Prepared remarks
Greetings, and welcome to Transcat, Inc. Fourth Quarter Fiscal Year 2024 financial results. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom Barbato. Thank you. You may begin.
Thank you, operator, and good morning, everyone. We appreciate your time and your interest in Transcat. With me here on the call today is our President and CEO, Lee Rudow; and our Chief Operating Officer, Mike West. We will begin the call with some prepared remarks, and then we'll open up the call for questions. Our earnings release crossed the wire after markets closed yesterday, both the earnings release and the slides that we will reference during our prepared remarks can be found on our website, transcat.com in the Investor Relations section. If you would, please refer to Slide number 2. As you are aware, we make forward-looking statements during the formal presentation and Q&A portion of this teleconference. These statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today.
These factors are outlined in the news release as well as in the documents filed by the company with the SEC. You can find those on our website where we regularly post information about the company as well as on the SEC's website at sec.gov. We undertake no obligation to publicly update or correct any of the forward-looking statements contained in this call, whether as a result of new information, future events or otherwise, except as required by law. Please review our forward-looking statements in conjunction with these precautionary factors. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to compared GAAP measures in the tables accompanying the earnings release. With that, I'll turn the call over to Lee.
Thank you, Tom. Good morning, everyone. We appreciate you joining us on the call today. Fiscal 2024 was another strong year for Transcat. Our excellent operating results included double-digit organic service growth, significant and continued gross margin expansion and dynamic growth in EBITDA and operating cash flow. We fortified our strong position in core markets by enhancing our differentiated value proposition and expanded our addressable markets. It was a great year, and we're very proud of the team, their continued hard work and their accomplishments. In fiscal 2024, we generated double-digit organic service growth of 11% and total service growth of 17%. Consolidated revenue was up 13% to $259 million. The demand for our products and services remains strong. Consolidated gross margins expanded 270 basis points to 32.3%, driven by organic service revenue, inherent leverage in our service operating model, improved productivity in our labs and a higher rental mix in our Distribution segment.
Adjusted EBITDA, a key metric for us given our acquisition strategy grew 27% from prior year to $38.6 million. Accretive acquisitions played an important role in fiscal 2024 as we acquired 3 companies: TIC-MS, SteriQual and Axiom Test Equipment; the acquisitions expanded our addressable markets, widened the breadth of our service offering and allowed us to leverage our existing infrastructure. As always, the key differentiator of Transcat's acquisition strategy is the effectiveness of our integration process that enables us to quickly achieve growth synergies and capitalize on compelling cross-selling organic growth opportunities. In fiscal 2024, service gross margins continued to expand. Margins expanded 160 basis points to 33.8%. Service margins benefited from our differentiated suite of services which continues to resonate throughout our highly regulated and expanded addressable markets.
Transcat customers continue to recognize and value Transcat's role servicing markets where the cost of failure is high and risk mitigation is a top priority. I'll touch upon the fourth quarter results for our Service segment. In the fourth quarter of fiscal 2024, our Service segment recorded its 60th straight quarter of year-over-year growth. We generated 18% total service growth and 13% organic service growth driven by recurring revenue streams and high year-over-year retention. Increases in productivity, driven primarily by automation and process improvement, drove year-over-year increases in the fourth quarter Service gross margin by 170 basis points to 35.7%. Turning to Distribution for the full fiscal 2024 year. Revenue grew 5% and benefited from the high-performing Axiom acquisition. Gross margins expanded 420 basis points from the prior year. In the fourth quarter, distribution revenue grew 8% and gross margins expanded 510 basis points, again, driven by the increased mix of the rental business. With that, I'll turn things over to Tom Barbato for a more detailed look at the fiscal 2024 financials.
