Business context and reporting period
Transcat, Inc. provides accredited calibration and laboratory instrument services and distributes professional test, measurement and control equipment. Its two segments are Service and Distribution, serving regulated life sciences, manufacturing, energy, aerospace and other industries. This 10-K covers the fiscal year ended March 25, 2017 (52 weeks), with comparison to the fiscal year ended March 26, 2016. The filing’s fiscal fourth quarter is included below; it is not a calendar-quarter report.
Financial performance and liquidity
Amounts are in U.S. dollars. Annual financial results:
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $143.9 million | $122.2 million |
| Gross profit / margin | $35.0 million / 24.3% | $29.1 million / 23.8% |
| Operating income / margin | $7.9 million / 5.5% | $6.3 million / 5.2% |
| Net income / margin | $4.5 million / 3.1% | $4.1 million / 3.4% |
| Diluted EPS | $0.64 | $0.58 |
| Cash from operations | $7.5 million | $11.0 million |
| Capital expenditures | $5.3 million | $4.1 million |
Service revenue rose 20.1% to $71.1 million; Distribution sales rose 15.6% to $72.8 million. Segment gross margins improved to 26.8% for Service and 21.9% for Distribution. Adjusted EBITDA, a non-GAAP measure, was $14.5 million (10.1% of revenue), versus $10.6 million (8.6%).
In fiscal Q4 2017, revenue was $38.5 million, gross profit $9.8 million, net income $1.4 million and diluted EPS $0.20. In fiscal Q4 2016, the respective figures were $32.9 million, $8.5 million, $1.6 million and $0.22.
At year-end, cash was $0.8 million, current assets $35.6 million and current liabilities $19.8 million. Total debt was $27.3 million, including $18.6 million drawn on the revolving facility and $8.7 million on the term loan; shareholders’ equity was $43.4 million. The $30 million revolving facility had $11.4 million unused capacity. The facility matures September 20, 2018. The company reported compliance with its loan covenants.
Changes versus the prior year
- Total revenue increased 17.8%, supported by acquisitions and organic Service growth, plus a Distribution recovery from the prior-year decline.
- Net income increased 9.7%, but net margin declined from 3.4% to 3.1% as higher interest and tax expense more than offset improved operating performance. The effective tax rate rose to 36.9% from 31.3%; management attributed the prior-year rate partly to research-credit benefits.
- Operating cash flow fell to $7.5 million, primarily reflecting working-capital needs, including higher receivables and inventory. Year-end receivables were $22.0 million, with days sales outstanding of 46 versus 42; inventory was $10.3 million versus $6.5 million.
- Six acquisitions were completed across FY 2016 and FY 2017; the FY 2017 Excalibur acquisition added calibration, used-equipment sales and equipment rentals. FY 2017 acquisition consideration was approximately $7.6 million.
Outlook, risks and unusual items
Management expected double-digit Service revenue growth in FY 2018 from organic and acquired growth, and anticipated pursuing acquisition and operating synergies. It set a longer-term revenue goal of $175 million to $200 million within three to four years. FY 2018 expected capital expenditures were $6.0 million to $6.5 million, with investment focused on IT and service capabilities; the expected tax rate was 34% to 36%. These are forward-looking expectations, not guarantees.
Key risks include dependence on Fluke for approximately one-quarter of product purchases; debt, variable interest rates and covenant requirements; acquisition integration and goodwill/intangible valuation; competitive and cyclical Distribution demand, including oil-and-gas exposure; customer concentration in regulated industries; foreign-exchange exposure; and cybersecurity, information-system and ERP implementation risks. The company reported no goodwill or intangible impairment, no legal proceedings, and effective management disclosure controls and internal control over financial reporting. The independent auditor did not attest to internal controls, as the company qualified as a smaller reporting company.
Important facts for investors to verify
- Whether organic Service growth and anticipated double-digit FY 2018 growth are being achieved, separately from acquisition contributions.
- Whether Distribution’s recovery and improved margins are sustainable amid price competition, supplier concentration and cyclical demand.
- Working-capital conversion and operating cash flow, especially receivables, inventory and the increase in days sales outstanding.
- Debt capacity, refinancing plans ahead of the September 2018 facility maturity, interest-rate exposure and covenant headroom.
- Integration progress and returns on acquisitions, including Excalibur, and the assumptions supporting recorded goodwill and intangible assets.
- Execution and cost of Operational Excellence and planned IT investment, alongside the stated revenue goal and capital-spending outlook.