TRANSCAT INC (TRNS) FY 2025 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this annual report. In addition to historical information, the following discussion and analysis includes forward looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” and elsewhere in this annual report. See the discussion under “Cautionary Note Regarding Forward Looking Statements” beginning on page 1 of this annual report.

OVERVIEW

Operational Overview. We are a leading provider of accredited calibration services, cost control and optimization services, and distribution and rental of value-added professional grade handheld test, measurement, and control instrumentation.

We operate our business through two reportable business segments, Service and Distribution, which offer a comprehensive range of services and products to the same customer base.

Our strength in our Service segment is based upon our wide range of disciplines, our investment in quality systems and our ability to provide accredited calibrations to customers in highly regulated targeted market segments. Our services range from the calibration and repair of a single unit to managing a customer’s entire calibration program. We believe our Service segment offers an opportunity for long-term growth and the potential for continuing revenue from established customers with regular calibration cycles and recurring laboratory instrument service requirements.

Our Service segment has shown consistent revenue growth over the past several years, ending fiscal year 2025 with its 64th consecutive quarter of year-over-year growth. This segment has benefited from both organic growth as well as acquisitions over those 64 quarters. The business acquisitions that we made have been focused on expanding our service capabilities, increasing our geographic reach and leveraging our Calibration Service Centers and other infrastructure to create operational synergies.

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Our Service segment revenue growth was 7.0% for fiscal year 2025 from fiscal year 2024.  This increase was primarily due to the acquisitions of Martin and Becnel. Acquired revenue, which represents revenue from acquisitions completed after the end of the prior year, was $10.4 million.  Service Segment revenue was also impacted by the number of weeks.  Fiscal year 2025 had 52 weeks, while fiscal year 2024 had 53 weeks.  When adjusted for the 52/53 week impact, organic service revenue increased by 2.7%.  The Service segment gross margin decreased by 40 basis points. Service segment gross margin decreases were primarily due to small organic revenue increases offset by decreased margins in the Transcat Solutions business.

In our Distribution segment, we sell and offer for rent, professional grade handheld test and measurement instruments. Because we specialize in professional grade handheld test and measurement instruments, as opposed to a wide array of industrial products, our sales and customer service personnel can provide value-added technical assistance to our customers to aid them in determining what product best meets their particular application requirements. We have expertise in the procurement and sale of used equipment, furthering our ability to add value for our customers. We also have a higher-end electronic test and measurement equipment rental business that augments our organically grown test and measurement equipment rental business. Through our website and sales teams, customers can place orders for test and measurement instruments and can elect to have their purchased instruments calibrated and certified by our Calibration Service Centers before shipment as well as on regular post-purchase intervals. Pre-shipment calibration and certification allows our customers to place newly purchased instruments into service immediately upon receipt.

Sales in our Distribution segment are generally not consumable items but are instruments purchased as replacements, upgrades or for expansion of manufacturing or research and development facilities. As such, this segment can be heavily impacted by changes in the economic environment. As customers increase or decrease capital and discretionary spending, our Distribution sales will typically be directly impacted.

In fiscal year 2025, Distribution segment sales increased by 7.8%. This increase in sales primarily due to sales from the acquisition of Becnel and increases in traditional rental products.

The Distribution segment gross margin in fiscal year 2025 increased by 20 basis points. The increase in segment gross margin was primarily due to increased margins from rental revenue, which now includes Becnel, and a favorable mix of higher margin products sold.

Initiatives implemented within this segment include adding new in-demand vendors and product lines, expanding the number of SKUs that we offer with and without pre-shipment calibration and offering equipment rental and used equipment options. Management believes this diversification strategy will mitigate the impact that any particular industry or sector will have on the overall performance of this segment as well as help to further differentiate us from our competitors going forward.

Financial Overview. In evaluating our results for fiscal year 2025, investors should consider that we operate on a 52/53-week fiscal year, ending the last Saturday in March. In a 52-week fiscal year, each of the four quarters is a 13-week period. In a 53-week fiscal year, the last quarter is a 14-week period. Fiscal year 2025 consisted of 52 weeks and fiscal year 2024 consisted of 53 weeks.

