Transcat, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, ended June 30, 2018; comparable quarter ended June 24, 2017. Amounts are in thousands unless otherwise noted.
Business context
Transcat provides calibration and laboratory instrument services and distributes professional-grade test, measurement and control instruments, with a focus on regulated industries including life sciences. It reports Service and Distribution segments. The quarter’s results were unaudited.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Service revenue | $19,325 | $18,482 | +4.6% |
| Distribution sales | $17,333 | $17,797 | -2.6% |
| Total revenue | $36,658 | $36,279 | +1.0% |
| Gross profit / margin | $9,113 / 24.9% | $8,691 / 24.0% | +4.9%; margin +0.9 percentage points |
| Operating income / margin | $2,025 / 5.5% | $1,411 / 3.9% | +43.5%; margin +1.6 percentage points |
| Net income | $1,428 | $856 | +66.8% |
| Diluted EPS | $0.19 | $0.12 | — |
| Adjusted EBITDA (non-GAAP) | $3,842 | $3,361 | +14.3% |
| Operating cash flow | $3,062 | $(2,882) | Improved by $5,944 |
Service gross margin was 25.5%, up from 25.1%; Distribution gross margin was 24.2%, up from 22.8%. Adjusted EBITDA was 10.5% of revenue versus 9.3%. The effective tax rate was 20.7%, compared with 24.8%.
Balance sheet, debt and liquidity
At June 30, 2018, cash was $486, current assets were $38,016 and current liabilities were $18,614. Total assets were $94,510 and shareholders’ equity was $52,871. Long-term debt was $19,402, plus $2,143 current portion, for total debt of $21,545. The company reported a $30 million revolving credit facility, with $8 million outstanding, and a $13.6 million term-loan balance. The filing reports covenant compliance and a leverage ratio of 1.28, down from 1.40 at fiscal year-end.
Cash from operations was $3,062, investing cash outflow was $1,918, and financing cash outflow was $1,383. Capital expenditures were $1,918; cash declined by $91 to $486. Operating cash flow benefited principally from collections and working-capital movements, including a $2,937 cash inflow from accounts and other receivables, partly offset by inventory and liability changes.
Material changes and management commentary
- Revenue growth was organic: Service gains from new life-sciences business and general industrial manufacturing were partly offset by lower Distribution sales.
- Distribution results reflected product mix, while rental revenue rose 24% to $0.9 million. Management also cited sales disruption during the Irvine-to-Los Angeles site consolidation.
- Gross-margin improvement reflected Service productivity and Distribution product mix, inventory management and pricing initiatives. Operating expenses fell 2.6%; the prior-year quarter included a one-off $0.3 million non-cash stock-compensation expense.
- Transcat acquired substantially all assets of NBS Calibration, an Arizona calibration-services provider. The purchase price was described as immaterial and included in property and equipment purchases.
- Revenue recognition standard Topic 606 was adopted using the modified retrospective approach; management said the effect on revenue recognition and the cumulative adjustment were immaterial.
Outlook, risks and unusual items
Management expected “solid” fiscal 2019 results, citing Service wins, Distribution’s cash generation and opportunities to improve margins through investments in people, processes and technology. It noted further operational-excellence work remained over the next 12–24 months and that acquisitions would be incremental to growth expectations. Full-year effective tax rate guidance was 25%–27%; capital expenditures were expected to be $7.0–$7.5 million.
Risks identified include reliance on a significant inventory vendor, indebtedness and interest-rate exposure, acquisition execution and integration, economic conditions, oil-and-gas volatility, competition, foreign exchange and cybersecurity. A 1% interest-rate move was estimated to affect annual interest expense by about $0.2 million, assuming borrowing levels were unchanged. The company had no interest-rate hedges; it used short-term foreign-exchange forwards, including a $4.9 million notional contract renewed in July 2018. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Service growth and productivity improvements continue, given quarterly variability in service orders and the decline in trailing-twelve-month growth from earlier comparisons.
- Whether Distribution sales recover after the product-mix effects and location-consolidation disruption, and whether rental growth is sustained.
- Progress toward the stated full-year tax-rate and capital-expenditure outlook, and the impact of planned investment on cash generation.
- Debt availability and covenant headroom: the filing describes a $30 million revolver and $8 million outstanding, but its wording about the amount “available” is unclear.
- Integration and contribution of the NBS assets, and execution of the broader acquisition pipeline.
- Exposure to variable interest rates, foreign exchange, vendor concentration and the other disclosed risks.