Net revenue in the fourth quarter of fiscal 2011 was $25.8 million, an increase of 9.4% compared with net revenue of $23.5 million in the fourth quarter of fiscal 2010. Product segment net sales were $16.9 million for the fourth quarter of fiscal 2011, an increase of 14.5% compared with $14.7 million in the same period of the prior fiscal year. Service segment net revenue, which represented 34.6% of total net revenue, increased 1.0% to $8.9 million in the fourth quarter of fiscal 2011 compared with $8.8 million in the prior fiscal year fourth quarter.
Net income was $1.1 million, or $0.14 per diluted share, in the fourth quarter of fiscal 2011, up 25.0%, or $0.2 million, from net income of $0.9 million, or $0.12 per diluted share, in the same period of the prior fiscal year. The growth in net income was driven by a 67.0% increase in operating profits in the Company’s Product segment.
Charles P. Hadeed, President, CEO and COO of Transcat, commented, “We delivered our sixth consecutive record quarter as our Product segment grew more than 14 percent reflecting continued market penetration as a result of expanding our vendor and product portfolio and enhanced marketing activities. The Service segment growth for the quarter did not meet our expectations, but we are encouraged with the direction of that business which, in combination with our recent acquisition activity, should provide additional future growth opportunities.”
Mr. Hadeed continued, “Fiscal year 2011 was a record year for Transcat, highlighted by solid financial performance, including record annual revenue and record operating income. The integration and performance of United Scale and Engineering Corporation (“United Scale”), acquired in fiscal 2010, and our two fiscal 2011 acquisitions have gone extremely well. TMetrix was readily folded into our operations, incrementally adding to our Service business in Canada while enabling us to leverage our infrastructure. The Wind Turbine Tools acquisition expanded our reach into the wind energy industry and positions us well to accelerate growth within this industry.”
In April 2011, Transcat acquired CMC Instrument Services, Inc. (“CMC”), a Rochester, New York-based provider of dimensional calibration and repair services. Mr. Hadeed commented, “The CMC acquisition is strategically well-suited for us. It provides incremental calibration services market share and, being within our existing operating footprint, is a relatively easy fold-in acquisition that allows us to leverage our existing infrastructure.”
Strong Product Sales Combined with Prudent Expense Management and an Improved Pricing Environment Drive 110 Basis Point Operating Margin Expansion in Fiscal 2011 Fourth Quarter
Fourth quarter 2011 gross profit increased to $6.9 million, or 26.9% of net revenue, compared with $6.4 million, or 27.3% of net revenue, in the prior year period, reflecting gains in gross profit from both the Product and Service segments of 11.4% and 2.5%, respectively. The 40 basis point decline in gross margin was primarily due to market channel mix.
Total operating expenses increased $0.1 million, or 1.6%, to $5.1 million in the fourth quarter of fiscal 2011, remaining relatively consistent compared with the fourth quarter of fiscal 2010. As a percentage of net revenue, operating expenses in the fourth quarter of fiscal 2011 were 20.0%, down from 21.5% in the prior fiscal year fourth quarter. Incremental operating and integration expenses associated with recently acquired businesses were offset by lower compensation expense and other spending controls.
Operating income for the fourth quarter of fiscal 2011 was $1.8 million, an increase of $0.4 million, or 30.6%, compared with $1.4 million in the fourth quarter of fiscal 2010. Operating margin was 6.9% in the fourth quarter of fiscal 2011, up 110 basis points from the prior fiscal year period.
During the fourth quarter of fiscal 2011, Transcat generated $2.4 million of EBITDA (earnings before interest, taxes, depreciation and amortization), compared with $1.9 million for the same period of the prior fiscal year. See Note 1 on page 5 for further description of this non-GAAP financial measure.
The effective tax rate in the fourth quarter of fiscal 2011 was 37.5% compared with 35.4% in the fourth quarter of fiscal 2010. The fourth quarter of fiscal 2011 tax rate was more indicative of what the Company expects in the future.
