Transcat 2011 second quarter increases 13.1% to $20.9 million

Net income was $0.5 million, or $0.07 per diluted share, in the second quarter of fiscal 2011, up 180.3%, or $0.3 million, from net income of $0.2 million, or $0.02 per diluted share, in the same period of the prior fiscal year.

Charles P. Hadeed, President, CEO and COO of Transcat, commented, "We believe our improving business trend is a direct reflection of not just a moderately improving economy, but more our ability to build our calibration business while expanding our customer base and deepening our customer relationships in our products distribution business. With $20.9 million in total net revenue we have achieved four consecutive quarters of record-breaking revenue. Additionally, the measurable leverage in our business was apparent as 8.3% organic net revenue growth was the driver of the 250 basis point expansion of our operating margin."

Second Quarter Fiscal 2011 Review

Total gross profit increased to $5.0 million, or 23.7% of net revenue, compared with $4.2 million, or 22.6% of net revenue, in the second quarter of fiscal 2010, reflecting increases in gross profit from both the Product and Service segments of 20.2% and 16.4%, respectively. Included in gross profit for the quarter was $0.3 million in incremental gross profit resulting from the United acquisition and $0.2 million in growth-based manufacturer rebates.

Total operating expenses increased $0.2 million, or 5.6%, to $4.1 million in the second quarter of fiscal 2011 compared with the second quarter of fiscal 2010, primarily due to the incremental expenses associated with United. As a percentage of net revenue, operating expenses in the second quarter of fiscal 2011 were 19.4%, down from 20.7% in the prior year second quarter.

Operating income for the second quarter of fiscal 2011 was $0.9 million, or 4.3% of net revenue, an increase of $0.6 million, or 169.9%, compared with the $0.3 million of operating income in the second quarter of fiscal 2010. The increase reflects the impact of higher sales and expanded gross profit margins in both the Service and Product segments. The effective tax rate in the second quarter of fiscal 2011 was 39.7%.

Product and Service Segment Review

Product Segment

Product segment net sales increased $1.5 million, or 12.5%, to $13.5 million in the second quarter of fiscal 2011 compared with $12.0 million in the same period of the prior fiscal year, which reflects the modest improvement in the economy, a better pricing environment and the success of the Company's sales and marketing efforts. Net sales growth of $1.8 million in the industries the Company traditionally serves was complemented by $0.4 million in incremental revenue from United, but partially offset by a $0.7 million sales decline in the wind energy industry. The decline in wind energy net sales was attributed to the timing of projects. Sales to the wind energy industry accounted for 6.3% and 13.1% of Product segment sales in the second quarter of fiscal 2011 and prior year second quarter, respectively.

Average Product segment sales per day were $214 thousand in the second quarter of fiscal 2011 compared with $190 thousand in the same period of the prior fiscal year. Sales of the Company's products through its website increased 29.6% to $1.2 million, or 9.3% of product sales, in the second quarter of fiscal 2011 compared with $1.0 million, or 8.0% of product sales, in the same period of the prior fiscal year. Focused sales efforts with specific product groups continued to drive the increase in web-based sales.

Product segment gross profit in the second quarter of fiscal 2011 was $3.2 million, or 23.8% of net product sales, compared with $2.7 million, or 22.3% of net product sales, in the second 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. The 150 basis point increase in gross margin was primarily due to improved pricing and $0.2 million in incremental manufacturer rebates. The Company's manufacturer rebate includes a point-of-sale rebate program with a key vendor that is based on Product segment sales growth on a year-over-year basis. The Company did not qualify for this type of rebate in the second quarter of fiscal 2010 as sales were negatively impacted by the economic downturn.

Product segment operating income was $0.9 million, or 6.7% of net product sales, in the second quarter of fiscal 2011 compared with $0.4 million, or 3.0% of net product sales, in the same period of the prior fiscal year.

Service Segment

Service segment net revenue was $7.4 million in the second quarter of fiscal 2011, a $0.9 million, or 14.1% increase from the $6.5 million reported in the same period of the prior fiscal year. Services provided to the wind energy industry were consistent year-over-year and represented 5.3% of total service revenue for the second quarter of fiscal 2011, compared with 5.9% of total service revenue in the same period of the prior fiscal year. The second quarter also included $0.5 million in incremental revenue as a result of the Company's acquisition of United.

