Transcat, Inc. — Q1 FY2017 Form 10-Q
Business context and period. The quarter ended June 25, 2016; comparisons are with the quarter ended June 27, 2015. Transcat provides calibration and laboratory instrument services and distributes test, measurement and control instruments, with a focus on regulated industries. It reports Service and Distribution segments. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Service revenue | $17.175 | $13.535 | +26.9% |
| Distribution sales | $15.972 | $16.135 | -1.0% |
| Total revenue | $33.147 | $29.670 | +11.7% |
| Gross profit / margin | $8.246 / 24.9% | $7.062 / 23.8% | +16.8%; +1.1 percentage points |
| Operating income / margin | $1.438 / 4.3% | $1.027 / 3.5% | +40.0% |
| Net income | $0.834 | $0.601 | +38.8% |
| Diluted EPS | $0.12 | $0.08 | Up $0.04 |
| Adjusted EBITDA (non-GAAP) | $3.105 | $1.994 | +55.7% |
Service gross margin improved to 27.5% from 26.1%; Distribution gross margin was 22.0% versus 21.9%. Service generated 51.8% of revenue, up from 45.6%. Selling, marketing and warehouse expense rose 20.0%, primarily reflecting acquisitions; total operating expenses rose 12.8% and were 20.6% of revenue versus 20.3%. The effective tax rate was 34.3%, compared with 35.5%.
Cash flow, debt and liquidity
- Operating cash flow was negative $0.140 million, versus positive $2.636 million a year earlier. The filing cites working-capital timing, including inventory growth and reductions in payables and accrued liabilities.
- Investing cash outflow was $7.890 million, including $6.923 million for acquisitions and $0.967 million of capital expenditures. Financing provided $8.350 million, including a $10.0 million term-loan draw and net repayment of $1.489 million on the revolver. Cash ended the quarter at $0.781 million.
- At June 25, 2016, total debt was approximately $27.346 million: $17.6 million outstanding on the revolving facility and $9.8 million on the term loan. The revolver has a $30.0 million maximum; the filing states $11.4 million remained available to borrow. Debt maturities and borrowing are subject to covenants. The company reported compliance with all covenants and expected to remain compliant during FY2017.
- Current assets were $27.821 million and current liabilities $16.159 million. Accounts receivable were $17.221 million, inventory $7.589 million and accounts payable $7.322 million. The filing reports 43 days sales outstanding, compared with 42 days.
Material changes and management commentary
Transcat acquired substantially all assets of California-based Excalibur Engineering on April 1, 2016, for approximately $7.6 million net of cash acquired. The business adds calibration services, equipment rentals and used-equipment sales. The preliminary allocation included $3.440 million of goodwill and $2.090 million of identifiable intangible assets. The quarter also reflects continued integration of five acquisitions completed in FY2016 and this acquisition.
Management attributed growth to acquisitions and organic Service expansion. Service operating income grew 62% on 27% revenue growth. Distribution sales remained pressured by sluggish U.S. industrial output, particularly in oil and gas, though rentals and Excalibur sales helped offset weakness. Management said it expects acquisition-driven revenue growth and aims to grow Service organically while stabilizing Distribution. It also expected operating expenses to decline as a percentage of revenue over the remainder of FY2017. The company estimated a FY2017 effective tax rate of 34%–36%; it provided no specific revenue or earnings guidance.
Risks, contingencies and other notable items
- Risks identified include reliance on a significant inventory supplier, indebtedness and interest rates, acquisition execution and integration, economic and oil-and-gas conditions, segment competition, currency fluctuations, low trading volume and cybersecurity.
- Interest rates are variable; management estimated a 1 percentage-point rate change would affect annual interest expense by approximately $0.3 million at constant average borrowings. No interest-rate hedges were in place.
- The company used foreign-exchange forwards; a $5.7 million notional contract was outstanding at quarter-end and renewed in July. Forward-contract fair-value losses were $0.1 million for the quarter, with the filing noting an offset from the hedged receivables.
- Unpaid acquisition-related contingent consideration was $0.8 million and other holdbacks were $2.3 million at quarter-end, included in current liabilities. Excalibur accounted for $0.7 million of the holdbacks.
- Acquired assets contributed to depreciation and amortization of $1.549 million, up from $0.840 million. Management noted that acquisition-related revenue growth may moderate or reduce gross margins as fixed costs are added.
Important facts for investors to verify
- Whether Service growth is sustainable organically and whether Distribution stabilizes amid weak industrial and oil-and-gas demand.
- Excalibur’s contribution, integration progress, realized synergies and final purchase-price allocation.
- Operating cash conversion and working-capital trends, especially inventory, collections and payables.
- Debt capacity, covenant headroom, repayment requirements and sensitivity to variable interest rates.
- Actual FY2017 tax rate and operating-expense leverage versus management’s stated expectations.
- The continuing impact of acquisitions and amortization on reported earnings, and the assumptions underlying non-GAAP Adjusted EBITDA.