Product and Service Segment Review
Product Segment:Represents the distribution of professional grade handheld test and measurement instruments business (65.4% of total net revenue)
Product segment net sales increased $2.1 million, or 14.5%, to $16.9 million in the fourth quarter of fiscal 2011 compared with the same period of the prior fiscal year, driven by the Company’s expanding customer base. Sales to wind energy customers accounted for 7.2% and 5.4% of Product segment sales in the fourth quarters of fiscal 2011 and 2010, respectively. Fourth quarter 2011 wind energy sales were aided by the acquisition of Wind Turbine Tools in January 2011.
Average Product segment sales per day were $263 thousand in the fourth quarter of fiscal 2011 up from $230 thousand in the same period of the prior fiscal year. Sales of the Company’s products through its website increased 35.5% to $1.6 million, or 9.4% of product sales, in the fourth quarter of fiscal 2011 compared with $1.2 million, or 7.9% of product sales, in the same period of the prior fiscal year. Focused sales efforts within specific product groups and enhanced email marketing continued to drive the increase in online sales.
Product segment gross profit in the fourth quarter of fiscal 2011 grew to $4.2 million, or 25.0% of net product sales, compared with $3.8 million, or 25.7% of net product sales, in the fourth quarter of fiscal 2010. Gross margin for the Product segment is a function of a number of factors including volume, market channel mix, manufacturers’ rebates, product mix and discounts to customers. During the fourth quarter of fiscal 2011, Transcat employed aggressive pricing strategies within its direct channel resulting in market share gains, increased sales and higher profits. However, the pricing methods employed in our direct channel and an increased mix of products sold through the Company’s reseller channel, compressed gross margin by 70 basis points.
Product segment operating income was up 67.0% to $1.2 million, or 7.4% of net product sales, in the fourth quarter of fiscal 2011 compared with $0.7 million, or 5.1% of net product sales, in the same period of the prior fiscal year.
Service Segment:Represents theaccredited calibration, repair and weighing system services business (34.6% of total net revenue)
Service segment net revenue was $8.9 million in the fourth quarter of fiscal 2011, a $0.1 million, or 1.0% increase from the $8.8 million reported in the same period of the prior fiscal year. When comparing year-over-year, higher revenue from non-wind energy customers of $0.6 million was offset by a $0.5 million decline in services provided to wind energy customers. This decline was primarily related to the cyclical nature of the wind energy industry and an unusually high volume of calibration and repair services provided to a key wind energy customer during the fourth quarter of fiscal 2010. Services provided to wind energy customers represented 6.4% of total service revenue for the fourth quarter of fiscal 2011 compared with 11.8% of total service revenue in the same period of the prior fiscal year.
The Company’s strategy has been to focus its capital and marketing investments in the electrical, temperature, pressure and dimensional disciplines. Typically, 15% to 20% of Service segment revenue has been generated from outsourcing customer equipment to third-party vendors for calibration beyond the Company’s chosen scope of capabilities. In the fourth quarter of fiscal 2011, 19.3% of the Company’s Service segment revenue was subcontracted to third-party vendors compared with 21.6% in the fourth quarter of fiscal 2010. The Company continues to evaluate the need for capital investments that could provide more in-house capabilities as it deems appropriate.
Service segment gross profit in the fourth quarter of fiscal 2011 was $2.7 million, an increase of 2.5% from $2.6 million in the same period of the prior fiscal year. Gross margin improved 40 basis points year-over-year as general inflationary increases and incremental costs associated with recent acquisitions were more than offset by other expense reductions, primarily lower third-party vendor costs associated with wind energy customers.
Service segment operating income was $0.5 million during the fourth quarter of fiscal 2011 compared with operating income of $0.6 million in the same period of the prior fiscal year. The decrease in operating income was primarily due to increased sales and marketing expenses.
Twelve-Month Review
Net revenue increased $10.1 million, or 12.5%, to $91.2 million in fiscal 2011, compared with net revenue of $81.1 million in fiscal 2010. Total annual growth for non-wind energy customers was $11.5 million including $3.1 million in incremental revenue from United Scale, while total wind energy customer revenue declined $1.4 million for the year in what was considered a weak year in the wind energy industry.
