Transcat, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended March 27, 2021 (52 weeks), compared with fiscal year ended March 28, 2020. The filing also reports fourth-quarter results; fiscal year 2021 Q4 ended March 27, 2021. Transcat provides accredited calibration and laboratory services and distributes and rents test and measurement instruments.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $173.3 million | $173.1 million |
| Gross profit / margin | $46.1 million / 26.6% | $42.5 million / 24.5% |
| Operating income / margin | $11.1 million / 6.4% | $10.9 million / 6.3% |
| Net income / diluted EPS | $7.8 million / $1.03 | $8.1 million / $1.08 |
| Adjusted EBITDA (non-GAAP) | $20.6 million / 11.9% of revenue | $18.4 million / 10.6% of revenue |
| Cash from operations | $23.6 million | $11.6 million |
| Capital expenditures | $6.6 million | $6.6 million |
Segments: Service revenue increased 8.9% to $101.3 million; organic growth excluding $5.2 million of acquired revenue was 3.3%. Distribution sales declined 10.0% to $72.1 million. Service gross margin rose 500 basis points to 30.3%; Distribution gross margin fell 230 basis points to 21.4%. Service operating income increased to $10.4 million from $5.7 million, while Distribution operating income declined to $0.6 million from $5.2 million.
Fourth quarter: Revenue was $48.8 million versus $45.8 million in FY2020 Q4; gross profit was $14.0 million versus $12.1 million; net income was $3.2 million versus $2.5 million; diluted EPS was $0.42 versus $0.33.
Liquidity and debt: At year-end, cash was $0.6 million, current assets were $48.9 million and current liabilities were $25.1 million. Debt totaled approximately $19.6 million: $10.6 million on the term loan and $8.9 million on the revolving facility. The revolving facility commitment was increased to $40 million and extended to October 2022. The company reported compliance with covenants; its defined leverage ratio was 0.94, down from 1.53. Operating cash flow benefited from working-capital movements, including a $2.7 million inventory reduction and increased accrued liabilities. The company deferred $2.0 million of employer payroll taxes under the CARES Act.
Material changes and notable items
- Total revenue was essentially flat as Service growth offset weaker Distribution sales. COVID-19-related declines in oil and gas and other industrial demand affected Distribution; vendor rebate and cooperative advertising reductions also pressured its margin.
- Service growth and margin improvement reflected productivity, operating leverage, pricing, and the BioTek and pipettes.com acquisitions. Service recorded its 48th consecutive quarter of year-over-year growth.
- Operating expenses increased 10.8% to $35.0 million, including higher general and administrative costs tied to acquisitions, technology and infrastructure. The effective tax rate rose to 21.9% from 17.1%, chiefly due to smaller discrete share-based compensation tax benefits.
- Distribution backlog increased to $6.3 million from $4.3 million, with $4.9 million in backorders, attributed to pandemic-related supply disruption and longer lead times.
- FY2021 investing cash outflow included $3.6 million for acquisitions. BioTek was acquired for approximately $3.5 million. After year-end, Transcat acquired Upstate Metrology for approximately $0.9 million.
- No goodwill or intangible asset impairment was indicated. The auditor issued unqualified opinions on the financial statements and internal control; management reported effective internal controls. The filing reports no pending or threatened legal proceeding expected to have a material adverse effect.
Outlook, risks and contingencies
For FY2022 Q1, management expected Service organic growth similar to FY2021 Q4, with improving Service gross margins but less improvement than in FY2021. Distribution was expected to grow at a double-digit rate against a weak prior-year comparison. Operating expenses were expected to be similar to FY2021 Q4. Management projected an FY2022 effective tax rate of 20%–22% and capital expenditures of approximately $7.5–$8.5 million. No full-year revenue or earnings guidance is provided in the filing.
Management cited continuing uncertainty around COVID-19, including supply-chain and workforce disruption. Other key risks include intense competition, vendor product availability and rebate changes, exposure to industrial and oil-and-gas demand, recruiting and retaining skilled technicians, cybersecurity and IT-system risks, acquisition integration and goodwill impairment, debt covenant compliance, and foreign-currency fluctuations. The company uses short-term currency forwards but had no interest-rate hedging arrangements at year-end. Management described Service margins as sustainable, but cautioned that FY2021 productivity comparisons and the anniversary of the pipettes.com acquisition would temper near-term margin improvement.
A $0.65 million restructuring expense is included in the FY2021 Adjusted EBITDA reconciliation; the filing text does not clearly describe its nature. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
Investor verification points
- Check whether Service organic growth, retention and margins continue after acquisition contributions and FY2021 productivity gains.
- Track Distribution demand, vendor rebates, supply lead times and conversion of the $6.3 million backlog into sales.
- Reconcile the revolving-facility commitment, drawn balance and available borrowing capacity: the filing describes a $40 million commitment and $8.9 million outstanding, while its availability wording is not fully clear.
- Assess cash conversion and working-capital sustainability, including receivable collections, deferred payroll taxes and planned capital spending.
- Review acquisition integration, purchase-price estimates and the unexplained restructuring expense; monitor covenant headroom and future debt needs.