Business context and reporting period
Transcat, Inc. provides calibration and laboratory instrument services and distributes test, measurement and control instruments, primarily to regulated industries including life sciences. This Form 10-Q covers the second quarter and first six months of fiscal 2021, ended September 26, 2020; comparisons are to the periods ended September 28, 2019. COVID-19 affected customer demand, particularly in Distribution.
Key financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $41.6 | $41.8 | $80.5 | $84.2 |
| Gross profit / margin | $11.5 / 27.6% | $10.4 / 25.0% | $20.9 / 26.0% | $20.5 / 24.4% |
| Operating income | $3.1 | $3.1 | $4.0 | $5.0 |
| Net income | $2.0 | $2.4 | $2.8 | $4.1 |
| Diluted EPS | $0.27 | $0.32 | $0.38 | $0.55 |
| Adjusted EBITDA (non-GAAP) | $5.2 | $4.8 | $8.7 | $8.7 |
| Operating cash flow | Not presented by quarter | $12.5 | $2.8 |
- Q2 Service revenue increased 4.5% to $24.6 million; Distribution sales fell 6.6% to $17.1 million. Excluding acquired revenue, organic revenue declined 5.7% overall.
- For the first six months, Service revenue rose 3.5%, while Distribution sales declined 13.8%. Net income fell 31.1%; management attributed the decline to lower operating income and a higher tax provision.
- Q2 gross margin expansion reflected Service productivity, pricing, mix and cost reductions. Distribution margin contracted to 21.1% from 24.3%, due to lower volume, product mix, and reduced vendor rebates and cooperative advertising.
- Six-month operating cash flow rose to $12.5 million, principally reflecting working-capital movements, including lower receivables. Investing cash outflow was $3.1 million, primarily capital expenditures. Financing cash outflow was $8.4 million, including $6.6 million of revolver repayments, $1.0 million of term-loan repayments, and $1.3 million of share repurchases/withholding-related share settlements.
Financial position and material changes
At September 26, 2020, cash was $1.0 million, current assets $45.4 million and current liabilities $20.6 million. Total debt was approximately $22.7 million, comprising $11.6 million on the term loan and $11.1 million on the revolving facility; lease liabilities were $8.2 million. The company reported a 1.19 credit-agreement leverage ratio and compliance with its loan covenants. The term loan bears a fixed 4.15% rate; revolving borrowings had rates of 1.4%–2.7% during the first half.
On May 18, 2020, the company amended its credit facility, extending the revolver to October 20, 2022 and setting a $40 million commitment, with revised covenants and a $5.5 million fiscal 2021 capital-expenditure limit. The filing describes $40 million as available while also reporting $11.1 million outstanding; verify the actual undrawn capacity. Compared with March 28, 2020, debt declined, while right-of-use assets and lease liabilities increased. The TTE acquisition, completed in February 2020, added pipette calibration capabilities; its revenue supported Service growth.
Outlook, risks and unusual items
- Management expected modest year-over-year Service revenue growth and solid gross-margin improvement in Q3 FY2021; Distribution was expected to remain pressured, and operating income was expected to be similar to Q3 FY2020. Management cautioned that COVID-19 created substantial economic uncertainty.
- Management forecast a FY2021 effective tax rate of 22%–23%, increased from its previous 20%–21% estimate, and raised expected capital expenditures to $5.5–$6.5 million from $5.0–$5.5 million. This outlook exceeds the stated $5.5 million credit-agreement capital-expenditure limit at the top end; the filing text does not explain how the range relates to the covenant.
- First-half G&A included approximately $0.4 million of severance expense. Stock-based compensation expense increased to $0.7 million from $0.3 million year over year; reduced discrete tax benefits from stock awards contributed to the higher tax rate.
- Principal disclosed risks include COVID-19 impacts, economic and customer-industry volatility, competition, employee retention, vendor inventory and rebate changes, acquisition integration, cybersecurity and IT disruption, indebtedness, and foreign-exchange exposure. The company used a $4.5 million notional foreign-exchange forward contract; it reported no revolver interest-rate hedge.
Most important facts for investors to verify
- Whether the capital-expenditure outlook of up to $6.5 million is permitted under the stated $5.5 million covenant limit, and whether any exception or amendment applies.
- Actual revolving-credit availability and borrowing capacity, given the filing’s presentation of a $40 million facility and $11.1 million outstanding.
- Whether Service growth and margin gains can persist as COVID-related demand weakness continues in Distribution and other markets.
- How much of the strong first-half operating cash flow reflects sustainable earnings versus timing-related working-capital changes.
- The impact of higher operating expenses, acquisition amortization, severance and reduced stock-based compensation tax benefits on future earnings.