Transcat, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2018 (53 weeks), compared with the 52-week fiscal year ended March 25, 2017. The filing was signed June 8, 2018. Transcat provides calibration and laboratory instrument services and distributes test, measurement and control equipment.
Financial results
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $155.1 million | $143.9 million | +7.8% |
| Gross profit / margin | $37.4 million / 24.1% | $35.0 million / 24.3% | Profit +7.1%; margin down 0.2 pts |
| Operating income | $9.0 million | $7.9 million | +13.8% |
| Net income | $5.9 million | $4.5 million | +31.0% |
| Diluted EPS | $0.81 | $0.64 | +$0.17 |
| Operating cash flow | $9.9 million | $7.5 million | +$2.3 million |
| Capital expenditures | $5.9 million | $5.3 million | +$0.6 million |
Segments: Service revenue was $77.4 million (+8.9%, all organic); Distribution sales were $77.7 million (+6.7%, all organic). Service gross margin declined to 25.7% from 26.8%, mainly due to technician productivity challenges earlier in the year and service mix. Distribution gross margin improved to 22.5% from 21.9%, reflecting stronger rental revenue and customer mix. Adjusted EBITDA, a non-GAAP measure, was $16.4 million, up 12.7% (10.6% of revenue).
Quarterly context: Fiscal Q4 revenue was $42.5 million versus $38.5 million; net income was $2.5 million versus $1.4 million; diluted EPS was $0.33 versus $0.20. The company estimates full-year revenue growth would have been approximately 6% excluding the extra fiscal week.
Cash, debt and liquidity
Cash was $0.6 million at year-end, down from $0.8 million. Total debt was $22.9 million, compared with $27.3 million a year earlier; the company reported a 1.40 leverage ratio and compliance with loan covenants. Its amended credit agreement includes a $30 million revolving facility, with $8.7 million outstanding, and a term loan with $14.1 million outstanding. The agreement matures in 2021; term-loan payments include a $4.3 million payment due in October 2022. The company reported $40.5 million of current assets and $21.2 million of current liabilities. Operating cash flow exceeded capital expenditures by approximately $4.0 million.
Changes, outlook and risks
- Revenue and operating income grew in both segments; Service recorded its 36th consecutive quarter of year-over-year growth. The fiscal year’s 53rd week contributed to reported growth.
- The effective tax rate fell to 25.5% from 36.9% as reported in MD&A, principally reflecting the Tax Act and deferred-tax revaluation. Management expects a 25%–27% rate in fiscal 2019.
- Management expects mid-to-high single-digit organic Service growth, continued market-share gains, and acquisition activity as a long-term growth driver. It targets $175–$200 million of revenue over the next two to three years.
- Fiscal 2019 capital expenditures are expected to be $7.0–$7.5 million, including investments in IT, Operational Excellence and growth capabilities. Management expects technology and process investments to improve productivity and margins over time.
- Key risks include reliance on Fluke for a significant share of Distribution inventory, competitive and economic pressures (including oil and gas exposure), debt and interest-rate risk, acquisition integration, cybersecurity and aging ERP systems, and foreign-exchange exposure. The company uses short-term currency forwards but had no interest-rate hedging arrangements at year-end.
- The filing reports no legal proceedings. Management and the auditor concluded internal control over financial reporting was effective as of March 31, 2018.
Investor verification points
- Assess whether Service growth and recovery in technician productivity support improved Service margins.
- Check whether fiscal 2019 capital spending and Operational Excellence investments translate into the stated efficiency and margin benefits.
- Review debt repayment requirements, covenant headroom, variable-rate exposure and the large 2022 term-loan payment.
- Monitor inventory concentration with Fluke, Distribution pricing and vendor rebates, and the sustainability of higher-margin rental and used-equipment growth.
- Confirm the final accounting impacts of the Tax Act and adoption of the new revenue-recognition standard; management expected the adoption adjustment to be immaterial.