A discussion regarding our financial condition and results of operations for the fiscal year ended March 30, 2024 and year-to-year comparisons between fiscal year 2024 and fiscal year ended March 25, 2023 ("fiscal year 2023"), which are not included in this Form 10-K, can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2024 and are incorporated by reference herein.

Total revenue for fiscal year 2025 was $278.4 million. This represented an increase of $18.9 million or 7.3% versus total revenue of $259.5 million for fiscal year 2024.  This increase was primarily due to recently completed acquisitions, and increased rental sales, which includes incremental revenue from an acquisition completed in fiscal year 2025.

Service revenue was $181.4 million in fiscal year 2025, an increase of $11.9 million or 7.0%. Service revenue accounted for 65.2% of our total revenue during fiscal year 2025. Of our Service revenue in fiscal year 2025, 86.0% was generated by our Calibration Service Centers and cost control and optimization services while 12.8% was generated through subcontracted third-party vendors, compared with 86.6% and 12.3%, respectively, in fiscal year 2024. The remainder of our Service revenue in each period was derived from freight charges.

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Distribution sales were $97.0 million in fiscal year 2025, an increase of $7.0 million or 7.8%.  Distribution sales accounted for 34.8% of our total revenue in fiscal year 2025.

Sales to domestic customers comprised 93.3% of total Distribution sales in fiscal year 2025, while 5.7% were to Canadian customers and 1.0% were to customers in other international markets.

Total gross profit was $89.5 million in fiscal year 2025 compared to $83.8 million in fiscal year 2024, an increase of $5.6 million or 6.7%. Total gross margin was 32.1%, which is a 20 basis point decrease versus fiscal year 2024. Service gross margin was 33.4% in fiscal year 2025 compared with 33.8% in fiscal year 2024, a 40 basis point decrease. Distribution gross margin was 29.7% in fiscal year 2025 compared with 29.5% in fiscal year 2024, a 20 basis point increase. This decrease in service gross margin in fiscal year 2025 was primarily largely the result of lower revenue and gross margins for Transcat Solutions. The increase in the distribution segment gross margin was primarily due to increased margins from rental revenue, which now includes Becnel.

Operating expenses were $71.6 million, or 25.7% of total revenue, in fiscal year 2025 compared with $64.0 million, or 24.7% of total revenue, in fiscal year 2024. Operating income was $17.9 million, or 6.4% of total revenue, in fiscal year 2025 compared with $19.8 million, or 7.6% of total revenue, in fiscal year 2024. The year-over-year increase in selling, marketing and warehouse expenses was due to increased expenses related to recent acquisitions, especially acquisition related amortization expense, and higher incentive-based employee costs due to higher sales. The year-over-year increase in general and administrative expenses was due to incremental expenses from acquired businesses (including stock expense), increased payroll costs for new employees and continued investments in technology.

Net income for fiscal year 2025 was $14.5 million compared with $13.6 million in fiscal year 2024, a $0.9 million increase. Diluted earnings per share for fiscal year 2025 was $1.57 compared with $1.63 for fiscal year 2024, a $0.06 per diluted share decrease.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Use of Estimates. The preparation of our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States (“GAAP”) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to, allowance for credit losses and returns, inventory reserves, estimated levels of achievement for performance-based restricted stock units, fair value of stock options, depreciable lives of fixed assets, estimated lives of major catalogs and intangible assets, fair value of the goodwill reporting units, and the valuation of assets acquired, liabilities assumed and consideration transferred in business acquisitions. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. Our estimates are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Such changes and refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to our Consolidated Financial Statements.

