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| TRNS > SEC Filings for TRNS > Form 10-Q on 11-Feb-2013 | All Recent SEC Filings |
11-Feb-2013
Quarterly Report
Forward-Looking Statements: This report and, in particular, the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this report, contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These include statements concerning expectations, estimates, and projections about the industry, management beliefs and assumptions of Transcat, Inc. ("Transcat", "we", "us", or "our"). Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast. Therefore, our actual results and outcomes may materially differ from those expressed or forecasted in any such forward-looking statements. When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements contained elsewhere in this report and in any documents incorporated herein by reference. New risks and uncertainties arise from time to time and we cannot predict those events or how they may affect us. For a more detailed discussion of the risks and uncertainties that may affect Transcat's operating and financial results and its ability to achieve its financial objectives, interested parties should review the "Risk Factors" sections in Transcat's reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended March 31, 2012. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Accounts Receivable: Accounts receivable represent amounts due from customers in the ordinary course of business. These amounts are recorded net of the allowance for doubtful accounts and returns in the Consolidated Balance Sheets. The allowance for doubtful accounts is based upon the expected collectibility of accounts receivable. We apply a specific formula to our accounts receivable aging, which may be adjusted on a specific account basis where the formula may not appropriately reserve for loss exposure. After all attempts to collect a receivable have failed, the receivable is written-off against the allowance for doubtful accounts. The returns reserve is calculated based upon the historical rate of returns applied to revenue over a specific timeframe. The returns reserve will increase or decrease as a result of changes in the level of revenue and/or the historical rate of returns.
Stock-Based Compensation: We measure the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. We record compensation cost related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period of each award. Excess tax benefits from the exercise of stock awards are presented in the Consolidated Statements of Cash Flows as a financing activity. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. We did not capitalize any stock-based compensation costs as part of an asset. We estimate forfeiture rates based on our historical experience.
We grant performance-based restricted stock units as a primary component of executive compensation. The units generally vest following the third fiscal year from the date of grant subject to certain cumulative diluted earnings per share growth targets over the eligible period. Compensation cost ultimately recognized for these performance-based restricted stock units will equal the grant-date fair market value of the unit that coincides with the actual outcome of the performance conditions. On an interim basis, we record compensation cost based on an assessment of the probability of achieving the performance conditions. We achieved 75% of the target level for the performance-based restricted stock units granted in fiscal year 2010 and as a result, issued 52 thousand shares of common stock to executive officers and certain key employees during the first quarter of fiscal year 2013. At December 29, 2012, we estimated the probability of achievement for the units granted in fiscal years 2013 and 2012 to be 100% of the target levels and 75% of the target level for the units granted in fiscal year 2011.
Revenue Recognition: Product sales are recorded when a product's title and risk of loss transfer to the customer. We recognize the majority of our service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. Some service revenue is generated from managing customers' calibration programs in which we recognize revenue in equal amounts at fixed intervals. We generally invoice our customers for freight, shipping, and handling charges. Provisions for customer returns are provided for in the period the related revenues are recorded based upon historical data.
RESULTS OF OPERATIONS
The following table presents, for the third quarter and first nine months of
fiscal years 2013 and 2012, the components of our Consolidated Statements of
Operations.
(Unaudited) (Unaudited)
Third Quarter Ended Nine Months Ended
December 29, December 24, December 29, December 24,
2012 2011 2012 2011
Gross Margin:
Product Gross Margin 23.2 % 25.6 % 23.6 % 25.3 %
Service Gross Margin 21.5 % 20.1 % 22.8 % 22.2 %
Total Gross Margin 22.6 % 23.9 % 23.3 % 24.3 %
As a Percentage of Total Revenue:
Product Sales 66.3 % 68.1 % 65.0 % 67.6 %
Service Revenue 33.7 % 31.9 % 35.0 % 32.4 %
Total Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Selling, Marketing and Warehouse Expenses 11.5 % 12.0 % 12.1 % 12.7 %
Administrative Expenses 6.9 % 6.1 % 7.5 % 7.2 %
Total Operating Expenses 18.4 % 18.1 % 19.6 % 19.9 %
Operating Income 4.2 % 5.8 % 3.7 % 4.4 %
Interest and Other Expense, net 0.2 % 0.1 % 0.2 % 0.2 %
Income Before Income Taxes 4.0 % 5.7 % 3.5 % 4.2 %
Provision for Income Taxes 1.3 % 2.1 % 1.2 % 1.6 %
Net Income 2.7 % 3.6 % 2.3 % 2.6 %
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THIRD QUARTER ENDED DECEMBER 29, 2012 COMPARED TO THIRD QUARTER ENDED DECEMBER
24, 2011 (dollars in thousands):
Revenue:
Third Quarter Ended
December 29, December 24,
2012 2011
Revenue:
Product Sales $ 19,440 $ 19,382
Service Revenue 9,884 9,078
Total Revenue $ 29,324 $ 28,460
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Total revenue increased $0.9 million, or 3.0%, from the third quarter of fiscal year 2012 to the third quarter of fiscal year 2013.
