Transcat, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended September 28, 2013 (fiscal 2014); comparative periods ended September 29, 2012. Amounts are in millions except per-share data.
Business context and performance
Transcat provides calibration, repair, inspection and compliance services and distributes test, measurement and control instruments. Its reportable segments are Service and Distribution.
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Revenue | $28.882 | $26.788 | $57.592 | $51.885 |
| Gross profit | $6.821 | $6.078 | $14.035 | $12.285 |
| Operating income | $1.281 | $1.180 | $2.433 | $1.774 |
| Net income | $0.771 | $0.745 | $1.492 | $1.106 |
| Diluted EPS | $0.10 | $0.10 | $0.20 | $0.15 |
| Gross margin | 23.6% | 22.7% | 24.4% | 23.7% |
| Operating margin | 4.4% | 4.4% | 4.2% | 3.4% |
Revenue, margins and material changes
- Q2 revenue increased 7.8% year over year: Service revenue rose 16.6% to $11.472 million, while Distribution sales increased 2.7% to $17.410 million. Management attributed Service growth to existing-customer expansion and acquisitions.
- For the first six months, revenue grew 11.0%; Service revenue rose 25.0% to $23.211 million and Distribution sales increased 3.2% to $34.381 million. Management cited organic Service growth and acquisition contributions.
- Q2 gross profit increased 12.2%; Distribution gross margin improved to 23.6% from 22.0%, helped by vendor rebates and partly offset by customer discounts. Service gross margin edged down to 23.6% from 23.9%. Year-to-date Service gross margin improved to 25.4% from 23.4%, while Distribution margin declined to 23.6% from 23.8%.
- Q2 operating expenses increased 13.1% to $5.540 million, primarily reflecting Service sales and marketing investment. Six-month operating expenses rose 10.4% to $11.602 million, slightly less than revenue growth.
- Q2 net income increased 3.5%; six-month net income increased 34.9%. Effective tax rates were 36.4% for Q2 and 36.8% year to date, versus 34.0% in the comparable periods.
Cash flow, liquidity and debt
- Six-month operating cash flow was $0.234 million, down from $0.654 million. Inventory increased $1.464 million from fiscal year-end to $8.267 million; accounts payable decreased $1.720 million. Cash was $0.409 million at September 28.
- Investing cash outflow was $0.313 million, including $0.553 million of capital expenditures and $0.240 million of asset-sale proceeds. Financing cash provided was $0.032 million, including $0.701 million of net revolving-credit borrowings and $0.780 million used for share repurchases.
- Long-term debt was $8.718 million, up from $8.017 million at March 30, 2013. The revolving facility has a $20.0 million limit and matures in September 2015; the company reported compliance with covenants during the six-month period. Interest rates ranged from 1.09% to 1.15%.
- Management said cash and available facility capacity should meet expected working-capital, capital-expenditure and lease needs for the foreseeable future. The company reported days sales outstanding of 40 days versus 39 a year earlier.
Outlook, risks and unusual items
- Management expected year-over-year revenue growth to continue in the second half of fiscal 2014, with operating-income growth; it cautioned that increased performance-based compensation could temper that growth. No numerical guidance was provided.
- Service revenue can vary with calibration timing, customer capital spending and outsourcing decisions. Management said trailing-twelve-month trends are more indicative; Service revenue for the twelve months ended September 28, 2013 was $45.3 million, up 18.1% year over year.
- Pending product shipments rose 45.4% year over year to $3.438 million, primarily due to backorders and orders awaiting calibration or installation. Shipment timing and manufacturer production issues can affect the balance.
- During Q2, Transcat repurchased approximately 0.1 million shares for $0.780 million. On October 4, after quarter-end, it repurchased 0.7 million shares at $8.10 per share, funded with a revolving-facility borrowing. The bank agreed to exclude the repurchase from certain covenant provisions. Shares outstanding on November 7 were 6,684,161.
- Interest-rate exposure is variable; management estimated a 1% rate change would alter annual interest expense by less than $0.1 million at unchanged average borrowings. More than 90% of revenue was U.S.-dollar denominated; foreign-exchange contracts were used to manage Canadian-dollar exposure.
Important facts for investors to verify
- How the post-quarter share repurchase affected outstanding debt, facility availability and covenant calculations.
- Whether Service growth is sustained organically and whether its quarterly margin volatility moderates.
- Whether elevated pending shipments convert to reported sales, and whether inventory and working-capital levels support cash generation.
- Whether performance-based compensation and other operating costs limit the operating-income growth described in the outlook.