Thanks, Lee. I'll start on Slide 4 of the earnings deck posted on our website which provides detail regarding our revenue on a consolidated basis and by segment for the fourth quarter and full year. Fourth quarter consolidated revenue of $70.9 million was up 14% versus the prior year and was driven by Service segment strength and solid revenue performance in our Distribution business. Looking at it by segment, Service revenue growth remained very strong at 18%, with 13% of the growth coming organically and the other 5% from acquisition. As Lee mentioned, demand for our core calibration business remains strong. Turning to Distribution. Revenue of $24.2 million was up 8% versus the prior year. We continue to see growth in the higher-margin rental business, which also benefited from the Axiom Test Equipment acquisition. Finally, on a full-year basis, total consolidated revenue was $259.5 million, an increase of 13% compared to the prior fiscal year.
Our service business saw very strong demand throughout the year, resulting in year-over-year growth of 17%. Distribution segment revenue grew 5%, driven by strong rental performance. Turning to Slide 5. Our consolidated gross profit for the fourth quarter of $24 million was up 26% from the prior year, and our gross margin expanded 300 basis points. Service gross margin expanded 170 basis points to 35.7%. The Service margin increase further demonstrates our ability to leverage high levels of technician productivity and our differentiated value proposition. Distribution segment gross margin of 30.3% was up 510 basis points. For the full year, our consolidated gross profit increased 23% to $83.8 million and our gross margin improved 270 basis points to 32.3%. Our Service gross margin was 33.8%, which represented an increase of 160 basis points compared to the prior year. Distribution segment gross margin of 29.5% was up 420 basis points as the segment benefited from significant growth in the higher-margin rental business.
Turning to Slide 6. Q4 net income of $6.9 million increased 88% from the prior year, and our diluted earnings per share increased to $0.77 from $0.48. Net income includes a noncash adjustment of $2.4 million for the amended NEXA Earn-Out agreement. We report adjusted diluted earnings per share as well to normalize for the impact of upfront and ongoing acquisition-related costs. Q4 adjusted diluted earnings per share was $0.66, up 10% from the same quarter of the prior year. Full year net income increased 28% from prior year or $0.23 per share and benefited from $800,000 of interest income driven by the proceeds from our successful secondary offering earlier in Q2 of fiscal '24. Flipping to Slide 7, where we show our adjusted EBITDA and adjusted EBITDA margin. We use adjusted EBITDA, which is non-GAAP to gauge the performance of our business because we believe it is the best measure of our operating performance and ability to generate cash.
As we continue to execute on our acquisition strategy, this metric becomes even more important to highlight as it does adjust for one-time deal-related transaction costs as well as the increased level of noncash expenses that will hit our income statement from acquisition purchase accounting. With that in mind, fourth quarter consolidated adjusted EBITDA of $11.7 million was up 30% from the same quarter in the prior year, and the adjusted EBITDA margin expanded 200 basis points, both segments had adjusted EBITDA growth and EBITDA margin expansion compared to last year. Full year EBITDA was $38.6 million, which is up 27% compared to the prior year, driven by the significant year-over-year profit improvement in both segments as always, a reconciliation of adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation. Moving to Slide 8. Operating free cash flow of $19.3 million significantly improved versus the prior year.
Full year capital expenditures were $2 million higher than prior year, primarily to support the growth in rentals. Capital expenditures in total continued to be centered around Service segment capabilities, rental pool assets, technology and future growth projects. The spend was in line with expectations. Slide 9 highlights our strong balance sheet. At year-end, we had total net cash of $31 million with a leverage ratio of 0.1x. We had $80 million available from our credit facility at quarter end. And as previously announced, we acquired Becnel Rental Tools for $50 million just after the end of fiscal year, paid in combination of $32.5 million in company stock and $17.5 million in cash. Lastly, we expect to file our Form 10-K on May 28. With that, I'll turn it back to you, Lee.
Thank you, Tom. As I mentioned at the beginning of the call, fiscal 2024 was a remarkable year for Transcat. Our strategy focuses on creating significant and consistent differentiation in the highly regulated markets we operate in. We aim to continuously enhance the value we deliver to our customers, particularly in the life sciences sector. We will continue to utilize our competitive advantages, such as strong leadership and execution, to strengthen and expand Transcat's position in these markets. We anticipate ongoing benefits from recurring revenue streams and expect organic service growth in the high single-digit to low double-digit percentages. We also foresee continued growth in our high-margin rental business. Our commitment to continuous process improvement and automation should further promote sustainable margin expansion in our service operations. Regarding acquisitions, we believe our solid and varied acquisition pipeline will be crucial to our future growth strategy.
