Transcat, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2020, ended September 28, 2019; comparisons are with the corresponding periods ended September 29, 2018. Transcat provides calibration and laboratory instrument services and distributes test, measurement and control instruments, with a focus on regulated industries.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $41.8 million | $38.9 million | $84.2 million | $75.5 million |
| Gross profit / margin | $10.4 million / 25.0% | $9.1 million / 23.5% | $20.5 million / 24.4% | $18.3 million / 24.2% |
| Operating income | $3.1 million | $2.2 million | $5.0 million | $4.2 million |
| Net income | $2.4 million | $1.5 million | $4.1 million | $2.9 million |
| Diluted EPS | $0.32 | $0.20 | $0.55 | $0.39 |
| Adjusted EBITDA (non-GAAP) | $4.8 million | $4.0 million | $8.7 million | $7.9 million |
- Q2 revenue rose 7.4%; organic consolidated growth was 5.5%. Service revenue increased 18.1% (15.1% organic), while Distribution sales declined 3.8%. Service growth reflected regulated-market demand and acquisitions; Distribution’s quarterly decline primarily reflected lower sales to non-core, lower-margin resellers.
- For the six months, revenue increased 11.4%; Service grew 17.0% (13.5% organic) and Distribution grew 5.4%.
- Q2 gross margin expanded 150 basis points. Management attributed improvement to Service productivity and efficiency, better client-based lab contract margins, and Distribution product mix and rental revenue. Q2 operating expenses rose 6.1% but declined as a share of revenue to 17.7% from 17.9%.
- Q2 net income growth was aided by higher operating income and share-based compensation tax benefits. The effective tax rate was 13.9% versus 24.9%; for the six months it was 7.6% versus 22.9%.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $2.8 million, down from $4.9 million. Investing cash use was $4.8 million, including $4.0 million of capital expenditures; financing provided $2.2 million. Cash increased $0.1 million to $0.9 million.
- At September 28, 2019, total debt was approximately $24.7 million: $11.1 million outstanding on the revolver and $13.6 million on the term loan. The term loan carries a 4.15% fixed rate and requires monthly payments of approximately $0.2 million through December 2025. Revolver rates ranged from 3.3% to 3.7% during the six months. The company reported covenant compliance and a leverage ratio of 1.32, up from 1.12 at fiscal year-end.
- The credit agreement has a $30 million revolving facility, scheduled to expire October 29, 2021. The filing says $30 million was “available” while also reporting $11.1 million outstanding; the remaining borrowing capacity is therefore not clear from the filing text.
- Current assets were $46.3 million and current liabilities $19.4 million. The balance sheet also included $7.4 million of right-of-use assets and $5.9 million of lease liabilities following adoption of the new lease standard.
- Working-capital movements, particularly a $3.4 million decrease in accounts payable, contributed to lower operating cash flow. Capital spending is directed principally to service capabilities, technology and rental equipment.
Material developments, outlook and risks
- Transcat acquired Infinite Integral Solutions, a Canadian calibration-software company, in July 2019; $0.5 million was paid during the quarter, with additional consideration subject in part to milestones. It also acquired substantially all assets of Gauge Repair Service in April 2019. Management described acquisitions as part of its growth strategy.
- Management said it remained on pace to achieve record fiscal 2020 revenue and net income, expected mid- to high-single-digit Service revenue growth, and anticipated incremental Service gross-margin improvement through the rest of the year. It forecast a full-year effective tax rate of 18%–19% and capital expenditures of $7.8–$8.2 million. No specific full-year revenue or net-income target was provided.
- Management cited an active acquisition pipeline and plans to invest in people, processes and technology. It expects to subcontract approximately 13%–15% of Service revenue to third parties.
- Notable items include $0.8 million of discrete share-based compensation tax benefits in the first six months; a $0.2 million loss on sale of a Montana building in Q1; and $2.8 million of cash used for share withholding related to equity awards. Adoption of lease accounting added approximately $8 million each of lease assets and liabilities without material income-statement or cash-flow impact.
- Risks identified include competition, technician and management recruitment and retention, customer-industry volatility, acquisition execution and integration, indebtedness and covenant requirements, vendor inventory and rebate changes, IT and cybersecurity disruptions, and foreign-exchange exposure. The company uses short-term foreign-exchange forwards; it reported no interest-rate hedging arrangements. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the filing’s statement that $30 million was available under the revolver with the $11.1 million reported as outstanding, and confirm actual undrawn capacity.
- Assess how much of Service growth and margin improvement is organic and sustainable versus acquisition-related, and monitor Distribution demand and pending shipments.
- Compare full-year results with management’s outlook, especially Service growth, margin progression, tax rate and capital spending.
- Track operating cash conversion, working-capital needs, debt, lease obligations and covenant headroom as the company continues investing and pursuing acquisitions.
- Evaluate the effect of discrete equity-compensation tax benefits on reported earnings; management’s full-year tax-rate outlook is higher than the six-month rate.