Product segment net sales were $59.9 million in fiscal 2011, an increase of 12.6%, compared with $53.1 million in fiscal 2010. Net sales growth for non-wind energy customers, including $1.6 million in incremental sales from United Scale, was partially offset by the decline in wind energy sales. Sales to wind energy customers accounted for 5.5% and 8.8% of Product segment sales in fiscal 2011 and fiscal 2010, respectively. Online Product sales were $5.6 million in fiscal 2011, up 31.8%, compared with $4.2 million in fiscal 2010. Transcat’s pending product shipments during fiscal year 2011 increased 13.0% to $2.0 million.
Service segment net revenue was $31.3 million in fiscal 2011, up 12.2%, compared with $27.9 million in fiscal 2010. Services provided to wind energy customers were relatively consistent year-over-year and represented 6.8% of total service revenue in fiscal 2011, compared with 7.6% of total service revenue in the prior fiscal year. United Scale contributed $1.5 million of incremental revenue in fiscal 2011, while revenue growth related to other customers increased $1.9 million for the year.
Gross margin improved to 25.5% in fiscal 2011, from 23.8% in fiscal 2010. Product segment gross margin was 25.7% and 23.4% for fiscal 2011 and 2010, respectively. The year-over-year increase was primarily a result of an improved pricing environment and increased manufacturer rebate income. Service segment gross margin was 25.3% for fiscal 2011 compared with 24.5% for fiscal 2010. A large portion of the higher Service segment revenue was acquisition related, which limited operating leverage opportunities.
Operating expenses increased $1.8 million, or 10.6%, to $18.7 million in fiscal 2011 compared with $16.9 million in fiscal 2010. As a percentage of net revenue, operating expenses during fiscal 2011 were 20.5%, compared with 20.9% during fiscal 2010. The primary drivers of increased operating expenses were higher employee-related expenses, including incremental costs for United Scale and Wind Turbine Tools personnel, and investments in sales and marketing. Operating income in fiscal 2011 was $4.6 million, or 5.0% of net revenue, compared with $2.4 million, or 2.9% of net revenue, in fiscal 2010.
Net income was $2.8 million, or $0.37 per diluted share, for fiscal 2011 compared with $1.5 million, or $0.19 per diluted share, for fiscal 2010.
EBITDA was $6.8 million for fiscal 2011, compared with $4.4 million for fiscal 2010. See Note 1 on page 5 for further description of this non-GAAP financial measure.
Balance Sheet and Cash Management
Net cash generated from operations was $2.6 million in fiscal 2011 compared with $5.6 million in fiscal 2010. The year-over-year change was the result of working capital requirements and timing. Inventory at the end of fiscal 2011 was $7.6 million, up from $5.9 million at the end of fiscal 2010, due to the Company’s strategic decision to increase inventory levels of specific, higher-volume products in support of greater sales growth and to maintain high levels of customer service in response to increased lead times from manufacturers. It is anticipated that inventory will increase in the first quarter of fiscal 2012 as the Company has made advance purchases of specific high demand items to ensure availability in the event that the aftermath of the Japanese earthquake causes part shortages related to those products.
Capital expenditures in fiscal 2011 were $1.6 million compared with $1.1 million in fiscal 2010 and were primarily used for additional service capabilities and infrastructure improvements that included facility expansion and investments in information technology. During fiscal 2011, the Company also spent $3.4 million to acquire TMetrix and Wind Turbine Tools and used an additional $0.6 million for the repurchase of 80,000 common shares in a private transaction at $6.90 per share.
On January 15, 2011, Transcat entered into an amendment to its credit agreement with JP Morgan Chase Bank, N.A., which provides for a revolving credit line of $15.0 million. The credit agreement was extended for 3 years on similar financial terms and conditions. The agreement allows up to $10.0 million for acquisitions in any 12-month period and dividends and stock repurchases up to $2.0 million in any 12-month period.
Outlook
Mr. Hadeed concluded, “Our objective continues to be to grow our Service segment at a greater rate than our Product segment. In addition, our focus is long-term and not quarter to quarter. We will continue to both proactively and reactively address near-term challenges such as extended vendor supply chain issues, declining international sales as a result of end of life products and wind energy industry cyclicality. We believe we are well prepared to deal with these challenges and perform for the long-term.”