The following items in our Consolidated Financial Statements require significant estimation or judgment:

Accounts Receivable. Accounts receivable represents amounts due from customers in the ordinary course of business. These amounts are recorded net of the allowance for credit losses and returns in the Consolidated Balance Sheets. The allowance for credit losses is based upon the expected collectability of accounts receivable. We apply a specific formula to our accounts receivable aging, which may be adjusted on a specific account basis where the formula may not appropriately reserve for loss exposure. After all attempts to collect a receivable have failed, the receivable is written-off against the allowance for credit losses. A returns reserve is calculated based upon the historical rate of returns applied to revenues over a specific timeframe. The returns reserve will increase or decrease as a result of changes in the level of revenues and/or the historical rate of returns. Management believes that the allowances are appropriate to cover anticipated losses under current conditions. However, unexpected changes or deterioration in economic conditions could materially change these expectations.

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Inventory. Inventory consists of products purchased for resale and is valued at the lower of cost or net realizable value. Costs are determined using the average cost method of inventory valuation. Inventory is reduced by a reserve for items not saleable at or above cost by applying a specific loss factor, based on historical experience and current demand, to specific categories of our inventory. Inventory is at risk of obsolescence if economic conditions change. Relevant economic conditions include changing consumer demand, customer preferences or increasing competition. We believe these risks are largely mitigated because our inventory typically turns several times per year. We evaluate the adequacy of the reserve on a quarterly basis.

Business Acquisitions. We apply the acquisition method of accounting for business acquisitions. Under the acquisition method, identifiable assets acquired, liabilities assumed and consideration transferred are measured at their acquisition-date fair value. We use a valuation hierarchy to determine the fair values used. Historically, we have relied, in part, upon the use of reports from third-party valuation specialists to assist in the estimation of fair values. Purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition.  The fair value of contingent consideration is determined at each reporting period with changes reflected in the statement of operations.  Administration costs to acquire a business may include, but are not limited to, fees for accounting, legal and valuation services and are recorded as incurred in our Consolidated Statement of Income.

Goodwill and Intangible Assets. Goodwill represents the excess of the purchase price over the values assigned to the underlying net assets of an acquired business and is not amortized. As of March 29, 2025, we had $176.9 million of recorded goodwill.

Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. These intangible assets are amortized over their estimated useful lives and are reviewed for impairment if and when indicators are present.

We test goodwill for impairment for each reporting unit on an annual basis during the fourth quarter of each fiscal year or immediately if conditions indicate that such impairment could exist. We estimate the fair value of our reporting units using the fair market value measurement requirement. We have the option to perform a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit has declined below its carrying value. This assessment considers various financial, macroeconomic, industry and segment specific qualitative factors. Based on the results of our qualitative impairment testing, we have determined that it was more likely than not that the fair values exceeded the carrying values of goodwill for each reporting unit and there were no impairments as of each of March 29, 2025 and March 30, 2024.

Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable.  In the event a trigger is identified, the carrying value of the asset group is compared to the undiscounted cash flows from that asset group. There were no intangible asset impairment indicators identified during the years ended March 29, 2025 or March 30, 2024.

Income Taxes. We record deferred income taxes for the effects of timing differences between financial and tax reporting. These differences relate primarily to operating leases, goodwill and intangible assets, depreciation and amortization and stock-based compensation. We base our deferred income taxes, accrued income taxes and provision for income taxes upon income, statutory tax rates, the legal structure of our Company, interpretation of tax laws and tax planning opportunities available to us in the various jurisdictions in which we operate. We file income tax returns in the U.S. federal jurisdiction, various states, Canada and Ireland. We have been audited by federal, state and foreign tax authorities, but a number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. From time to time, these audits result in assessments of additional tax. If a loss is determined to be probable as a result of an audit, an accrual is established.

We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50% likelihood of being ultimately realized upon settlement. Future changes in judgments and estimates related to the expected ultimate resolution of uncertain tax positions will affect income in the quarter of such change. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome.

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Stock-Based Compensation. We measure the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted. The application of this pricing model involves assumptions that require judgment and are sensitive in the determination of compensation expense. The fair market value of our common stock on the date of each option grant is determined based on the most recent closing price on our primary trading stock exchange, currently the Nasdaq Global Market.

