Transcat, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2021, ended December 26, 2020; comparisons are to periods ended December 28, 2019. Amounts below are in millions except per-share data and percentages. Transcat provides calibration and laboratory instrument services and distributes test, measurement and control instruments, with a focus on regulated industries.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $44.1 | $43.2 | $124.6 | $127.3 |
| Gross profit / margin | $11.2 / 25.5% | $9.9 / 23.0% | $32.1 / 25.8% | $30.4 / 23.9% |
| Operating income | $2.5 | $2.1 | $6.6 | $7.1 |
| Net income | $1.8 | $1.5 | $4.6 | $5.6 |
| Diluted EPS | $0.23 | $0.20 | $0.61 | $0.75 |
| Adjusted EBITDA (non-GAAP) | $4.6 | $4.1 | $13.3 | $12.8 |
Cash flow and liquidity: Nine-month operating cash flow was $15.6, versus $8.2 a year earlier; capital expenditures were $4.3, and cash used for acquisitions was $3.4. Investing cash outflow was $7.7 and financing cash outflow was $6.6. Cash at December 26 was $1.0. Current assets were $47.2 and current liabilities $20.0. Accounts receivable was $30.6; days sales outstanding increased to 62 from 54 a year earlier.
Debt: Long-term debt was $24.4, including $13.2 drawn on the revolving facility and $11.1 on the term loan (including its current portion). The revolving facility commitment is $40.0 and extends to October 2022; the term loan carries a fixed 4.15% rate and scheduled monthly payments through December 2025. The company reported covenant compliance and a credit-agreement leverage ratio of 1.24, down from 1.53 at fiscal year-end.
Changes and segment results
- Q3 revenue increased 2.0%; nine-month revenue decreased 2.2%. Q3 net income rose 19.2%, while nine-month net income fell 17.8%.
- Service revenue rose 12.2% in Q3 and 6.3% for the nine months. Q3 organic Service revenue increased 5.9%, excluding $1.4 of acquired revenue. Service gross margin improved to 27.9% from 22.0% in Q3.
- Distribution sales declined 8.6% in Q3 and 11.9% for the nine months, reflecting weaker demand, particularly in oil and gas and industrial markets. Q3 Distribution gross margin fell to 22.5% from 24.0%.
- Q3 consolidated gross margin expanded 250 basis points. Higher Service productivity, pricing and cost controls more than offset weaker Distribution results. Operating expenses increased 11.3% in Q3 and 9.7% for the nine months, including technology and infrastructure investment, acquisition-related costs and, for the nine-month period, about $0.4 of severance expense.
Outlook, risks and unusual items
- Management expected solid Service revenue growth in fiscal Q4 versus the prior year, year-over-year gross-margin improvement at a slower pace than in the prior two quarters, continued Distribution pressure, and Q4 operating income similar to the prior-year quarter. Full-year fiscal 2021 tax rate was expected at 22%–23%; capital expenditures were forecast at $6.0–$6.5, including $1.0–$1.5 for maintenance and replacements.
- Management described the operating environment as challenging and remained cautious about COVID-19 impacts. It cited pandemic-related demand weakness in Distribution and other markets, as well as vendor reductions in rebate and cooperative advertising programs.
- BioTek, a pipette calibration provider, was acquired effective December 16, 2020 for approximately $3.4; $0.4 was placed in escrow for potential indemnification claims. The acquisition expanded Service capabilities. Management also cited a growing, active acquisition pipeline.
- Other disclosed risks include competition, recruiting and retaining skilled technicians, cybersecurity and IT disruption, acquisition integration, customer and vendor conditions, indebtedness, foreign-exchange movements and general economic conditions. The company uses foreign-exchange forwards; a $4.5 notional contract was outstanding at quarter-end and renewed in January 2021.
- The nine-month effective tax rate rose to 20.7% from 12.0%, mainly because discrete stock-compensation tax benefits declined to $0.3 from $0.9. The quarter-end revolver had no interest-rate hedge; management estimated a 1% rate move would change annual interest expense by about $0.1, assuming unchanged average borrowings.
Key facts for investors to verify
- Whether Service growth and margin gains persist, and how much reflects organic growth versus acquisitions.
- Whether Distribution demand, gross margin and vendor rebate programs recover as pandemic-related pressures change.
- Cash conversion and receivables collection, given higher DSO, alongside planned capital spending and acquisition activity.
- Debt levels, covenant headroom and borrowing costs; the filing states the $40.0 facility commitment and $13.2 drawn but does not clearly state remaining availability after borrowings.
- Actual fiscal Q4 and full-year results against management’s outlook, including the tax rate and capital expenditure forecast.