Transcat, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 26, 2016 (52 weeks), compared with the fiscal year ended March 28, 2015. The filing also reports fourth-quarter results. Amounts below are in U.S. dollars.
Business context
Transcat provides accredited calibration and laboratory instrument services and distributes professional test, measurement and control instruments. Its two segments are Service and Distribution. The company focuses on regulated industries, particularly life sciences, and seeks growth through organic expansion, cross-selling and acquisitions.
Financial results and key metrics
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $122.2 million | $123.6 million | Down 1.2% |
| Service revenue | $59.2 million | $51.8 million | Up 14.3% |
| Distribution sales | $63.0 million | $71.8 million | Down 12.3% |
| Gross profit / margin | $29.1 million / 23.8% | $29.1 million / 23.5% | Margin up 0.3 percentage points |
| Operating income / margin | $6.3 million / 5.2% | $6.8 million / 5.5% | Income down 6.9% |
| Net income | $4.1 million | $4.0 million | Up 2.4% |
| Diluted EPS | $0.58 | $0.57 | Up $0.01 |
| Adjusted EBITDA (non-GAAP) | $10.6 million | $10.3 million | Up 3.0% |
| Cash from operations | $11.0 million | $4.4 million | Up $6.5 million |
| Capital expenditures | $4.1 million | $3.5 million | Up $0.6 million |
Service gross margin declined to 26.3% from 27.2%; Distribution gross margin improved to 21.5% from 20.9%. At year-end, cash was $0.6 million, current assets were $26.2 million and current liabilities were $15.8 million. Long-term debt was $19.1 million, up from $12.2 million. Total assets were $76.7 million and shareholders’ equity was $38.9 million.
Fourth-quarter revenue was $32.9 million versus $32.3 million a year earlier. Fourth-quarter net income was $1.6 million versus $1.9 million; diluted EPS was $0.22 versus $0.27.
Material changes and notable items
- Service growth reflected acquisitions and organic gains; Service represented 48.5% of annual revenue, up from 41.9%.
- Distribution weakness was attributed to reduced oil-and-gas demand, lower industrial output, a strong U.S. dollar and increased online competition.
- The company completed five acquisitions during FY 2016 and spent $13.9 million on acquisitions. Acquisition-related goodwill increased by $8.4 million. No goodwill or intangible-asset impairment was identified.
- Administrative expenses increased 9.4%, partly due to acquisition costs and performance-based compensation. The income-tax provision declined as the effective tax rate fell to 31.3% from 37.3%, mainly reflecting research and development credits, including credits for prior periods.
- Operating cash flow improved substantially, driven primarily by working-capital changes. Investing cash outflow was $18.0 million, including acquisitions and capital spending.
Outlook, liquidity and risks
Management expected double-digit Service revenue performance and strong organic growth in FY 2017, with margin expansion as acquisitions are integrated. For Distribution, the stated priority was stabilization through expanded product offerings, digital investment, equipment rentals and used-equipment sales. Management targeted revenue of $175 million to $200 million within five years, with double-digit Adjusted EBITDA margins at that scale; this is forward-looking and not a guarantee.
After year-end, the credit agreement was amended to add a $10.0 million term loan, increase total borrowing capacity to $40.0 million, and raise the maximum leverage ratio from 2.75 to 3.0. The company also borrowed $6.6 million under its revolver to fund the April 2016 Excalibur acquisition. Management said cash and available credit were adequate for foreseeable needs. FY 2017 capital expenditures were estimated at $5.0 million to $5.5 million.
Key risks include reliance on Fluke for a significant share of Distribution purchases, competition and further Distribution declines, oil-and-gas and broader economic weakness, acquisition integration and goodwill risk, debt and covenant compliance, interest-rate exposure, foreign exchange, cybersecurity and information-system disruption, and the need to retain skilled personnel. The company reported compliance with loan covenants during FY 2016. It had no interest-rate hedge at year-end; a 1% rate change was estimated to affect annual interest expense by about $0.2 million. Legal proceedings: none reported. The independent auditor gave an unqualified opinion on the financial statements; management concluded internal control over financial reporting was effective, but the auditor did not attest to it.
Important facts for investors to verify
- Whether Service organic growth and acquired-business integration deliver the forecast growth and margin expansion.
- Whether Distribution sales stabilize despite market weakness, online competition and dependence on key suppliers.
- Current borrowings, covenant headroom, repayment requirements and interest costs following the post-year-end credit amendments and Excalibur acquisition.
- Acquisition purchase-price allocations, integration results, contingent consideration and any future impairment indicators.
- The assumptions behind management’s five-year revenue and Adjusted EBITDA targets, including the non-GAAP measure’s reconciliation and comparability.