We record compensation cost related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period for awards expected to vest. In accordance with Accounting Standards Updates (“ASU”) 2016-09, excess tax benefits for share-based award activity are reflected in the Consolidated Statement of Income as a component of the provision for income taxes. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. We did not capitalize any stock-based compensation costs as part of an asset. We estimate forfeiture rates based on our historical experience.

We grant timed-based and performance-based restricted stock units as a component of executive and key employee compensation. These restricted stock units are either time vested or vest following the third fiscal year from the date of grant subject to cumulative diluted earnings per share growth targets over the eligible period. Compensation cost ultimately recognized for these restricted stock units will equal the grant-date fair market value of the unit that coincides with the actual outcome of the performance conditions. On an interim basis, we record compensation cost based on the expected level of achievement of the performance conditions. The expense relating to the time vested restricted stock units is recognized on a straight-line basis over the requisite service period for the entire award.

Stock options vest either immediately or over a period of up to five years using a straight-line basis and expire either five years or ten years from the date of grant. The expense relating to options is recognized on a straight-line basis over the requisite service period for the entire award.

See Note 6 to our Consolidated Financial Statements for further disclosure regarding our stock-based compensation.

Post-retirement Health Care Plans. The Company has a defined benefit post-retirement health care plan which provides long-term care insurance benefits, medical and dental insurance benefits, and medical premium reimbursement benefits to eligible retired corporate officers and their eligible spouses.

For accounting purposes, the defined benefit post-retirement health care plan requires assumptions to estimate the projected and accumulated benefit obligations, including the following variables: discount rate; certain employee-related factors, such as retirement age and mortality; and health care cost trend rates. These and other assumptions affect the annual expense and obligations recognized for the underlying plans. Our assumptions reflect our historical experiences and management's best judgment regarding future expectations.

Increasing the assumed health care cost trend rate by one percentage point would increase the accumulated post-retirement benefit obligation and the annual net periodic post-retirement benefit cost by $0.1 million. A one percentage point decrease in the healthcare cost trend would decrease the accumulated post-retirement benefit obligation and the annual net periodic post-retirement benefit cost by $0.1 million.

Recently Issued Accounting Pronouncements. In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) to determine the potential impact they may have on our consolidated financial statements.  For a discussion of the newly issued accounting pronouncements see “Recently Adopted Accounting Pronouncements” and "Recent Accounting Guidance Not Yet Adopted" under Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of this report.

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RESULTS OF OPERATIONS

The following table sets forth, for fiscal years 2025 and 2024, the components of our Consolidated Statements of Income.

FISCAL YEAR ENDED March 29, 2025 COMPARED TO FISCAL YEAR ENDED March 30, 2024 (dollars in thousands):

Revenue:

Total revenue was $278.4 million in fiscal year 2025 compared to $259.5 million in fiscal year 2024, an increase of $18.9 million or 7.3%.  When normalizing for the fewer days from fiscal year 2025's 52 weeks versus fiscal year 2024’s 53 weeks, the Company estimates that its full year revenue growth was approximately 9.1%.

Service revenue, which accounted for 65.2% and 65.3% of our total revenue in fiscal years 2025 and 2024, respectively, increased $11.9 million, or 7.0% from fiscal year 2024 to fiscal year 2025. This year-over-year increase included $10.4 million of incremental revenue from the acquisitions of Becnel and Martin.  It also included organic revenue growth of 2.7% when adjusted for the 52/53 week impact, which was driven by continued market share gains, offset by comparatively lower revenue from the Transcat Solutions business.

Our fiscal years 2025 and 2024 Service revenue growth in relation to prior fiscal year quarter comparisons, was as follows:

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The growth in fiscal year 2025 and fiscal year 2024 reflected both organic growth and acquisitions. The growth in Service segment revenue in fiscal year 2025 includes revenue from Becnel and Martin. The growth in Service segment revenue in fiscal year 2024 includes revenue from TIC-MS and SteriQual.  The lower growth percentages in fiscal year 2025 are due to lower organic revenue growth compared to fiscal year 2024.

