Transcat, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2019, ended September 29, 2018; comparisons are to the periods ended September 23, 2017. Transcat provides calibration and laboratory services and distributes test, measurement and control instruments, serving regulated and industrial markets.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $38.9m | $35.9m | $75.5m | $72.2m |
| Gross profit / margin | $9.1m / 23.5% | $8.2m / 22.7% | $18.3m / 24.2% | $16.8m / 23.3% |
| Operating income / margin | $2.2m / 5.6% | $1.5m / 4.1% | $4.2m / 5.6% | $2.9m / 4.0% |
| Net income | $1.5m | $0.8m | $2.9m | $1.6m |
| Diluted EPS | $0.20 | $0.11 | $0.39 | $0.23 |
| Adjusted EBITDA (non-GAAP) | $4.0m | $3.3m | $7.9m | $6.7m |
Q2 revenue increased 8.2%: Service rose 9.1% (7.6% organic, excluding $0.3m from acquisitions) and Distribution rose 7.3%. For the six months, Service revenue grew 6.8% and Distribution 2.3%. Q2 Adjusted EBITDA margin was 10.3%, versus 9.2%; six-month margin was 10.4%, versus 9.2%.
Six-month operating cash flow was $4.9m, compared with $1.7m; investing cash use was $7.3m, including $3.7m of capital expenditures and $3.6m for acquisitions. Financing provided $2.4m. Cash was $0.6m at September 29. Current assets were $41.6m and current liabilities $20.8m. Debt totaled $25.3m, including $12.3m drawn on the revolving facility and $13.0m on the term loan. The filing reports a $30.0m revolving facility; the stated drawn amount implies approximately $17.7m undrawn, subject to facility terms. The company was covenant-compliant; its leverage ratio was 1.34 versus 1.40 at fiscal year-end.
Material changes and notable items
- Q2 total gross margin expanded 80 basis points year over year. Service and Distribution margins improved; management cited product mix, vendor rebates and pricing initiatives in Distribution.
- Operating expenses rose 4.0% in Q2, mainly from investment in infrastructure and operational excellence; expenses as a share of revenue declined to 17.9% from 18.6%.
- Q2 FY2018 gross profit and operating margin had been affected by Hurricanes Harvey and Maria; management estimated impacts of 20–40 basis points to Service gross margin and 40–90 basis points to operating margin.
- The lower effective tax rate reflected the Tax Act and stock-based compensation tax benefits. Six-month rates were 22.9% versus 29.6%; management’s full-year FY2019 estimate was 25%–27%.
- Transcat acquired Angel’s Instrumentation, a calibration-services provider, during Q2 for approximately $4.7m, and acquired NBS Calibration during Q1. Angel’s purchase allocation included $1.3m of goodwill and $1.5m of intangible assets. $1.1m of contingent consideration and holdbacks remained unpaid at quarter-end.
- Inventory increased $1.5m from March 31, partly reflecting strategic purchases and acquired inventory. Q2 pending product shipments were $3.7m, down $0.2m year over year; 66.7% were backorders.
Outlook, risks and contingencies
Management said Service continues to gain market share, Distribution is showing strength in sales and margins, Angel’s integration is on track, and the acquisition pipeline is robust. The stated goal is double-digit Service revenue growth through organic growth and acquisitions. Management expects FY2019 capital expenditures of $7.0m–$7.5m, focused on technology, growth capabilities and rental assets. The filing provides no specific revenue or earnings guidance.
Risks identified include dependence on a significant inventory supplier, indebtedness and acquisition integration, economic conditions, competition, oil and gas volatility, foreign exchange and cybersecurity. A 1% interest-rate change was estimated to change annual interest expense by approximately $0.3m at constant borrowing levels; no interest-rate hedges were in place at quarter-end. The company uses foreign-exchange forwards; a $4.2m notional contract outstanding at quarter-end was renewed in October. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Service growth and margin gains persist, including the organic contribution apart from acquisitions.
- Angel’s and NBS’s integration, contribution to results, and the eventual payment of contingent consideration and holdbacks.
- Cash conversion and working-capital trends, particularly inventory growth and pending shipments.
- Debt levels, actual revolver availability, covenant headroom and exposure to changing interest rates.
- Progress against the FY2019 tax-rate and capital-expenditure estimates, and whether operational investments deliver expected productivity and margin benefits.