Transcat, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, ended June 27, 2015; comparisons are with the first quarter ended June 28, 2014. Amounts are in thousands unless stated otherwise. Transcat provides calibration and compliance services and distributes test, measurement and control instruments, with a focus on regulated industries.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Service revenue | $13,535 | $12,138 | +11.5% |
| Distribution sales | $16,135 | $16,981 | -5.0% |
| Total revenue | $29,670 | $29,119 | +1.9% |
| Gross profit | $7,062 | $6,669 | +5.9% |
| Operating income | $1,027 | $759 | +35.3% |
| Net income | $601 | $445 | +35.1% |
| Diluted EPS | $0.08 | $0.06 | +$0.02 |
Consolidated gross margin rose to 23.8% from 22.9%; operating margin increased to 3.5% from 2.6%, and net margin to 2.0% from 1.5%. Service gross margin improved to 26.1% from 24.2%; Distribution gross margin was 21.9% versus 22.0%. The effective tax rate declined to 35.5% from 37.7%.
Cash flow, debt and liquidity
- Operating cash flow was $2,636, compared with cash used of $2,414 in the prior-year quarter. Investing activities used $1,789, including $1,089 of capital expenditures and $700 for an acquisition; financing activities used $657, primarily for debt repayment. Cash ended at $50, down from $65 at the prior fiscal year-end.
- At June 27, 2015, total assets were $60,684, current assets $24,079, and current liabilities $10,378. Long-term debt was $11,471. The filing reports $29.5 million “available” under a $30 million revolving facility, of which $11.5 million was outstanding; investors should verify the precise meaning of that availability disclosure.
- The credit agreement matures September 20, 2018. The company said it complied with covenants and believed its facility and cash were sufficient for foreseeable working capital, capital expenditure and lease needs. Facility rates were 1.7%–1.8% during the quarter; a 1% interest-rate move was estimated to affect annual interest expense by about $0.1 million.
Material changes and notable items
- Service growth reflected organic and acquisition-related growth; trailing 12-month Service revenue increased 9.5%. Management cited market softness in test and measurement equipment and weak oil and gas demand for the 5.0% Distribution decline.
- Service operating income rose to $646 from $267, while Distribution operating income fell to $381 from $492. Administrative expenses increased 14.7%, primarily due to employee-related expenses and professional fees; selling, marketing and warehouse expenses declined 5.2%.
- On June 22, Transcat acquired substantially all assets of Calibration Technologies, a New Jersey analytical-instrument services provider, for approximately $1.0 million. The purchase allocation included $603 of goodwill and $490 of identifiable intangible assets; $300 of contingent consideration remained unpaid and was recorded in current other liabilities.
- Receivables and other receivables provided $2,896 of operating cash, while accounts payable and accrued compensation and other liabilities used $1,162 and $1,172, respectively. Days sales outstanding increased to 42 from 40. The prior-year quarter included a $2.0 million strategic inventory purchase and higher tax and compensation payments.
Outlook, risks and controls
Management expected fiscal 2016 to be a strong year and forecast mid-teens consolidated operating income growth, on an annualized basis, reflecting expected higher performance-based variable compensation, particularly in the fourth quarter. The filing provides no specific revenue or EPS guidance.
Risks highlighted include reliance on a significant inventory supplier, indebtedness, acquisition execution and integration, economic conditions, competition, cybersecurity and foreign-currency fluctuations. Approximately 90% of quarterly revenue was denominated in U.S. dollars; the company used short-term foreign-exchange forwards and reported a $5.6 million notional contract maturing in July 2015. It had no interest-rate hedges at quarter-end. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Service growth and margin gains persist, and whether Distribution demand—particularly in oil and gas—recovers.
- The exact borrowing availability under the revolving credit facility, covenant headroom, and the effect of variable rates on debt costs.
- Integration results and purchase-accounting assumptions for Calibration Technologies, including the $300 contingent consideration.
- Cash conversion, receivables collection (DSO of 42), and the sustainability of the mid-teens operating-income outlook.
- Supplier concentration, foreign-exchange exposure and the filing’s other identified business risks.