Within any year, while we add new customers, we also have customers from the prior year whose service orders may not repeat for any number of factors. Among those factors are variations in the timing of periodic calibrations and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of Service segment orders can vary on a quarter-to-quarter basis, we believe a trailing twelve-month trend provides a better indication of the progress of this segment.

The following table presents the trailing twelve-month Service segment revenue for each quarter in fiscal years 2025 and 2024 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period:

Our strategy has been to focus our investments in the core electrical, temperature, pressure, physical/dimensional and radio frequency/microwave calibration disciplines. We expect to subcontract approximately 13% to 15% of our Service revenue to third-party vendors for calibration beyond our chosen scope of capabilities. We continually evaluate our outsourcing needs and make capital investments, as deemed necessary, to add more in-house capabilities and reduce the need for third-party vendors. Capability expansion through business acquisitions is another way that we seek to reduce the need for outsourcing. The following table presents the source of our Service revenue and the percentage of Service revenue derived from each source for each quarter during fiscal years 2025 and 2024:

Our Distribution sales accounted for 34.8% and 34.7% of our total revenue in fiscal years 2025 and 2024, respectively. Distribution sales increased $7.0 million, or 7.8% in fiscal year 2025 compared to fiscal year 2024. This year-over-year increase is primarily due to $7.2 million of incremental revenue from the acquisitions of Becnel and Martin offset by slower demand for our non-rental products. The change in fiscal year 2024 versus fiscal year 2023 was due to incremental revenue from the acquisition of Axiom offset by slower demand for our non-rental products.  Our fiscal years 2025 and 2024 Distribution sales growth in relation to prior fiscal year quarter comparisons were as follows:

Distribution sales orders include orders for instruments that we routinely stock in our inventory, customized products, and other products ordered less frequently, which we do not stock. Backorders are the total dollar value of orders received for which revenue has not yet been recognized. Pending product shipments are primarily backorders, but also include the total dollar value of products that are requested to be calibrated in our service centers prior to shipment, orders required by the customer to be shipped complete or at a future date, and other orders awaiting final credit or management review prior to shipment. Management uses pending product shipments and backorders as measures of our future business performance and financial performance within the Distribution segment.

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Our total pending product shipments decreased $1.8 million, or 34.7%, at the end of fiscal year 2025 compared to the end of fiscal year 2024. Backorders at the end of fiscal year 2025 were $2.7 million, compared to $4.5 million at the end of fiscal year 2024. The year-over-year decrease in pending product shipments and backorders was a result of improved fulfillment of existing orders.

The following table presents the percentage of total pending product shipments that were backorders at the end of each quarter in fiscal years 2025 and 2024 and our historical trend of total pending product shipments:

Gross Profit:

Total gross profit in fiscal year 2025 was $89.5 million compared to $83.8 million in fiscal year 2024, an increase of $5.6 million or 6.7%. As a percentage of total revenue, total gross margin was 32.1% in fiscal year 2025 compared to 32.3% in fiscal year 2024, a 20 basis point decrease.

Service gross profit was $60.7 million, an increase of $3.4 million, or 5.9%, from fiscal year 2024 to fiscal year 2025. Our annual and quarterly Service segment gross margins are a function of several factors. Our organic Service revenue growth provides some incremental gross margin growth by leveraging certain fixed costs of this segment. The mix of services provided to customers may also affect gross margins in any given period. Service gross margin decreased by 40 basis points in fiscal year 2025 versus fiscal year 2024. This decrease in service gross margin in fiscal year 2025 was the result of lower revenue and gross margins from Transcat Solutions.

The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:

Our Distribution gross margin includes net sales less the direct cost of inventory sold and the direct costs of equipment rental revenues, primarily depreciation expense for the fixed assets in our rental equipment pool, as well as the impact of rebates and cooperative advertising income we receive from vendors, freight billed to customers, freight expenses and direct shipping costs. We recorded vendor rebates of $0.9 million in fiscal year 2025 and $0.6 million in fiscal year 2024, as a reduction of cost of Distribution sales. In general, our Distribution gross margin can vary based upon the mix of products sold, price discounting, the timing of periodic vendor rebates offered and cooperative advertising programs from suppliers.

