Business context and reporting period
Transcat, Inc. provides calibration and laboratory instrument services and distributes test, measurement and control instruments, with a focus on regulated industries. This unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2019, ended December 29, 2018; comparisons are with periods ended December 23, 2017.
Financial performance
| Metric | Third quarter FY2019 | Third quarter FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $40.9 million | $40.5 million | $116.4 million | $112.7 million |
| Gross profit / margin | $9.5 million / 23.4% | $9.7 million / 24.0% | $27.8 million / 23.9% | $26.5 million / 23.6% |
| Operating income | $2.4 million | $2.7 million | $6.6 million | $5.5 million |
| Net income | $1.6 million | $1.8 million | $4.5 million | $3.5 million |
| Diluted EPS | $0.21 | $0.25 | $0.60 | $0.48 |
| Adjusted EBITDA (non-GAAP) | $4.4 million | $4.4 million | $12.2 million | $11.1 million |
- Revenue mix: Quarterly Service revenue grew 9.2% to $20.5 million, including $0.7 million from acquisitions; organic Service growth was 5.2%. Distribution sales fell 6.2% to $20.4 million. For the nine months, Service revenue rose 7.6% to $59.7 million and Distribution sales declined 0.9% to $56.7 million.
- Margins and earnings: Quarterly Service gross margin fell to 21.9% from 25.0%, reflecting work mix, lower Canadian sales and reduced technician productivity as new staff were hired. Distribution gross margin improved to 24.8% from 23.0%. Nine-month operating expenses increased 0.9%, slower than revenue growth; operating margin improved to 5.7% from 4.9%.
- Cash flow: Nine-month operating cash flow was $7.2 million, versus $5.8 million. Investing cash outflow was $9.2 million, including $5.5 million of capital expenditures and $3.6 million for acquisitions. Financing provided $1.8 million. Cash increased $0.2 million to $0.8 million.
- Liquidity and debt: At December 29, current assets were $41.7 million and current liabilities $19.3 million. Total debt was approximately $24.6 million, comprising a $15.0 million term loan and approximately $9.5 million drawn on the revolving facility. The term loan carries a fixed 4.15% rate and monthly payments through December 2025; revolver rates ranged from 3.2% to 3.8% in the first nine months. The company reported compliance with covenants and a 1.30 leverage ratio. The filing describes the revolver as a $30 million facility but also says $30 million was available while reporting borrowings; the precise undrawn availability is not clearly stated.
Material changes and notable items
- Quarterly revenue rose 1.0%, but net income declined 14.3%; nine-month revenue increased 3.3% and net income increased 29.3% year over year.
- The Angel’s Instrumentation acquisition added calibration capabilities and geographic reach. The reported purchase price was approximately $4.7 million; preliminary allocation included $1.9 million of goodwill and $1.6 million of intangible assets. The company also acquired NBS Calibration, described as immaterial in purchase price.
- Quarterly Adjusted EBITDA was flat year over year despite lower net income. Nine-month Adjusted EBITDA grew 10.6% to $12.2 million. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
- Accounts receivable days sales outstanding increased to 51 from 49 a year earlier. Inventory rose $1.0 million from fiscal year-end, while accounts payable decreased $2.1 million during the nine-month period.
Outlook, risks and contingencies
- Management expected record fiscal 2019 revenue and net income and favorable year-over-year fourth-quarter comparisons excluding the prior year’s extra week. It cited record recent Service contract bookings and a strong pipeline for new business and acquisitions; these are forward-looking statements, not guarantees.
- Management expects a fiscal 2019 effective tax rate of 24%–25% and full-year capital expenditures of $7.2–$7.4 million. Prior capital expenditure guidance was not provided in the filing text.
- Management expects technology, automation and process improvements to raise Service productivity, capacity and margins, and anticipates sales and cost synergies from Angel’s.
- Key disclosed risks include reliance on a significant inventory supplier, indebtedness, acquisition execution and integration, economic conditions, competition, oil and gas industry volatility, Canadian currency movements, cybersecurity, and estimates related to deferred taxes. A 1% interest-rate change was estimated to affect annual interest expense by approximately $0.2 million. About 90% of revenue was U.S.-dollar denominated; a 10% Canadian-dollar move would affect revenue by approximately 1%.
- The company estimated that adopting the new lease standard would add approximately $6–$8 million of right-of-use assets and lease liabilities to the balance sheet, with no material income-statement or cash-flow impact expected.
Important facts for investors to verify
- Whether Service gross-margin pressure from technician productivity and work mix reverses, and whether the stated productivity initiatives deliver improvement.
- Whether Service growth and contract bookings offset continued weakness in Distribution sales, particularly in Canada and lower-margin reseller channels.
- The acquisition’s realized contribution, integration progress and expected synergies, including the final purchase-price allocation and contingent consideration.
- Revolver availability and borrowing terms, given the filing’s inconsistent description of facility availability; also monitor debt, leverage and covenant headroom.
- Progress against full-year revenue, net income, tax-rate and capital-expenditure expectations, and the impact of lease adoption.