Transcat, Inc. (“Transcat” or the “Company”), a leading provider of accredited calibration, repair, inspection and laboratory instrument services and value-added distributor of professional grade handheld test, measurement and control instrumentation, today reported financial results for its second quarter ended September 26, 2020 (the “second quarter”) of fiscal year 2021, which ends March 27, 2021 (“fiscal 2021”). Results include the previously-reported acquisition of TTE Laboratories, Inc. (referred to as “pipettes.com”) effective February 21, 2020.
“Our Service segment delivered another excellent quarter, reaching the second highest gross margin level in company history at 32.2%, an increase of 660 basis points year-over-year,” commented Lee D. Rudow, President and CEO. “Technician productivity, expense reductions and strategic pricing drove the margin improvement, which was further helped by a favorable mix and the results of pipettes.com. Our teams have done a tremendous job leveraging our technology investments and have remained focused on driving efficiencies and better cost controls in our lab network.”
“In addition to the high level of performance in our Service segment, we were certainly encouraged with the Distribution segment, where sales grew significantly over our first quarter of fiscal 2021. Overall, our Service margin performance helped drive record second quarter consolidated operating income of more than $3 million, exceeding our expectations. Additionally, we continued to generate strong cash from operations, which was used in part to reduce debt and fund technology investments.”
Second Quarter Fiscal 2021 Review (Results are compared with the second quarter of the fiscal year ended March 28, 2020 (“fiscal 2020”))
Despite the ongoing impact from the COVID-19 pandemic, consolidated revenue remained stable year-over-year. Consolidated gross profit increased $1.0 million, or 10.0%, and gross margin expanded 260 basis points as a result of continued productivity improvements in the Service Segment, strategic pricing and cost controls, which offset continued softness in the Distribution segment. Operating expenses grew $1.0 million, or 13.9%, due to investments to further technology initiatives and incremental expenses related to pipettes.com. Net income per diluted share was $0.27 compared with $0.32 in last fiscal year’s second quarter with the prior period benefiting by $0.05 from a lower tax rate due to increased discrete income tax benefits related to stock-based awards.
Service segment margins saw significant expansion
Represents the accredited calibration, repair, inspection and laboratory instrument services business
(59% of total revenue for the second quarter of fiscal 2021).
The increase in Service revenue reflected new Life Science business, including $1.2 million of incremental revenue from pipettes.com, which more than offset softness from other markets. On a trailing twelve-month basis, Service revenue was $94.6 million, up 4.3% when compared with the trailing twelve-month period ending with the prior-fiscal year second quarter.
Service segment gross margin improved 660 basis points due to continued productivity initiatives and technology enhancements, more seasoned technicians, optimized client-based lab operations, strategic pricing, and a favorable mix of Service work performed in the quarter.
Distribution segment revenue and margins continued to be impacted by COVID-19 pandemic
Represents the sale and rental of new and used professional grade handheld test, measurement and control instrumentation (41% of total revenue for the second quarter of fiscal 2021).
Distribution segment sales continued to be impacted by the COVID-19 pandemic, with reduced demand from oil and gas related businesses and other industrial manufacturing sectors. Rental revenue was up 32% sequentially from the first quarter of fiscal 2021 and was up 1.2% over the prior-year period. Distribution gross margin reflects lower volume from core product sales and reduced co-operative advertising and rebate programs as vendors reduced these programs to lower their costs.
Six Month Review (Results are compared with the first six months of fiscal 2020)
Total revenue was $80.5 million, a decrease of 4.3%, or $3.6 million, primarily due to a reduction in demand for Distribution products as a result of the COVID-19 pandemic which commenced at the beginning of the Company’s fiscal 2021 year. Despite the lower revenue, consolidated gross profit was up $0.4 million, or 2.0%, and gross margin expanded 160 basis points to 26.0%. Consolidated operating expenses increased $1.4 million, or 8.9%, as the Company continued to invest in technology initiatives. As a result, operating income was $4.0 million compared with $5.0 million in last fiscal year’s period.
Net income was $2.8 million, or $0.38 per diluted share, compared with $4.1 million, or $0.55 per diluted share. Adjusted EBITDA was consistent at $8.7 million. See Note 1 on page 4 for a description of this non-GAAP financial measure and page 9 for the Adjusted EBITDA Reconciliation table.
Strong Balance Sheet and Liquidity
Year-to-date net cash provided by operations of $12.5 million increased from $2.8 million in the prior-year period and was used to fund $3.1 million of capital expenditures and $7.6 million of debt repayment. Capital expenditures were primarily focused on technology, Service segment capabilities and rental pool assets.
At the end of the second quarter, Transcat had $28.9 million available for borrowing under its secured revolving credit facility. Total debt of $22.7 million was down $7.6 million from fiscal 2020 year-end. The Company’s leverage ratio, as defined in its credit agreement, was down to 1.19 at quarter end compared with 1.53 at fiscal 2020 year-end.
Mr. Rudow concluded, “The results of the second quarter were strong and we are pleased with the significant progress made in our Service margin expansion initiatives. Our balance sheet is solid and the M&A pipeline is active. Additionally, we believe our new customer pipeline positions us well for strong organic growth as we work through these current challenging times. We are equally focused on continuing to advance our initiatives aimed at further enhancing our Service business, including additional technology deployments to drive productivity.
“As we head into the winter months, we remain cautious given the high degree of uncertainty that still exists in today’s COVID-19 impacted economic environment. For the third quarter of fiscal 2021, we expect Service revenue to grow modestly versus last fiscal year’s third quarter, and we anticipate solid improvement in gross margin year-over-year. Distribution is likely to continue to be negatively impacted by the current economic environment. We expect operating income for the third quarter of fiscal 2021 to be similar to the third quarter of fiscal 2020.”
Transcat adjusted its expected income tax rate for fiscal 2021 to a range of 22% to 23% from the previously provided range of 20% to 21%, largely due to profitability exceeding previous estimates.
The Company now expects capital expenditures to be approximately $5.5 million to $6.5 million, up from the previous estimated range of $5.0 million to $5.5 million. Capital investments are expected to be primarily for technology, growth-oriented opportunities within both of its operating segments, and rental pool assets. Maintenance and existing asset replacements are expected to be consistent with fiscal 2020 at approximately $1.0 million to $1.5 million. BusinessWire