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The following table reflects the quarterly historical trend of our Distribution gross margin as a percent of Distribution sales:

Distribution segment gross margin increased 20 basis points in fiscal year 2025 compared to fiscal year 2024. The increase in the Distribution segment gross margin was primarily due to increased margins from rental revenue, which now includes Becnel and a favorable mix of higher margin products sold.

Operating Expenses:

Total operating expenses were $71.6 million in fiscal year 2025 compared to $64.0 million in fiscal year 2024. This represented an increase of $7.6 million, or 11.8%, compared to fiscal year 2024. As a percentage of total revenue, operating expenses increased 100 basis points from 24.7% in fiscal year 2024 to 25.7% in fiscal year 2025. The year-over-year increase in selling, marketing and warehouse expenses is due to increased expenses related to recent acquisitions, especially acquisition related amortization expense, and higher incentive-based employee costs due to higher sales. The increase in general and administrative expenses includes incremental expenses related to acquired companies, increased payroll costs for new employees and continued investments in technology.

Provision for Income Taxes:

Our effective tax rate for fiscal years 2025 and 2024 was 20.8% and 26.0%, respectively.  The decrease in effective tax rate is due to the timing of our discrete items in relation to the timing of our pre-tax net income and due to tax expense recognized in fiscal year 2024 associated with executive compensation limitations that resulted from share-based awards. Our provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in fiscal years 2025 and 2024 were $1.3 million and $0.6 million, respectively. We continue to evaluate our tax provision on a quarterly basis and adjust, as deemed necessary, our effective tax rate given changes in facts and circumstances expected in the future.

We expect to receive certain federal, state, Canadian and Irish tax credits in future years. We also expect to receive discrete tax benefits related to share-based compensation awards in fiscal year 2026. As such, we expect our effective tax rate in fiscal year 2026 to be between 27.0% and 29.0%.

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Net Income:

Net income for fiscal year 2025 increased by $0.9 million or 6.4% compared to fiscal year 2024. As a percentage of revenue, net income was 5.2% in fiscal year 2025, down from 5.3% in fiscal year 2024.  The year-over-year increase in net income was primarily due to lower operating income, offset by lower interest expense, net and higher other income related to the sale of assets related to our United Scale division.

Non-GAAP Financial Measures

Adjusted EBITDA:

In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, non-cash stock compensation expense, acquisition related transaction expenses, contingent consideration, and certain other expenses), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, stock-based compensation expense and other items, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.

Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

During fiscal year 2025, Adjusted EBITDA was $39.7 million, an increase of $1.1 million or 2.9% compared to fiscal year 2024. As a percentage of revenue, Adjusted EBITDA was 14.3% during fiscal year 2025 versus 14.9% during fiscal year 2024, a 60 basis point decrease. The dollar increase in Adjusted EBITDA during fiscal year 2025 was primarily driven by increases in depreciation and amortization expense offset by lower operating income and lower noncash stock compensation.

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Adjusted Diluted Earnings Per Share:

In addition to reporting Diluted Earnings Per Share, a GAAP measure, we present Adjusted Diluted Earnings Per Share (net income plus acquisition related amortization expense, acquisition related transaction expenses, acquisition related stock-based compensation, contingent consideration, and acquisition amortization of backlog; divided by the average diluted shares outstanding during the period), which is a non-GAAP measure. Our management believes Adjusted Diluted Earnings Per Share is an important measure of our operating performance because it provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.

