Transcat, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended March 28, 2015 (52 weeks), compared with the year ended March 29, 2014. The filing also reports fourth-quarter results; FY2015 Q4 ended March 28, 2015.
Business context
Transcat provides accredited calibration, compliance and related services, and distributes professional-grade test, measurement and control instruments. Its two segments serve overlapping customer markets, particularly life science and other regulated industries. FY2015 revenue was 42% Service and 58% Distribution. Acquisitions of Ulrich Metrology and Apex Metrology Solutions expanded Service capabilities and geographic reach.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $123.6 million | $118.5 million |
| Gross profit / margin | $29.1 million / 23.5% | $29.8 million / 25.1% |
| Operating expenses | $22.3 million | $23.1 million |
| Operating income / margin | $6.8 million / 5.5% | $6.7 million / 5.7% |
| Net income | $4.0 million | $4.0 million |
| Diluted EPS | $0.57 | $0.54 |
| Cash from operating activities | $4.4 million | $7.6 million |
| Capital expenditures | $3.5 million | $2.0 million |
| Long-term debt at year-end | $12.2 million | $7.6 million |
FY2015 Q4: Revenue was $32.3 million, gross profit $8.5 million, net income $1.9 million, basic EPS $0.28 and diluted EPS $0.27. In the prior-year fourth quarter, revenue was $30.4 million, gross profit $8.6 million, net income $1.7 million, basic EPS $0.25 and diluted EPS $0.24.
Liquidity: Cash was $65,000 and current assets were $27.1 million, versus current liabilities of $11.9 million. The revolving facility had a $30.0 million maximum, with $12.2 million outstanding and $28.2 million reported available. It matures September 20, 2018. The company reported compliance with all loan covenants. Operating lease commitments totaled $6.4 million.
Changes versus the prior year
- Total revenue rose 4.3%. Service revenue increased 7.5% to $51.8 million, from acquisitions and organic growth; Distribution sales rose 2.1% to $71.8 million.
- Service gross margin improved to 27.2% from 26.6%, and Service operating income increased to $3.7 million from $2.4 million.
- Distribution gross margin fell to 20.9% from 24.1%; Distribution operating income declined to $3.1 million from $4.3 million. Management cited lower vendor rebates and increased customer discounts.
- Total gross margin decreased 160 basis points. Lower operating expenses helped lift operating income slightly, while interest and other expense increased to $345,000 from $259,000.
- Operating cash flow declined by $3.2 million, reflecting working-capital movements, including higher receivables and inventory and lower accrued compensation and tax liabilities. Investing outflow rose to $10.7 million, including $7.3 million for acquisitions.
Outlook, risks and unusual items
- Management expected mid-teens consolidated operating income growth in FY2016, while noting quarter-to-quarter fluctuations. It expected management and technology investments, including new C3 asset-management software and a redesigned e-commerce website, to support longer-term growth.
- FY2015 acquisitions were Ulrich (August 2014) and Apex (March 2015); combined purchase price was approximately $7.3 million. A subsequent event: Transcat acquired substantially all assets of Calibration Technologies, Inc. on June 22, 2015.
- Vendor rebates recorded against distribution costs were $0.3 million, down from $2.1 million; cooperative advertising income rose to $2.2 million from $1.9 million. These amounts affect reported Distribution margin.
- Canadian-dollar forward contracts generated a reported $0.9 million fair-value gain, recognized in other expense, with an offset from the underlying receivables. A 1% interest-rate move was estimated to change annual interest expense by about $0.1 million; no interest-rate hedge was in place at year-end.
- Key risks include reliance on Fluke for roughly one-third of product purchases, supplier availability and pricing, competition and e-commerce pressure, acquisition integration and goodwill/intangible valuation, debt and covenant exposure, economic sensitivity, foreign exchange, and cybersecurity or information-system disruption.
- No legal proceedings were reported. The IRS was examining the FY2013 federal return; no adjustments had been proposed. The auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal controls because Transcat qualified as a smaller reporting company.
Important facts for investors to verify
- Whether FY2016 operating income achieved management’s mid-teens growth outlook, and how much growth came from acquisitions versus organic performance.
- Whether Distribution margins and vendor rebates recovered, given the sharp year-over-year decline in rebates and increased discounting.
- Whether operating cash flow improved and receivables, inventory, and pending product shipments were effectively managed.
- Debt availability, covenant headroom, borrowing costs, and the impact of acquisition spending and integration on leverage and returns.
- Whether the acquired businesses and new technology investments produced expected growth without impairments or material integration costs.