Service revenue increased to $9.9 million in the third quarter of fiscal year 2013, a $0.8 million, or 8.9% increase, when compared to $9.1 million in the third quarter of fiscal year 2012. The growth during the quarter is primarily attributed to incremental revenue associated with our recent Anacor acquisition, partially offset by a $0.2 million loss of low margin revenue from services we were outsourcing for a customer that were not repeated in fiscal year 2013.
Within any year, while we add new customers, we also have customers from the prior year whose calibrations may not repeat for any number of reasons. Among those reasons are variations in the timing of customer periodic calibrations on instruments and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of calibration orders and segment expenses can vary on a quarter-to-quarter basis, we believe a trailing twelve-month trend provides a better indication of the progress of this segment. Service segment revenue for the twelve months ended December 29, 2012 was $39.1 million, up 13.1% when compared with $34.6 million for the twelve months ended December 24, 2011, a result of organic and acquisition related growth. Our fiscal years 2013 and 2012 service revenue growth in relation to prior fiscal year quarter comparisons is as follows:
FY 2013 FY 2012
Q3 Q2 Q1 Q4 Q3 Q2 Q1
Service Revenue Growth 8.9 % 19.8 % 3.7 % 20.1 % 24.0 % 10.3 % 10.1 %
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Within the calibration industry, there is a broad array of measurement disciplines making it costly and inefficient for any one provider to invest the needed capital for facilities, equipment and uniquely trained personnel necessary to address all measurement disciplines with in-house calibration capabilities. Our strategy has been to focus our investments in the core electrical, temperature, pressure and dimensional disciplines. Accordingly, over the long-term, we expect to outsource 15% to 20% of Service segment revenue to third party vendors for calibration beyond our chosen scope of capabilities. During any individual quarter, we could fluctuate beyond these percentages. We will continue to evaluate the need for capital investments that could provide more in-house capabilities for our staff of technicians and reduce the need for third party vendors in certain instances. The following table presents the source of our Service segment revenue and the percent of Service segment revenue for each quarter during fiscal years 2013 and 2012:
FY 2013 FY 2012
Q3 Q2 Q1 Q4 Q3 Q2 Q1
Percent of Service Revenue:
Depot/Onsite 82.3 % 82.6 % 79.1 % 80.5 % 77.9 % 79.0 % 77.7 %
Outsourced 15.3 % 14.9 % 18.3 % 16.7 % 19.7 % 18.5 % 19.8 %
Freight Billed to Customers 2.4 % 2.5 % 2.6 % 2.8 % 2.4 % 2.5 % 2.5 %
100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
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Product segment sales accounted for 66.3% of our total revenue in the third quarter of fiscal year 2013 and 68.1% of our total revenue in the third quarter of fiscal year 2012. Product segment sales were $19.4 million in the third quarter of fiscal year 2013, consistent with the prior-year period, in spite of a challenging marketplace and competitive pricing pressures. Our fiscal years 2013 and 2012 product sales growth (decline) in relation to prior fiscal year quarter comparisons is as follows:
FY 2013 FY 2012
Q3 Q2 Q1 Q4 Q3 Q2 Q1
Product Sales Growth
(Decline) 0.3 % (0.1 %) (4.8 %) 19.2 % 17.0 % 26.0 % 32.4 %
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Product sales were consistent year-over-year despite two fewer business days in the third quarter of fiscal year 2013 compared to the third quarter of fiscal year 2012. Product sales increased to $319 thousand per business day in the third quarter of fiscal year 2013, a 3.6% increase when compared to $308 thousand per business day in the third quarter of fiscal year 2012. Our product sales per business day for each fiscal quarter during the fiscal years 2013 and 2012 are as follows:
Customer product orders include orders for instruments that we routinely stock in our inventory, customized products, and other products ordered less frequently, which we do not stock. Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in our laboratories prior to shipment, orders required to be shipped complete or at a future date, and other orders awaiting final credit or management review prior to shipment. Our total pending product shipments for the third quarter of fiscal year 2013 decreased by $0.7 million, or 20.9%, from the third quarter of fiscal year 2012. Declining backorders were the primary driver of this year-over-year reduction. Overall, variations in pending product shipments can be impacted by several factors, including the timing of when product orders are placed in relation to the end of the fiscal period, specialized product orders that are not stocked, or production issues experienced by manufacturers. The following table presents the percentage of total pending product shipments that were backorders at the end of the third quarter of fiscal year 2013 and our historical trend of total pending product shipments:
FY 2013 FY 2012
Q3 Q2 Q1 Q4 Q3 Q2 Q1
Total Pending Product
Shipments $ 2,826 $ 2,365 $ 2,806 $ 2,670 $ 3,572 $ 3,368 $ 3,002
% of Pending Product
Shipments that are
Backorders 69.6 % 68.6 % 68.8 % 70.9 % 65.6 % 73.6 % 67.9 %
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Gross Profit:
Third Quarter Ended
December 29, December 24,
2012 2011
Gross Profit:
Product $ 4,503 $ 4,962
Service 2,127 1,826
Total $ 6,630 $ 6,788
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Total gross profit in the third quarter of fiscal year 2013 decreased $0.2 million, or 2.3%, from the third quarter of fiscal year 2012. Total gross margin in the third quarter of fiscal year 2013 decreased 130 basis points from the third quarter of fiscal year 2012.