Adjusted Diluted Earnings Per Share is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of Diluted Earnings Per Share and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted Diluted Earnings Per Share, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

LIQUIDITY AND CAPITAL RESOURCES

We expect that foreseeable liquidity and capital resource requirements will be met through cash and cash equivalents, anticipated cash flows from operations and borrowings from our revolving credit facility. We believe that these sources of financing will be adequate to meet our future requirements including anticipated operating expenses, capital expenditures, interest payments on our long-term debt, and planned business acquisitions. To the extent that the Company does not satisfy its liquidity requirements through cash and cash equivalents, anticipated cash flows from operations and borrowings from our revolving credit facility, it intends to satisfy such requirements through proceeds from the issuance of common stock.

Under our Second Amended and Restated Credit Facility Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), we have access to a revolving credit commitment (the “revolving credit facility”) of $80.0 million through June 2026, with a letter of credit subfacility of $10.0 million. Our 2018 term loan, with an original principal amount of $15.0 million (the “2018 Term Loan”), is also provided for under the Credit Agreement.

The Credit Agreement allows us to use up to $50.0 million under the revolving credit facility for acquisitions in any single fiscal year. The Credit Agreement restricts our ability to complete acquisitions of businesses with a principal place of business located in the United Kingdom or the European Union to an aggregate purchase price of $40.0 million during the term of the Credit Agreement, if the acquisition is financed directly or indirectly with the revolving credit facility. Under the Credit Agreement, we may make restricted payments up to $25.0 million in the aggregate over the term of the Credit Agreement and $10.0 million in any single fiscal year to repurchase shares and pay dividends.

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Effective July 1, 2023, interest on outstanding borrowings under the revolving credit facility accrue, at our election, at either the variable Daily Simple SOFR or a fixed rate for a designated period at the SOFR corresponding to such period (subject to a 0.25% floor), in each case, plus a margin. Unused fees accrue based on the average daily amount of unused credit available on the revolving credit facility. Interest rate margins and unused fees are determined on a quarterly basis based upon our calculated leverage ratio. Our interest rate for the revolving credit facility for fiscal year 2025 ranged from 5.1% to 6.2%. Interest on outstanding borrowings under the 2018 Term Loan accrue at a fixed rate of 3.90% over the term of the loan.

The Credit Agreement has certain covenants with which we must comply, including a fixed charge ratio covenant, which prohibits our fixed charge coverage ratio from being less than 1.15 to 1.00, and a leverage ratio covenant, which prohibits our leverage ratio from exceeding 3.00 to 1.00. Our leverage ratio, as defined in the Credit Agreement, was 0.78 at March 29, 2025, compared with 0.10 at March 30, 2024. We were in compliance with all loan covenants and requirements during fiscal years 2025 and 2024.

As of March 29, 2025, $80.0 million was available for borrowing under the revolving credit facility, of which, $30.9 million was outstanding. On September 25, 2023, we closed an underwritten public offering of our common stock for aggregate gross proceeds of $80.5 million (the “Offering”). In the Offering, we sold an aggregate of 847,371 shares at $95.00 per share for net proceeds of $75.2 million. After the closing of the Offering, we used approximately $50.0 million of the net proceeds to repay in full the amounts outstanding under the revolving credit facility. During fiscal year 2025 and 2024 we used $87.4 million and $12.9 million, respectively, drawn from cash on hand and from the revolving credit facility for business acquisitions.

As of March 29, 2025, $1.8 million was outstanding on the 2018 Term Loan, which was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $0.2 million per month through December 2025.

Cash Flows: The following table is a summary of our Consolidated Statements of Cash Flows (dollars in thousands):

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Operating Activities: Net cash provided by operating activities was $39.0 million during fiscal year 2025 compared to $32.6 million during fiscal year 2024. The year-over-year increase in cash provided by operations is primarily the result of increases in depreciation and amortization. The significant working capital fluctuations were as follows:

Our inventory balance decreased $2.9 million during fiscal year 2025.  Our inventory balance during fiscal year 2024 increased $0.5 million inclusive of $1.8 million of inventory acquired during the year.  The year-over-year change is a result of strategic inventory purchases during fiscal year 2024.

Accounts payable increased $5.3 million during fiscal year 2025, inclusive of $0.3 million of accounts payable acquired during the year. Accounts payable decreased by $4.4 million during fiscal year 2024, inclusive of $0.6 million of accounts payable acquired during the year. The variance is largely due to the timing of inventory and capital expenditure purchases and other payments in the respective periods.

