Business context and reporting period
Transcat, Inc. provides calibration and laboratory instrument services and distributes test, measurement and control equipment, primarily to regulated industries. This Form 10-Q covers the third quarter and first nine months of fiscal 2017, ended December 24, 2016; comparisons are with periods ended December 26, 2015. Amounts below are in millions unless noted.
Financial performance
| Metric | Third quarter FY2017 | Third quarter FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $37.813 | $30.160 | $105.445 | $89.306 |
| Gross profit | $8.915 | $6.778 | $25.188 | $20.577 |
| Operating income | $2.353 | $1.682 | $5.369 | $4.079 |
| Net income | $1.280 | $1.068 | $3.010 | $2.547 |
| Diluted EPS | $0.18 | $0.15 | $0.42 | $0.36 |
- Third-quarter revenue rose 25.4%; service and distribution each grew 25.4%. Management attributed growth to organic demand and acquired businesses.
- Third-quarter gross margin was 23.6%, up 110 basis points year over year. Operating income rose 39.9%; net income rose 19.9%. Net margin was 3.4% versus 3.5%.
- For the first nine months, revenue increased 18.1%, gross profit 22.4%, operating income 31.6% and net income 18.2%. Gross margin improved to 23.9% from 23.0%; net margin was 2.9%, unchanged year over year.
- Service revenue increased 23.8% for nine months, with mid-single-digit organic growth and the balance mainly from acquisitions. Distribution sales increased 13.0%; management cited acquisition contributions and organic growth, including equipment rentals and alternative-energy demand.
- Operating expenses increased 28.8% in the quarter and 20.1% for nine months, primarily reflecting acquisition-related costs and higher employee expenses. Nine-month interest and other expense was $0.547 million, versus $0.193 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $3.874 million, down from $7.403 million. Receivables and other receivables used $3.168 million and inventory used $3.967 million; accounts payable provided $3.378 million.
- Investing cash outflow was $11.052 million, including $4.104 million of capital expenditures and $6.977 million for acquisitions. Financing provided $6.934 million, including $10.0 million of term-loan proceeds. Cash declined $0.082 million to $0.559 million.
- At December 24, 2016, total debt was approximately $26.2 million: $17.1 million drawn on the revolving facility and $9.0 million on the term loan. The term loan included $1.4 million current debt. The company reported $12.9 million of unused revolving capacity and compliance with loan covenants.
- Current assets were $34.277 million and current liabilities $20.928 million. Capital spending included $1.1 million for service capabilities and $1.9 million for rental assets.
Outlook, risks and notable items
- Management said it expected a strong finish to fiscal 2017 and targeted $175 million to $200 million in revenue over the next three to four years. It also expected margin expansion as it integrates acquisitions; no specific near-term revenue or earnings guidance was provided.
- Management expected a fiscal 2017 effective tax rate of approximately 36% to 38%, citing lower expected research and development tax credits. The nine-month effective rate was 37.6%.
- Excalibur, acquired in April 2016, had an approximately $7.6 million purchase price and added used-equipment and rental activities. At quarter-end, $0.5 million of contingent consideration and $2.2 million of other holdbacks remained unpaid; the filing says the contingent amount and $1.8 million of holdbacks were paid subsequently.
- Risks highlighted include reliance on a significant inventory supplier, indebtedness and interest-rate exposure, acquisition integration, economic and oil-and-gas market conditions, competition, foreign currency fluctuations and cybersecurity. A 1% interest-rate change was estimated to affect annual interest expense by approximately $0.26 million, assuming unchanged average borrowings.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the credit-facility disclosures: the filing describes $30.0 million as available while also reporting $17.1 million outstanding and $12.9 million unused.
- Confirm the revolving credit agreement maturity date: the debt note states September 20, 2018, while MD&A states December 20, 2018.
- Assess whether acquisition-driven growth, integration, and higher operating costs can support the stated longer-term revenue and margin objectives.
- Monitor receivables, inventory, and cash conversion, given the decline in operating cash flow and increase in days sales outstanding to 46 from 42.
- Evaluate the non-GAAP Adjusted EBITDA measure alongside GAAP results: nine-month Adjusted EBITDA was $10.306 million, compared with $7.034 million.