes.
- On July 10, 2013, after quarter-end, Transcat repurchased 100,000 shares from an unaffiliated shareholder at $7.00 per share. Disclosure controls were deemed effective, and management reported no material change in internal control over financial reporting.
Key facts for investors to verify
- How much of the strong Service revenue and margin growth is organic and sustainable, versus acquisition-related.
- Whether Distribution margins recover from competitive pricing and sales-mix pressure.
- Whether higher pending shipments and backorders convert to revenue, and whether collection performance remains sound.
- Actual borrowing availability under the credit agreement, covenant headroom, and the effect of any interest-rate changes.
- The financial and share-count impact of the 100,000-share post-quarter repurchase.