Transcat, Inc. — Form 10-Q Summary
Business context and period. Transcat provides calibration and related compliance services and distributes test, measurement and control instruments. This filing covers fiscal Q3 and the first nine months of fiscal 2013, ended December 29, 2012; comparisons are to the periods ended December 24, 2011. Amounts below are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Revenue | $29.324 | $28.460 | $81.209 | $79.248 |
| Gross profit / margin | $6.630 / 22.6% | $6.788 / 23.9% | $18.915 / 23.3% | $19.239 / 24.3% |
| Operating income / margin | $1.221 / 4.2% | $1.653 / 5.8% | $2.995 / 3.7% | $3.464 / 4.4% |
| Net income | $0.782 | $1.024 | $1.888 | $2.095 |
| Diluted EPS | $0.10 | $0.13 | $0.25 | $0.27 |
- Quarterly revenue rose 3.0%; nine-month revenue rose 2.5%. Service growth outweighed weaker product sales.
- Quarterly product sales were $19.440 million, nearly flat year over year; service revenue increased 8.9% to $9.884 million. For nine months, product sales fell 1.5% to $52.753 million while service revenue rose 10.7% to $28.456 million.
- Operating cash flow was $2.350 million for nine months, versus $2.535 million. Investing used $5.318 million, including $2.189 million of capital spending and $3.129 million for acquisitions; financing provided $3.395 million.
- At December 29, cash was $0.459 million, current assets $24.638 million and current liabilities $12.589 million. Long-term debt was $6.642 million; total liabilities were $20.769 million. Cash increased from $0.032 million at March 31.
- The company reported a three-year $20 million revolving facility, with $6.6 million outstanding. It said it was in compliance with covenants and believed cash and facility resources sufficient for foreseeable needs. Interest rates during the first nine months ranged from 1.1% to 2.8%.
Material changes and management commentary
- Profitability weakened despite revenue growth: quarterly gross profit fell 2.3% and net income fell about 24%; nine-month gross profit fell 1.7% and net income fell about 10%.
- Product gross margin declined to 23.2% for the quarter from 25.6%, and to 23.6% for nine months from 25.3%. Management cited lower manufacturer rebates and, year to date, increased customer discounts; quarterly product sales faced competitive pricing and a challenging market.
- Service gross margin improved to 21.5% from 20.1% in the quarter and to 22.8% from 22.2% year to date. Service growth included acquisitions; management said acquisition-related costs constrained near-term margin expansion.
- Quarterly operating expenses increased 5.3%, including Salesforce.com implementation costs, higher employee-related costs and acquisition costs. Year-to-date expenses included one-time sales restructuring charges and Salesforce.com costs, partly offset by lower performance-based compensation.
- On July 16, 2012, Transcat acquired Anacor Compliance Services for approximately $3.1 million; about $1.9 million was allocated to goodwill and $0.6 million to identifiable intangible assets. On January 25, 2013, after quarter-end, it acquired Canadian calibration and inspection provider Cal-Matrix; financial details are not provided in the filing text.
Outlook, risks and unusual items
- Management’s long-term strategy is to grow services organically and through acquisitions, while expanding product-market penetration. It expected service operating income to increase significantly in Q4, but anticipated continued product-margin pressure.
- Management noted one fewer sales week in Q4 versus the prior-year period and warned that delayed production tax credits for wind-industry manufacturers could affect product sales. No numerical earnings or revenue guidance was provided.
- Service revenue can vary with calibration timing, customer capital spending and outsourcing decisions. Product risks include softness in test-and-measurement markets, price competition, manufacturer rebates and order/backorder timing. Quarter-end days sales outstanding rose to 41 from 39 a year earlier.
- A 1% interest-rate movement was estimated to change annual interest expense by less than $0.1 million, assuming borrowing levels stayed constant. More than 90% of nine-month revenue was U.S.-dollar denominated; the company also held a $2.0 million foreign-exchange forward contract maturing in January 2013.
- Other items include $0.2 million of acquisition costs recorded in the first nine months, a write-off of less than $0.1 million in prior credit-agreement costs, and issuance of 52,000 shares after achievement of 75% of a fiscal 2010 performance-stock target. Management reported effective disclosure controls and no material change in internal control.
Important facts for investors to verify
- Clarify actual undrawn credit capacity: the filing describes a $20 million facility with $6.6 million outstanding, but also says $20 million was available. The stated figures do not clearly reconcile.
- Track whether service growth and margins persist after acquisition integration, particularly following the post-quarter Cal-Matrix acquisition.
- Monitor product margins, manufacturer rebates, customer discounting and potential wind-sector demand effects.
- Review cash conversion, capital spending, acquisition funding and covenant headroom as debt and investment needs evolve.
- Assess the performance conditions underlying stock awards and the effect of ongoing CRM, restructuring and acquisition-related costs.