The Company's strategy has been to focus its capital and marketing investments in the electrical, temperature, pressure and dimensional disciplines. Historically, within the traditional industries the Company serves, 15% to 20% of Service segment revenue is generated from outsourcing customer equipment to third-party vendors for calibration beyond the Company's chosen scope of capabilities. In the second quarter of fiscal 2011, 19.8% of the Company's Service segment revenue was subcontracted to third-party vendors. 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 second quarter of fiscal 2011 was $1.8 million, an increase of 16.4% from $1.5 million in the same period of the prior fiscal year. Gross margin improved 50 basis points year-over-year, however, margin expansion was somewhat constrained as the incremental revenue from United was mostly offset by associated incremental service costs. In addition, third-party vendor calibrations, which have incremental costs, represented 37.5% of the $0.4 million in increased Service segment revenue not associated with United.

Service segment had essentially break-even operating income for the second quarters of both fiscal years 2011 and 2010.

Six-Month Review

Net revenue increased $5.8 million, or 16.4%, to $41.5 million for the first six months of fiscal 2011, from net revenue of $35.7 million in the first six months of fiscal 2010. Organic growth was 11.4% and the United acquisition contributed $1.8 million to net revenue for the first six months of fiscal year 2011.

Product segment net sales were $26.4 million in the first six months of fiscal 2011, an increase of 13.8%, compared with $23.2 million in the same period of the prior fiscal year. Drivers of growth for the first half were similar to the second quarter. Net sales growth of $3.9 million in the industries the Company traditionally serves was complemented by $0.8 million in incremental revenue from United, but partially offset by a $1.5 million sales decline in the wind energy industry. Sales to the wind energy industry accounted for 4.8% and 11.9% of Product segment sales in the first six months of fiscal 2011 and same period the prior year, respectively. Product sales generated over the Company's website were $2.5 million in the first six months of fiscal 2011, up 33.4%, when compared with $1.9 million in the first six months of fiscal 2010.

Service segment net revenue was $15.1 million in the first six months of fiscal 2011, up 21.1%, compared with $12.5 million in the first six months of fiscal 2010. Services provided to the wind energy industry increased $0.5 million year-over-year and represented 7.3% of total service revenue for the first six months of fiscal 2011, compared with 4.8% of total service revenue in the same period of the prior fiscal year. The first six months included $0.9 million in incremental revenue as a result of the Company's acquisition of United.

Gross margin was 24.8% for the first six months of fiscal 2011 compared with 22.6% in the same period of the prior fiscal year. Product segment gross margin was 25.3% and 22.9% for the first six months of 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 23.9% in the first six months of fiscal 2011 compared with 22.0% in the same period of the prior fiscal year.

Operating expenses increased $1.1 million to $9.0 million in the first six months of fiscal 2011, when compared with the same period of the prior fiscal year. As a percentage of net revenue, operating expenses during this period were 21.6%, down from 22.0% in the prior year period. Approximately $0.5 million of the $1.1 million year-over-year increase is associated with incremental United operating and integration expenses. The other primary drivers of increased operating expenses included strategic investments in sales and marketing for both the Product and Service segments as well other employee-related expenses. Operating income in the first six months of fiscal 2011 was $1.4 million, or 3.3% of net revenue, compared with $0.2 million, or 0.6% of net revenue, in the first six months of fiscal 2010.

Net income was $0.8 million, or $0.11 per diluted share, for the first six months of fiscal 2011 compared with $0.1 million, or $0.01 per diluted share, for the same period of the prior fiscal year.

Balance Sheet and Cash Management

Net cash generated from operations was $0.8 million in the first six months of fiscal 2011 compared with $3.5 million generated from operations in the same period of the prior fiscal year. The change was primarily due to timing associated with payables and receivables and a $1.4 million increase in inventory in fiscal 2011 compared with constant inventory levels at the end of the first six months of fiscal 2010. In addition, the Company paid an additional $1.0 million for management bonus and profit sharing payments to employees during the first half of fiscal 2011 compared with the same period in the prior fiscal year.

Inventory at the end of the second quarter of fiscal 2011 was $7.3 million, up from the $5.9 million at the end of fiscal 2010. The increase was primarily due to the strategic decision made by the Company to maintain higher inventory levels of specific, higher-volume products, in support of greater sales growth and in response to increased lead times from manufacturers.

Capital expenditures in the first six months of fiscal 2011 were $0.7 million compared with $0.6 million in the prior year period and were primarily used for additional service capabilities and infrastructure improvements that included facility expansion and investment in information technology. Transcat expects capital spending for fiscal 2011 to be in the range of $1.5 million to $2.0 million.