Transcat, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2022, ended December 25, 2021; comparisons are to the periods ended December 26, 2020. Amounts are in U.S. dollars unless noted.
Business context and results
Transcat provides calibration and laboratory instrument services and distributes test, measurement and control equipment. It focuses on regulated industries, particularly life sciences, and reports Service and Distribution segments. Growth reflected acquisitions, stronger demand in regulated markets, market-share gains in Service, and improved Distribution conditions versus periods affected by COVID-19.
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $50.9m (+15.5%) | $44.1m | $149.1m (+19.7%) | $124.6m |
| Gross profit / margin | $13.6m / 26.8% | $11.2m / 25.5% | $41.8m / 28.0% | $32.1m / 25.8% |
| Operating income / margin | $2.4m / 4.6% | $2.5m / 5.7% | $9.6m / 6.5% | $6.6m / 5.3% |
| Net income | $1.6m | $1.8m | $8.3m | $4.6m |
| Diluted EPS | $0.21 | $0.23 | $1.10 | $0.61 |
| Adjusted EBITDA (non-GAAP) | $5.5m; 10.7% of revenue | $4.6m; 10.4% | $18.7m; 12.5% | $13.3m; 10.7% |
Revenue, margins and material comparisons
- Q3 Service revenue rose 22.0% to $30.2m, including $2.9m from acquisitions and 10.2% organic growth. Service gross margin improved 180 basis points to 29.7%.
- Q3 Distribution sales increased 7.2% to $20.7m; its gross margin was unchanged at 22.5%. Pending product shipments were $8.9m, up $3.3m year over year, with 81.3% backorders; management cited supply disruption and increased demand.
- For the first nine months, Service revenue increased 20.8% to $87.3m and Distribution sales rose 18.1% to $61.7m. Gross-margin improvement reflected Service operating leverage, technician productivity and acquisition mix, as well as favorable Distribution product mix.
- Q3 operating expenses increased 29.2% to $11.3m, faster than revenue growth. Higher G&A reflected acquisition-related costs, acquired operations, payroll and technology investment; selling and marketing costs included higher incentives. Consequently, Q3 operating income fell 6.3% and net income fell 7.5% despite higher revenue and gross profit.
- Nine-month net income rose 81.8%, supported by higher operating income and a lower tax provision. The nine-month effective tax rate was 7.9% versus 20.7%, principally due to $1.7m of discrete share-based compensation tax benefits (versus $0.3m in the prior period). Q3 effective tax rates were 26.8% and 23.4%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $12.4m, down from $15.6m. Investing cash outflow was $26.8m, including $20.9m for acquisitions and $5.9m in capital expenditures. Financing provided $16.9m, including $22.8m of net revolving-credit borrowings and $5.6m used for share-award tax withholding/repurchases.
- Cash was $2.8m at December 25, 2021, versus $0.6m at March 27, 2021. Current assets were $57.5m and current liabilities $24.6m.
- Total debt was approximately $40.8m: $31.7m outstanding under the revolver and $9.1m under the term loan. The credit facility provides an $80m revolver commitment through June 2026; $48.3m of revolving capacity remained available. The company reported a 1.47 leverage ratio and compliance with covenants; the maximum permitted leverage ratio under the new agreement is 3.0.
- The term loan bears a fixed 3.90% rate after its amendment and is scheduled to be repaid through December 2025. Revolver rates ranged from 1.0% to 2.2% during the first nine months. Management said anticipated operating cash flow and revolver borrowings should meet foreseeable liquidity needs.
Acquisitions, outlook and risks
- NEXA, acquired effective August 31, 2021, had a purchase price of approximately $26.2m, including cash, stock and estimated contingent consideration. It contributed $2.9m revenue and a $0.3m operating loss from acquisition through the reported period; the loss includes acquired-intangible amortization. Its purchase-price allocation remained preliminary.
- Upstate Metrology was acquired in April 2021 for approximately $0.9m. Tangent Labs was acquired for approximately $9.0m cash effective December 31, 2021, after the quarter-end; its purchase-price allocation and pro forma results were not yet provided.
- For Q4 FY2022, management expected Service revenue growth in the high teens, Service gross margin around 35% on seasonally higher volume, and Distribution revenue growth in the high single digits. Operating expenses were expected to increase about $0.5m sequentially, including Tangent costs. The company expected a full-year tax rate of 14%–15%. These are management expectations, not reported results.
- Disclosed risks include COVID-19 effects, competition, recruiting and retaining skilled technicians, acquisition integration and execution, product availability and supply disruption, customer-industry volatility, cybersecurity and IT-system risks, indebtedness and variable-rate exposure, foreign currency movements, and general economic conditions. A 1% interest-rate change was estimated to change annual interest expense by about $0.2m, assuming average borrowings stayed constant; no revolver interest-rate hedge was in place.
Key facts for investors to verify
- Whether Q4 and full-year guidance was achieved, especially Service margin, revenue growth and the expected tax rate.
- Whether elevated pending shipments/backorders converted to Distribution revenue and how supply constraints affected fulfillment and margins.
- Acquisition integration, NEXA profitability and final purchase accounting, and Tangent’s subsequent contribution and funding.
- Whether expense growth, acquisition amortization and technology investment translate into sustainable operating profit and cash generation.
- Debt and covenant headroom, revolver borrowing costs, and the durability of the unusually low nine-month tax rate after discrete share-based tax benefits.