Transcat, Inc. — Form 10-Q Summary
Business and period: Transcat provides calibration and laboratory instrument services and distributes test, measurement and control instruments, with a focus on regulated industries. This report covers the third quarter and first nine months of fiscal 2018, ended December 23, 2017; comparisons are to the corresponding fiscal 2017 periods. Dollar amounts below are in millions unless noted.
Financial results
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $40.5 | $37.8 | $112.7 | $105.4 |
| Gross profit / margin | $9.7 / 24.0% | $8.9 / 23.6% | $26.5 / 23.6% | $25.2 / 23.9% |
| Operating income / margin | $2.7 / 6.6% | $2.4 / 6.2% | $5.5 / 4.9% | $5.4 / 5.1% |
| Net income | $1.8 | $1.3 | $3.5 | $3.1 |
| Diluted EPS | $0.25 | $0.18 | $0.48 | $0.43 |
| Adjusted EBITDA | $4.4 | $3.9 | $11.1 | $10.3 |
Revenue by segment: Q3 Service revenue grew 7.5% to $18.8 million and Distribution sales rose 6.7% to $21.7 million; management attributed growth to organic activity in both segments. For the nine months, Service revenue increased 7.6% to $55.5 million and Distribution sales increased 6.2% to $57.2 million.
Cash flow and liquidity: Nine-month operating cash flow was $5.8 million, versus $3.9 million a year earlier. Capital expenditures were $5.1 million, implying approximately $0.7 million of operating cash flow after capital expenditures. Investing cash outflow was $5.1 million, compared with $11.1 million, including a $7.0 million acquisition in the prior-year period. Cash was $0.5 million at quarter-end, down from $0.8 million at fiscal year-end.
Debt: Total debt was approximately $26.2 million at December 23, 2017, comprising $11.6 million drawn on the revolving facility and $14.6 million outstanding on the term loan. The company entered into an amended credit agreement in October, extending the $30 million revolving facility to October 2021 and establishing a $15 million term loan. The term loan requires monthly principal payments of $0.2 million and a $4.3 million payment in October 2022. The reported leverage ratio was 1.72, and the company said it complied with covenants.
Changes and management commentary
- Q3 gross margin improved 40 basis points year over year, reflecting Service productivity and Distribution sales mix, including more rental revenue and strategic pricing. Nine-month gross margin declined 30 basis points, mainly due to earlier-year Service technician productivity challenges.
- Q3 operating expenses rose 7.4%, primarily because of spending on technology infrastructure and operational excellence; lower acquisition-related amortization partly offset the increase. Nine-month operating expenses increased 6.1%.
- Q3 net income included an estimated $0.3 million, or $0.04 per share, benefit from the Tax Cuts and Jobs Act: a deferred-tax remeasurement benefit and a blended-rate benefit. The company estimated a less than $0.1 million tax charge for deemed repatriation of foreign earnings, payable over eight years.
- Management expected a record fiscal 2018, noting that the fourth quarter typically generates about one-third of annual operating income. Fiscal 2018 capital expenditures were forecast at $6.0–$6.3 million. Expected effective tax rates were 28%–29% for fiscal 2018 and approximately 26% for fiscal 2019. These are management expectations, not guarantees.
- The company reported $3.9 million of pending product shipments at quarter-end, of which 71.4% were backorders. It also disclosed that approximately 13%–15% of Service revenue is expected to be subcontracted to third parties.
Risks and unusual items
Disclosed risks include reliance on a significant inventory supplier, indebtedness and interest-rate exposure, acquisition integration and strategy, economic conditions, oil and gas industry volatility, competition, foreign exchange fluctuations, cybersecurity, and uncertainty in estimates related to tax reform. A 1% interest-rate change was estimated to change annual interest expense by approximately $0.3 million, assuming borrowing levels remain constant; the company reported no interest-rate hedges. It used foreign-exchange forward contracts, including a $5.4 million notional contract outstanding at quarter-end, renewed in January 2018. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether organic growth and Service productivity improvements continue, and whether nine-month gross-margin pressure persists.
- Whether the company achieves its record-year outlook and stays within its capital expenditure range.
- Debt repayment, covenant headroom, borrowing costs, and exposure to variable interest rates.
- The final tax-reform effects, including deferred-tax remeasurement and repatriation tax estimates.
- Supplier concentration, pending shipments and backorders, acquisition execution, and the company’s disclosed cybersecurity and market risks.