Transcat, Inc. (TRNS) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 24, 2022 (fiscal 2023); comparisons are with the periods ended September 25, 2021. Amounts are in U.S. dollars.
Business context
Transcat provides calibration and asset-management services and distributes professional test, measurement and control instruments. Its customers include life-science and other regulated industries. The company reports Service and Distribution segments.
Financial performance
| Metric | Fiscal Q2 2023 | Fiscal Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $56.4m | $50.4m | $111.1m | $98.2m |
| Gross profit | $16.8m | $14.6m | $32.8m | $28.1m |
| Operating income | $3.6m | $3.6m | $7.2m | $7.3m |
| Net income | $2.4m | $3.0m | $5.4m | $6.7m |
| Diluted EPS | $0.31 | $0.40 | $0.71 | $0.88 |
| Operating cash flow | Not presented by quarter | $5.2m | $7.5m |
Q2 revenue rose 12.0% year over year: Service revenue increased 19.4% (including $3.0m from acquisitions and 9.3% organic growth), while Distribution sales increased 1.6%. Q2 gross margin improved 0.7 percentage points to 29.7%; operating margin declined to 6.4% from 7.1%. For the six months, gross margin rose to 29.5% from 28.7%, while operating margin fell to 6.5% from 7.4%.
Six-month Adjusted EBITDA, a non-GAAP measure, was $14.8m, up 12.5%; it was 13.4% of revenue, unchanged year over year. Q2 Adjusted EBITDA was $7.5m, up 6.4%, but declined to 13.3% of revenue from 14.0%. Adjusted diluted EPS was $0.44 for Q2 and $0.98 for the six months, compared with $0.57 and $1.12, respectively.
Balance sheet and liquidity
At September 24, 2022, cash was $0.9m, current assets $62.6m and current liabilities $24.9m. Total debt was approximately $50.8m: $43.3m outstanding on the revolving facility and $7.5m on the term loan. The revolving facility has an $80m commitment and extends to June 2026; the term loan is repaid monthly through December 2025. The company reported covenant compliance and a leverage ratio of 1.81, versus 1.74 at fiscal year-end.
Six-month investing cash outflow was $8.8m, including $4.8m of capital expenditures and $4.0m for acquisitions. Financing provided $2.3m. Cash declined $0.5m to $0.9m. Operating cash flow was lower year over year, primarily reflecting working-capital changes, including a $3.7m inventory cash use.
Material changes, outlook and risks
- Operating expenses rose 19.1% in Q2 and 22.6% for the six months, reflecting acquisition costs and amortization, technology investment, payroll and incentive costs. Net income declined as expenses and income-tax provisions increased; reduced discrete share-based compensation tax benefits contributed to the higher tax provision.
- Management expects fiscal 2023 organic Service revenue growth in the high-single-digit range and a full-year effective tax rate of 22%–24%. It cited strong demand in regulated markets, while noting economic uncertainty. No other specific revenue or earnings guidance is provided.
- Distribution pending product shipments were $9.1m, up $1.5m year over year; 80.8% were backorders. Management attributed the increase to product-supply disruption and higher orders.
- Acquisitions: Alliance was acquired during the period for approximately $4.7m. After quarter-end, Transcat acquired e2b for approximately $3.15m and Complete Calibrations for approximately $1.2m; purchase-price allocations were not finalized. The latter transaction includes a technology license with an annual royalty of €0.1m.
- Other notable items include a $0.2m gain from Tangent acquisition escrow proceeds and the reduction of NEXA contingent consideration to zero. Foreign-currency translation losses were $1.3m for the six months.
- Risks highlighted include economic conditions, inflation, supply-chain disruption, interest-rate and foreign-exchange movements, acquisition integration, employee retention, customer-industry concentration, cybersecurity and IT disruptions, and potential goodwill or intangible-asset impairment. A 1% interest-rate change was estimated to affect annual interest expense by approximately $0.4m, assuming borrowing levels remain constant. The company had no interest-rate hedges.
Important facts for investors to verify
- Whether organic Service growth, excluding acquisitions, sustains the high-single-digit outlook, and how much reported growth depends on acquisitions.
- Whether higher operating costs, acquisition amortization and start-up costs pressure operating margins and earnings.
- Whether inventory and backorders convert to shipments and cash without worsening working-capital needs.
- Available borrowing capacity under the $80m facility after outstanding borrowings and any letters of credit; the filing’s wording does not clearly state unused availability.
- Final purchase-price allocations and integration outcomes for recent and subsequent acquisitions, including the Complete Calibrations royalty arrangement.
- Progress toward the stated 22%–24% full-year tax-rate outlook and exposure to variable-rate debt.