Transcat, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Third quarter ended December 26, 2015; nine months ended December 26, 2015. Dollar amounts below are in millions unless stated otherwise. Transcat provides accredited calibration and compliance services and distributes test, measurement and control instruments, with a focus on regulated industries.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $30.2 | $31.1 | $89.3 | $91.3 |
| Gross profit / margin | $6.8 / 22.5% | $7.0 / 22.5% | $20.6 / 23.0% | $20.6 / 22.6% |
| Operating income / margin | $1.7 / 5.6% | $1.4 / 4.4% | $4.1 / 4.6% | $3.7 / 4.0% |
| Net income | $1.1 | $0.8 | $2.5 | $2.1 |
| Diluted EPS | $0.15 | $0.11 | $0.36 | $0.30 |
- Service revenue rose 10.5% in Q3 and 11.5% for the nine-month period, supported by organic growth and acquisitions. Distribution sales fell 12.0% and 11.7%, respectively, primarily reflecting weaker oil and gas-related demand and currency-affected customer sales.
- Nine-month operating cash flow was $7.4 million, versus $1.2 million a year earlier. Investing used $6.6 million, including $3.7 million of capital expenditures and $2.9 million for acquisitions; financing used $1.4 million, including $1.6 million of net revolver repayment.
- At December 26, cash was $0.2 million, current assets $24.3 million, and current liabilities $12.2 million. Long-term debt was $10.5 million, down from $12.2 million at March 28, 2015. The $30 million revolving facility matures September 2018; the company reported covenant compliance. It borrowed $10.1 million after quarter-end to fund an acquisition.
- Q3 adjusted EBITDA, a non-GAAP measure, was $2.6 million, up 12.5%; nine-month adjusted EBITDA was $7.0 million, up 12.0%.
Changes, outlook, and risks
- Total revenue declined despite service growth, as distribution weakness more than offset gains in services. The stronger U.S. dollar reduced reported revenue by $0.5 million in Q3 and $1.3 million over nine months.
- Nine-month gross profit was essentially flat, while gross margin improved 40 basis points, primarily due to higher distribution vendor rebates. Service gross margin declined 30 basis points year over year for the nine months.
- Management revised its expectation from double-digit operating-income growth to flat-to-modest year-over-year growth, citing a weak macroeconomic environment. It expects FY2016 capital expenditures of $4.0–$4.5 million and targets revenue of $175–$200 million within five years, with double-digit EBITDA margins at those revenue levels.
- After quarter-end, Transcat acquired Spectrum Technologies for $11.8 million (including a $1.7 million holdback) and acquired Dispersion Laboratory for less than $1.0 million. Purchase-price allocations were incomplete. The company also completed three acquisitions during the first nine months for an aggregate purchase price of approximately $3.6 million.
- Key disclosed risks include oil and gas industry volatility, dependence on a significant inventory supplier, acquisition execution and integration, competition, economic conditions, cybersecurity, foreign exchange, and variable-rate borrowing. A 1% interest-rate change was estimated to affect annual interest expense by approximately $0.1 million.
Important facts for investors to verify
- Whether distribution demand stabilizes, particularly in oil and gas-related markets, and how currency movements affect reported sales.
- How much service growth is organic versus acquisition-driven, and whether service margins recover.
- Acquisition integration, purchase-price allocations, post-acquisition borrowing, and remaining revolver capacity under applicable limits and covenants.
- The durability of vendor rebates supporting distribution and total gross margins, and the effect of higher expected performance-based compensation.
- Progress against the revised operating-income outlook, FY2016 capital-expenditure estimate, and longer-term revenue and margin targets.