We plan to pursue and integrate strategic acquisitions that will enhance the value we offer our customers through expanded capabilities. We expect these acquisitions to be accretive and generate effective synergies. Additionally, we intend to broaden our accessible markets in areas that we consider strategic and align well with our core strengths. The recent acquisition of Becnel exemplifies this effort. This acquisition diversifies our service portfolio within regulated sectors and enhances Transcat's resilience. Becnel essentially serves as a rental platform with an expanding service component and operates in a regulated environmental space with growth opportunities alongside large instrumentation users. Becnel is a highly profitable company, managed by a talented team of leaders with a proven track record, which excites us. We are also thrilled about promoting John Cummins, the former owner of NEXA Enterprise Asset Management, to Vice President of Global Strategic Partnerships.
In his new role, John will implement our integrated Transcat's TS3 initiative, which stands for Transcat's Single Source Solutions. This initiative represents an important advancement for growth and differentiation, focused on anticipating and adapting to market needs and opportunities. TS3 integrates NEXA's asset management and life cycle services with Transcat's core calibration services, allowing us to offer a comprehensive suite of services to high-level decision-makers for both new capital projects and ongoing operations. Transcat will provide commissioning, decommissioning, validation, CMMS, calibration, reliability, and various other essential services to the life science manufacturing market, among others. This unique approach leverages Transcat's strong brand and market presence. We plan to launch the Transcat Single Source Solution program midway through the fiscal year and are eager to begin. Furthermore, we aim to generate sustained long-term value for our shareholders. Operator, please open the line for questions.
Questions and answers
Our first question comes from Greg Palm with Craig-Hallum.
This is Danny Eggerichs on for Greg today. Congrats on the good results again. Wanted to kind of start on the Service side. Obviously, you saw good growth again and a seemingly pretty good outlook for fiscal year '25 as well. I guess, as we're talking about the margin there, I think a quarterly record at 35.7%, and you kind of talked about some of the internal initiatives going on in the process improvements and the automation. Just kind of wondering where we're at in terms of those kind of internal initiatives and how much further we can kind of pull out of that margin moving forward?
Things are continuing to progress well. We are pleased with our efforts in automation, which we consider significant. If we were to compare our progress to a baseball game, we are likely in the fourth or fifth inning of that initiative. In terms of process improvement, we are perhaps closer to the third or fourth inning. This suggests that we still have room to grow in both areas. Additionally, we are continually developing our operational leaders at various management levels in our labs, which will eventually contribute to improving our margins. Currently, we have established ourselves in the mid-30% range, and I believe we will exceed that over time. As our systems improve and the other programs I'm referring to mature, we expect to reach the mid- to upper 30s and beyond, although it may be too early to discuss that in detail. Overall, we have the potential to keep improving, and that is the key point I want to convey.
Got it. That's helpful. And I guess maybe just sticking with margins, maybe on the Distribution side. So over 30% over the last couple of quarters here, and that's obviously before Becnel contribution. So I think maybe previously, it was kind of the 28% to 30% range. But now as we kind of layer in that higher-margin business as well. How should we think about the progression of the Distribution margins going forward?
Yes. Yes. Danny, it's Tom. Obviously, we're well entrenched in the low 30s, and we would expect with the addition of Becnel for that total margin to get into the kind of mid-30s. And we could provide some additional guidance as we go forward. We're still digesting Becnel, but we've got a pretty good idea of what impact it's going to have, obviously. But you could think of it in kind of that mid-30s range.
Okay. Great. And just following up on that Becnel. That's an entirely kind of new market that you're entering in on the rental side over there in kind of the oil and gas, is that correct?