During fiscal year 2025, accrued compensation and other liabilities decreased by $1.3 million, inclusive of $1.2 million from assumed liabilities, contingent consideration and purchase price holdbacks from acquisition transactions. During fiscal year 2024, accrued compensation and other liabilities increased by $6.5 million, inclusive of $3.1 million from assumed liabilities, contingent consideration and purchase price holdbacks from acquisition transactions.

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Investing Activities: During fiscal year 2025, we invested $13.2 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and capacity and our rental business.

During fiscal year 2024, we invested $13.3 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and our rental business.

During fiscal year 2025, we used $87.4 million for business acquisitions. During fiscal year 2024, we used $12.9 million for business acquisitions.

During each of fiscal year 2025 and fiscal year 2024, no contingent consideration was paid related to a business acquisition. $0.4 million and $0.8 million of holdback amounts were paid during fiscal year 2025 and fiscal year 2024, respectively.

During fiscal year 2025, we sold $15.5 million of marketable securities to partially fund acquisitions.  During fiscal year 2024, we purchased $15.5 million of marketable securities with the proceeds from the Offering.

Financing Activities: During fiscal year 2025, $30.9 million in cash was generated from the proceeds from our revolving credit facility and $1.9 million from the issuance of common stock from stock option exercises and the Employee Stock Purchase Plan. In addition, we used $2.3 million for scheduled repayments of our term loan and $3.6 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in fiscal year 2025, which is shown as a repurchase of shares of our common stock on our Consolidated Statements of Cash Flows.

During fiscal year 2024, $77.2 million in cash was generated from the issuance of common stock, net of direct costs, inclusive of $75.2 million from the Offering. In addition, we used $42.7 million to repay our revolving credit facility, $2.2 million for scheduled repayments of our term loan and $4.9 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in fiscal year 2024, which is shown as a repurchase of shares of our common stock on our Consolidated Statements of Cash Flows.

OUTLOOK

Acquisitions continued to play a key role in Service revenue, including most recently Martin Calibration which we are swiftly integrating into our operations.  Service organic growth was in the high single-digit range for the fourth quarter of fiscal year 2025 and the full fiscal year, when normalized for the 53rd week and excluding Transcat Solutions, driven by consistent demand in the Calibration business.  Revenue growth in both segments combined with continued productivity gains from increased automation and process improvements drove EBITDA growth for the fourth quarter of fiscal year 2025 and the full fiscal year.

The macroeconomic backdrop, including tariffs, has become more uncertain since the beginning of the year.  However, we believe our business model is resilient in any market environment due to the highly regulated markets we serve, particularly life science, aerospace, and defense, as our services are mandated. The stringent regulatory standards for manufacturers imposed by entities including the FDA, FAA and Department of Defense to ensure product safety and environmental protection drive the organic growth for our high-value calibration services. Our dedicated team has a proven track record of delivering profitable revenue growth over the past decade and a half. We believe our proven team in combination with the industry mandated service model, diversified portfolio with a Fortune 500 client base, and strong balance sheet will continue to differentiate us during fiscal year 2026 and beyond.

Looking ahead, while macroeconomic impacts on our business such as changes in product costs and customer demand for services are uncertain, we anticipate a return to high single-digit organic Service revenue growth once the environment normalizes.  Automation of our calibration processes and focus on productivity remain key enablers of margin expansion. We have demonstrated the ability to leverage these tools to improve our operational efficiency and drive margin expansion over an extended period. We will continue to leverage our acquisition expertise and are pleased with the current flow of strategic opportunities. We believe strong execution, paired with strategic acquisitions, positions us well to drive long-term shareholder value.

Transcat expects its income tax rate to range between 27.0% and 29.0% in fiscal 2026. This estimate includes Federal, various state, Canadian and Irish income taxes and reflects the discrete tax accounting associated with share-based payment awards.

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