Transcat, Inc. — Form 10-Q Summary
Business context and period: Transcat provides 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 2018, ended September 23, 2017; comparisons are to the periods ended September 24, 2016. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $35.93 | $34.49 | $72.21 | $67.63 |
| Gross profit / margin | $8.15 / 22.7% | $8.03 / 23.3% | $16.85 / 23.3% | $16.27 / 24.1% |
| Operating income / margin | $1.46 / 4.1% | $1.58 / 4.6% | $2.87 / 4.0% | $3.02 / 4.5% |
| Net income | $0.78 | $0.92 | $1.64 | $1.82 |
| Diluted EPS | $0.11 | $0.13 | $0.23 | $0.25 |
| Adjusted EBITDA (non-GAAP) | $3.30 | $3.30 | $6.66 | $6.41 |
- Q2 revenue increased 4.2%, entirely organically: Service revenue rose 7.6% and Distribution sales 0.9%. For the first six months, revenue rose 6.8%, with Service up 7.6% and Distribution up 5.9%.
- Q2 gross profit increased 1.6%, but gross margin declined 60 basis points. Six-month gross profit rose 3.5%, while gross margin fell 80 basis points.
- Q2 net income declined 14.8%; first-half net income declined 10.2%. Management attributed the declines chiefly to higher interest and other expense. Adjusted EBITDA was flat in Q2 and up 4.0% for the first half; it is a non-GAAP measure.
- Segment operating income for the first half was $1.68 million in Service, down from $1.84 million, and $1.19 million in Distribution, slightly above $1.18 million. Q2 segment operating income was $0.79 million in Service and $0.67 million in Distribution.
Cash flow, balance sheet and debt
- First-half operating cash flow was $1.66 million, versus $5.02 million a year earlier. Capital expenditures were $3.94 million, compared with $2.50 million; investing cash outflow was $3.94 million, versus $9.47 million, which included a prior-year acquisition.
- Financing provided $2.72 million, primarily from $3.11 million of net revolver borrowings. Cash declined by $0.22 million to $0.63 million.
- At September 23, 2017, total debt was approximately $29.7 million: $21.7 million drawn on the revolving facility and $8.0 million on the term loan. The $30.0 million revolver had approximately $8.3 million unused. Current debt was $1.43 million.
- Current assets were $36.05 million and current liabilities $16.08 million. Accounts receivable was $21.14 million and inventory $11.54 million. Cash was low at $0.63 million.
- On October 30, 2017, after quarter-end, the company amended and restated its credit agreement: the $30.0 million revolver was extended to October 2021, and a new $15.0 million term loan replaced the prior loan, with excess proceeds used to repay revolver borrowings. Acquisition borrowing capacity increased to $20.0 million per fiscal year. The maximum leverage ratio remained 3.0; the company reported compliance with covenants during Q2.
Management commentary, outlook and risks
- Hurricane Harvey disrupted the Houston lab and related operations; management estimated Q2 revenue and gross-profit losses of $0.1–$0.2 million. Hurricane Maria disrupted Puerto Rico operations late in the quarter. The Puerto Rico business represents less than 2% of revenue, and management did not expect a material overall impact. No potential insurance recoveries were recorded.
- Service margins were affected by hurricane disruption, technician hiring and ramp-up, and increased outsourcing. Management expected the productivity effect to be temporary and anticipated improvement in the second half. Distribution margin also declined, reflecting sales mix and lower volume-based vendor rebates.
- Management continued to expect mid-to-high-single-digit organic Service revenue growth, and stated that it expected the 34-quarter streak of year-over-year Service growth to continue. It targeted revenue of $175–$200 million over the next two to three years, including growth from acquisitions.
- Fiscal 2018 outlook included an effective tax rate of 34%–36% and capital expenditures of $6.0–$6.5 million. Management cautioned that natural-disaster recovery could pressure the second half, depending on customer recovery timelines; it did not provide a specific full-year revenue or earnings forecast.
- Disclosed risks include dependence on a significant inventory vendor, indebtedness, acquisition integration and execution, economic conditions, oil and gas industry volatility, competition, foreign-exchange movements and cybersecurity. A 1% interest-rate change was estimated to affect annual interest expense by approximately $0.3 million, assuming borrowings remained constant.
Important facts for investors to verify
- Whether Service productivity and gross margins improved as management expected in the second half, and whether hurricane-related disruption persisted or generated insurance recoveries.
- Whether organic Service growth and Distribution demand continued, including the trend in pending product shipments, which were $3.94 million at quarter-end, up from $3.53 million a year earlier.
- How the new $15.0 million term loan affected total borrowings, interest costs, repayments and covenant headroom after quarter-end.
- Whether cash generation improved after the first-half working-capital outflows, elevated capital spending and lower operating cash flow.
- Whether the stated tax-rate, capital-spending and multi-year revenue objectives remained achievable; these are forward-looking expectations, not guarantees.