We view the business differently. We believe it is not primarily connected to the oil and gas industry, but rather to the regulatory aspects related to the work that needs to be done. As Lee pointed out, there are environmental regulations involving the decommissioning of oil wells, and Becnel is involved in providing and renting the equipment necessary for those crucial tasks. Therefore, we see our focus as being more on the regulated end markets we operate in, which makes it more of a continuation than a shift.
Our next question is from Scott Buck with H.C. Wainwright.
Can you tell us what percentage of Distribution segment revenue is coming from rentals post-Becnel acquisition?
Yes. Post-acquisition, it's about 35% of the overall Distribution business.
Okay, that's helpful. I want to ask about acquisitions. Given the strength of your equity, does that change how you view potential acquisitions in terms of size or financing deals?
This is Lee. I would say yes and no. We have successfully completed the offering, positioning ourselves to pursue larger opportunities that align strategically with our goals. As we move forward, we will continue to assess our stock strength and cash position. Each potential deal will offer unique opportunities, and we will evaluate them on a case-by-case basis. I am pleased with our current position; our capital structure enables us to carry out our strategy effectively. How we approach each situation will depend on its individual circumstances. We will always consider equity as a possible financing option. I hope that answers your question, Scott.
Yes. No, that makes sense. I appreciate that. And then last one, Tom, just on OpEx for '25. How should we be thinking about general growth there versus the strength that you've seen on the top line?
Yes, Scott. I think if you look at kind of Q4 numbers as kind of a jumping off point, I think you could continue to expect some level of reasonable growth going forward from there. In order to be able to continue to grow at the rate we are organically, we need to continue to invest in the appropriate level of selling resources to support that future growth. So I would use Q4 as a jumping off point, some level of kind of modest growth from there and you would expect that growth to continue through the fiscal year.
Our next question is from Ted Jackson with Northland Securities.
I’m going to reiterate some points since most of my questions have already been addressed. Congratulations on the quarter. Can we revisit the rental segment? One of the remarks in the press release that I think is worth discussing further is your efforts to integrate rental into different parts of your customer base. Could you elaborate on that and share your thoughts on how this initiative will develop, what verticals you’re targeting, and the level of penetration you anticipate? I have a follow-up as well.
Yes, Ted, let me make sure I understand the question. So are you saying what sort of additional cross-selling opportunities are for the rental business into our service customers? Is that essentially...
Yes. One example I can share is from the Becnel deal, which we found appealing. This company specializes in renting equipment for the regulated decommissioning of oil wells. Upon examining their customer base, we noticed well-known companies like Halliburton and Schlumberger, as well as Baker Hughes. These firms are historically significant users of instrumentation, including process equipment, calibrators, and pressure gauges. Therefore, the opportunity extends beyond just the service and rental aspects; it includes instrumentation as well. We believe that wherever there is instrumentation, there are chances for growth in calibration too. Internally, we often say that all roads lead to calibration. When evaluating an acquisition, we like to confirm this aspect if possible. In the case of Becnel, we were able to achieve this. Ultimately, execution and effective cross-selling will be crucial, but we are confident in our ability to do this, and I expect positive outcomes for the company.
I would just say that we consistently focus on renting to our existing customer base. This approach helps address customer issues, fosters goodwill with them, and clearly presents an opportunity for us to achieve attractive margins. It's a regular part of our business operations and sales strategy.
Is there any case to be made that buying equipment in your Distribution business, that's CapEx and renting is more of an OpEx turning it into a variable that with interest rates higher and people managing and looking at the capital expenditures and a little more detail that there's an underlying lift maybe for some of your rental business because of the change in the interest rate environment and such.
Yes, there certainly could be. As we evaluate our company, we've consistently emphasized our resilience in the face of recessions, which is integral to our value proposition. Our range of services, including rentals, incorporates both operational and capital expenditures. Generally, the life sciences field shows a tendency towards stability. Examining the NEXA business reveals their focus on cost control and optimization, and together, these services promote a defense against economic fluctuations. We appreciate this aspect of the business and will continue to enhance it as part of our value proposition.