Service segment gross profit increased $0.3 million, or 16.5%, from the third quarter of fiscal year 2012 to the third quarter of fiscal year 2013. Service segment gross margin increased 140 basis points over the same time period. While this increase demonstrates margin expansion, it was somewhat constrained by acquisition-related revenue growth and the associated incremental costs. Because the timing of calibration orders and segment expenses can vary on a quarter-to-quarter basis, we believe a trailing twelve month trend provides a better indication of the progress of this segment. Service segment gross profit for the twelve months ended December 29, 2012 was $9.4 million, up 11.8% when compared with $8.4 million for the twelve months ended December 24, 2011, due to increased revenue. Service segment gross margin was 24.0% and 24.3% for the twelve months ended December 29, 2012 and December 24, 2011, respectively. The following table reflects the quarterly historical trend of our calibration services gross margin as a percent of service revenues:
FY 2013 FY 2012
Q3 Q2 Q1 Q4 Q3 Q2 Q1
Service Gross Margin 21.5 % 23.9 % 22.9 % 27.3 % 20.1 % 22.4 % 24.1 %
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We evaluate product gross profit from two perspectives. Channel gross profit includes net sales less the direct cost of inventory sold. Our total product gross profit includes channel gross profit as well as the impact of vendor rebates, cooperative advertising income, freight billed to customers, freight expenses and direct shipping costs. In general, our product gross margin can vary based upon the mix of products sold, price discounting and the timing of periodic vendor rebates and cooperative advertising income received from suppliers.
Product segment gross profit declined $0.5 million, or 9.3%, in the third quarter of fiscal year 2013 compared to the third quarter of fiscal year 2012. As a percentage of product sales, gross profit decreased to 23.2% in the third quarter of fiscal year 2013 compared with 25.6% in the third quarter of fiscal year 2012. Our product gross profit includes a point-of-sale rebate program with a key vendor that is based on Product segment sales growth on a calendar year-over-year basis. We experienced a decrease in our annual rebates which caused declines in our Product segment gross profit and gross margin. The following table reflects the quarterly historical trend of our product gross margin:
FY 2013 FY 2012
Q3 Q2 Q1 Q4 Q3 Q2 Q1
Channel Gross Margin (1) 21.2 % 21.5 % 22.7 % 23.3 % 22.5 % 23.1 % 23.0 %
Total Product Gross Margin (2) 23.2 % 22.0 % 25.7 % 24.7 % 25.6 % 25.4 % 24.8 %
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(1) Channel gross margin is calculated as net sales less purchase costs divided
by net sales.
(2) Includes vendor rebates, cooperative advertising income, freight billed to
customers, freight expenses, and direct shipping costs.
Operating Expenses:
Third Quarter Ended
December 29, December 24,
2012 2011
Operating Expenses:
Selling, Marketing and Warehouse $ 3,386 $ 3,403
Administrative 2,023 1,732
Total $ 5,409 $ 5,135
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Operating expenses increased $0.3 million, or 5.3%, from the third quarter of fiscal year 2012 to the third quarter of fiscal year 2013 and included upfront costs related to our deployment of Salesforce.com, a customer relationship management ("CRM") software program which is expected to increase the efficiency of our sales teams. Administrative expenses increased due to general increases in wages and other employee related expenses, and costs associated with acquisitions. As a percentage of total revenue, operating expenses were 18.4% and 18.1% in the third quarter of fiscal years 2013 and 2012, respectively.
Taxes:
Third Quarter Ended
December 29, December 24,
2012 2011
Provision for Income Taxes $ 402 $ 585
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Our effective tax rates for the third quarter of fiscal years 2013 and 2012 were 34.0% and 36.4%, respectively. We continue to evaluate our tax provision on a quarterly basis and make adjustments, as deemed necessary, to our effective tax rate given changes in facts and circumstances expected for the entire fiscal year.
