Transcat, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2012, ended December 24, 2011; comparable periods ended December 25, 2010. Amounts below are in millions of dollars except per-share data and percentages. Transcat distributes test and measurement instruments and provides calibration, repair, and related services.
Financial results
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net revenue | $28.46 | $23.88 | $79.25 | $65.43 |
| Gross profit | $6.79 | $6.05 | $19.24 | $16.37 |
| Operating income | $1.65 | $1.44 | $3.46 | $2.80 |
| Net income | $1.02 | $0.90 | $2.10 | $1.70 |
| Diluted EPS | $0.13 | $0.12 | $0.27 | $0.23 |
| Operating cash flow | — | — | $2.54 | $2.69 |
- Q3 revenue increased 19.2%; product sales rose 17.0% and service revenue 24.0%. Nine-month revenue grew 21.1%, with product sales up 24.5% and service revenue up 14.7%.
- Gross margin was 23.9% in Q3 versus 25.3% a year earlier, and 24.3% for nine months versus 25.0%. Product and service margins both declined, reflecting reseller sales mix and lower reseller margins, acquisition-related and inflationary service costs, and other factors.
- Operating expenses increased 11.3% in Q3 and 16.2% for nine months, but declined as a share of revenue: 18.1% versus 19.3% in Q3 and 19.9% versus 20.7% for nine months. Operating margin was 5.8% in Q3 and 4.4% for nine months.
- Q3 net margin was 3.6% versus 3.8%; nine-month net margin was 2.6% in both periods. Effective tax rates were 36.4% for Q3 and 37.2% for nine months, compared with 37.1% and 38.0%, respectively.
Cash, debt, and liquidity
- At December 24, 2011, cash was $0.06 million, working capital was $11.76 million, and current assets/current liabilities were approximately 1.84x. Cash was minimal relative to operating needs.
- Total debt was $6.85 million, all reported as long-term debt, compared with $5.25 million at March 26, 2011. The revolving facility has a $15 million commitment and matures in January 2014; the filing says $6.8 million was outstanding. The text does not clearly reconcile the stated facility availability with the amount drawn.
- Management reported compliance with all debt covenants and said cash and credit availability should meet working-capital, capital-expenditure, and lease needs for the foreseeable future. Interest rates on borrowings ranged from 1.1% to 3.3% during the nine months.
- Nine-month operating cash flow was $2.54 million, down from $2.69 million. Investing used $4.36 million, including $3.12 million for acquisitions and $1.23 million for property and equipment. Financing provided $1.84 million, primarily through net revolver borrowings. Ending cash was $0.06 million.
- Receivables and other receivables increased; the company reported days sales outstanding of 39, up from 36 a year earlier. Inventory was $8.81 million, up from $7.57 million at fiscal year-end.
Material changes, outlook, and risks
- Two service-business acquisitions were completed during the nine months: CMC Instrument Services in April 2011 and Newark Corporation’s calibration services division in September 2011. Purchase price was approximately $3.1 million; recorded goodwill was $1.7 million and customer-related intangible assets were $1.2 million. Acquisition costs of $0.2 million were expensed. Results are included from the acquisition dates.
- Management attributed growth to market-share gains, product portfolio expansion, sales and marketing, wind-industry demand, and acquisitions. Reseller growth included large orders of normally low-volume products. Pending product shipments rose 20.0% year over year to $3.57 million; 65.6% were backorders.
- Management expected an extra week of sales in Q4 FY2012 due to the company’s 52/53-week fiscal calendar. Beyond that comparison, it expected product growth to track closer to its “low to mid single digits” normal rate. Management expected service operations to benefit from the larger platform but noted possible short-term margin pressure during integration. It continued to consider acquisitions.
- Other exposures include variable interest rates, Canadian-dollar movements, customer calibration timing, manufacturer backorders, and acquisition integration. The company had a $1.2 million foreign-exchange forward contract maturing in January 2012; over 90% of revenue was U.S.-dollar denominated. Management estimated a 1% interest-rate move would affect annual interest expense by less than $0.1 million at constant average borrowings.
- Management stated disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. Interim results are unaudited and not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether revenue growth and acquisition contributions persist, particularly given the Q4 extra week and wind-industry demand fluctuations.
- Whether gross-margin pressure, especially in reseller sales and acquired service operations, stabilizes or continues.
- Whether receivables, inventory, and pending shipments convert to cash and whether operating cash flow keeps pace with growth.
- The exact undrawn availability under the $15 million credit facility, covenant headroom, and debt repayment needs.
- Acquisition integration progress, earn-out or contingent obligations, and the service segment’s ability to realize expected operating leverage.