Okay. And then just shifting over to Becnel for those of us that actually haven't really incorporated that into their forecast at this point. It's about a $20 million revenue business. I assume we would be kind of sort of layering that into this fiscal year with maybe an adjustment for the first quarter because it's quite a full quarter. Is there any seasonality to that business that should be taken into account? How do we think about that in terms of like how their top line flows through over the course of the 12-month cycle?
Yes, so Ted, I'll take that one. Consider it a revenue business in the high teens. You're right to point out that there should be an adjustment for the first quarter of this year, as we acquired them in mid-April. There is some seasonality to that business, which actually complements the seasonality of Transcat's business. Their lowest revenue occurs in calendar Q1, while Transcat typically sees its highest revenue in that quarter. So if there's going to be seasonality, that aligns well. However, Q1 is definitely the weakest quarter for them. This is true for all businesses operating in the Gulf, due to winter weather concerns and other factors. If you need more details, we can discuss this further offline.
Okay. It sounds like you've entered an interesting business. Are there opportunities for you in terms of mergers and acquisitions, like the pipeline? Can this area grow through further M&A? I'm sure you'll also be focusing on organic growth, but it does seem to place you in a completely new market, which is intriguing.
Yes, this is Lee. Whenever we make an acquisition and mention that it expands our addressable markets, we consider the potential for growth beyond the acquired company. While that is yet to be determined, we need to execute well. Your point is valid; if we can operate effectively and establish a solid track record for organic growth, we would also explore further acquisitions. This approach is typical for us. We will continue to evaluate this market, both organically and through acquisitions, and strive to make the best strategic decisions moving forward.
Our next question comes from Martin Yang with Oppenheimer.
First question on CapEx for fiscal '25. Is there anything incremental on a year-over-year basis, especially relating to Becnel?
Yes. Martin, great question. Obviously, we saw an increase in CapEx this past year with the Axiom acquisition. I think we should expect to see a similar increase in '25 with the Becnel acquisition, right? I mean the key to growing a rental business is you've got to have the assets in place to be able to rent. The returns on those assets are very good. And you see that in the margin profile of that business. So, yes, I would expect a similar increase to support rentals. And then the majority of the remainder of the business remains about the same.
Should we think about the similar increase in terms of dollar amount or percentage growth?
Dollar amount.
Can you provide more details on the new brand positioning with a more integrated service? Are you targeting customers that are harder to win without this offering?
Yes, I believe that's an accurate description. When we consider our value proposition developed over the years, both through internal growth and acquisitions, we see its strength. We are now in a unique position because of these efforts to offer something very comprehensive. If we engage with the right decision-makers at the right time, which is the essence of TS3, we have a persuasive strategy to serve highly regulated clients. Historically, we've seen steady growth across various opportunity levels. Our business model varies from a few hundred thousand dollars to around a million dollars. However, with our current value proposition, if we are positioned correctly, we see the potential for significant new opportunities. Achieving this requires a different strategy and game plan, which is precisely what TS3 represents. It offers a single-source solution that can save customers both time and money while ensuring their projects are executed properly, along with features like risk mitigation. So, I believe you've described it accurately.
I have a quick follow-up regarding your characterization of large. Are there possibilities for two main areas? One being a greater service offering to customers and the other potentially relating to the duration of the contracts or relationships with customers. Do either of these or any other factors give you the confidence that you can increase the potential size of your business engagements?
I think the potential is there for both to grow the length of these contracts and to grow the size of these contracts. Over time, the goal would be both based upon our ability to do something unique and to do it well and to add value. When you do those things, when you have that combination going for you at a fair price, you're going to have a really good relationship with your customer. And I think that's going to ultimately make its way to the length of the contract and the size of the contract. So you've got to execute well, Martin, but assuming you do that, I would agree that both are potentially our goals.
We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Lee Rudow for closing comments.
Okay. Well, thank you all for joining us on the call today. We certainly appreciate it. We'll be presenting at the Craig-Hallum Investment Conference in Minneapolis on May 29, if you're welcome to join us there. Otherwise, feel free to check in with us any time. We look forward to talking with everyone again after our first quarter. Take care.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.