NINE MONTHS ENDED DECEMBER 29, 2012 COMPARED TO NINE MONTHS ENDED DECEMBER 24,
2011 (dollars in thousands):
Revenue:
Nine Months Ended
December 29, December 24,
2012 2011
Revenue:
Product Sales $ 52,753 $ 53,533
Service Revenue 28,456 25,715
Total Revenue $ 81,209 $ 79,248
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Total revenue increased $2.0 million, or 2.5%, from the first nine months of fiscal year 2012 to the first nine months of fiscal year 2013. Revenue increases in the Service segment were partially offset by lower sales in the Product segment.
Service revenue increased $2.7 million, or 10.7%, from the first nine months of fiscal year 2012 to the first nine months of fiscal year 2013. The growth is attributed to higher organic revenue combined with incremental revenue from recent acquisitions, partially offset by the strategic decision not to renew $0.8 million in low margin revenue from services that we were outsourcing for a customer.
Our product sales accounted for 65.0% and 67.6% of our total revenue in the first nine months of fiscal years 2013 and 2012, respectively. For the first nine months of fiscal year 2013, product sales decreased $0.8 million, or 1.5%, compared with the first nine months of fiscal year 2012. Sales to both direct and reseller customers declined, reflecting general softness in the test and measurement equipment market.
Gross Profit:
Nine Months Ended
December 29, December 24,
2012 2011
Gross Profit:
Product $ 12,436 $ 13,541
Service 6,479 5,698
Total $ 18,915 $ 19,239
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Total gross profit in the first nine months of fiscal year 2013 decreased $0.3 million, or 1.7%, from the first nine months of fiscal year 2012. Total gross margin declined 100 basis points in the first nine months of fiscal year 2013 compared to the same period in the previous fiscal year.
Service segment gross profit increased $0.8 million, or 13.7%, from the first nine months of fiscal year 2012 to the first nine months of fiscal year 2013. Service segment gross margin increased 60 basis points over the same time period to 22.8%. Revenue growth in the Service segment reflected incremental revenue from recent acquisitions, which limited short-term gross margin expansion opportunity.
Product segment gross margin in the first nine months of fiscal year 2013 was 23.6% and declined 170 basis points when compared with 25.3% in the first nine months of fiscal year 2012. Product segment gross profit decreased $1.1 million in the first nine months of fiscal year 2013 compared to the first nine months of fiscal year 2012, as a result of a decline in manufacturer rebates as well as increased price discounts extended to customers, partially offset by an increase in cooperative advertising income.
Operating Expenses:
Nine Months Ended
December 29, December 24,
2012 2011
Operating Expenses:
Selling, Marketing and Warehouse $ 9,786 $ 10,071
Administrative 6,134 5,704
Total $ 15,920 $ 15,775
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Operating expenses increased $0.1 million from the first nine months of fiscal year 2012 to the first nine months of fiscal year 2013. As a percentage of total revenue, operating expenses during the first nine months of fiscal year 2013 were 19.6%, down from 19.9% in the first nine months of fiscal year 2012 reflecting lower performance-based compensation and acquisition-related expenses, partially offset by one-time sales organization restructuring charges and costs related to our deployment of Salesforce.com.
Taxes:
Nine Months Ended
December 29, December 24,
2012 2011
Provision for Income Taxes $ 972 $ 1,242
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Our effective tax rates for the first nine months of fiscal years 2013 and 2012 were 34.0% and 37.2%, respectively. We continue to evaluate our tax provision on a quarterly basis and make adjustments, as deemed necessary, to our effective tax rate given changes in facts and circumstances expected for the entire fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
We believe that amounts available under our current credit facility and our cash
on hand are sufficient to satisfy our expected working capital and capital
expenditure needs as well as our lease commitments for the foreseeable future.
Cash Flows: The following table is a summary of our Consolidated Statements of
Cash Flows:
Nine Months Ended
December 29, December 24,
2012 2011
Cash Provided by (Used in):
Operating Activities $ 2,350 $ 2,535
Investing Activities (5,318 ) (4,355 )
Financing Activities 3,395 1,835
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Operating Activities: Net cash provided by operating activities was $2.4 million for the first nine months of fiscal year 2013 compared to $2.5 million in the first nine months of fiscal year 2012. Significant working capital fluctuations were as follows:
· Accounts Receivable: The higher accounts receivable balance as of December 29, 2012 compared to the balance as of December 24, 2011 is reflective of an increase in quarterly revenues. In addition, our quarter-end days sales outstanding increased slightly year-over-year. The following table illustrates our days sales outstanding for the fiscal quarters ended December 29, 2012 and December 24, 2011:
December 29, December 24,
. . .
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