Market Overview

Transcat Achieves Strong Operating Income Growth on Margin Expansion for Fiscal 2019 First Quarter

Share:
  • Consolidated operating income increased 43.5% (17% when normalized)
    to $2.0 million on 1% revenue growth
  • Service segment revenue up nearly 5%
  • Service gross and operating margins expanded 40 and 70 basis
    points, respectively
  • Distribution gross margin of 24.2%, up 140 basis points
  • Achieved net income of $1.4 million or $0.19 per diluted share
  • Generated strong cash from operations of $3.1 million

Transcat, Inc. (NASDAQ:TRNS) ("Transcat" or the "Company"),

a leading provider of accredited calibration, repair, inspection and
laboratory instrument services and value-added distributor of
professional grade handheld test, measurement and control
instrumentation, today reported financial results for its first quarter
ended June 30, 2018 (the "first quarter") of fiscal year 2019, which
ends March 30, 2019 ("fiscal 2019").

"The operating leverage we believe is inherent in our business combined
with the early impact from our operational excellence initiatives were
demonstrated in the first quarter with only modest improvement in
revenue. Both of our segments saw margin expansion, resulting in
enhanced profitability," commented Lee D. Rudow, President and CEO.

He continued, "Our Service segment organic revenue growth rate was
almost 5%, while our new business activity levels were quite strong. We
generated a record level of new bookings in the first quarter, which we
expect will drive higher levels of growth for the fiscal year as we
continue to take market share.

"We maintained solid core new equipment sales volume within our
Distribution segment, although we had some softness in our used
equipment business. Solid mix, pricing and inventory management enabled
significant margin expansion, nonetheless."

First Quarter Fiscal 2019 Review (Results are compared with
the first quarter of the fiscal year ended March 31, 2018 ("fiscal
2018"))

               
($ in thousands) Change
FY19 Q1 FY18 Q1 $'s     %
Service Revenue $ 19,325 $ 18,482 $ 843 4.6 %
Distribution Sales $ 17,333   $ 17,797   $ (464 ) (2.6 )%
Revenue $ 36,658 $ 36,279 $ 379 1.0 %
Gross Profit $ 9,113 $ 8,691 $ 422 4.9 %
Gross Margin 24.9 % 24.0 %
 
Operating Income $ 2,025 $ 1,411 $ 614 43.5 %
Operating Margin 5.5 % 3.9 %
 
Net Income $ 1,428 $ 856 $ 572 66.8 %
Net Margin 3.9 % 2.4 %
 
Adjusted EBITDA* $ 3,842 $ 3,361 $ 481 14.3 %
Adjusted EBITDA* Margin 10.5 % 9.3 %
 

*See Note 1 on page 4 for a description of this non-GAAP
financial measure and page 9 for the Adjusted EBITDA Reconciliation
table.

Transcat achieved quarterly revenue of $36.7 million that drove a 4.9%
increase in gross profit. General and Administrative expenses declined
to $3.1 million as last fiscal year's first quarter included a $0.3
million one-off non-cash stock-based compensation expense. As a result
of the gross margin improvement and cost discipline, operating income
grew 43.5%, or $0.6 million, and operating margin expanded 160 basis
points. Even when normalizing for the one-off non-cash stock-based
compensation expense in last fiscal year's first quarter, operating
income grew 17%. The effective tax rate decreased to 20.7% from 24.8%,
largely due to lower U.S. federal tax rates from the December 2017 Tax
Cuts and Jobs Act. Net income for the quarter grew 67% and fully diluted
earnings per share increased to $0.19 from $0.12.

Service segment demonstrates operating leverage on nearly 5%
organic revenue growth

Represents the accredited calibration, repair, inspection and
laboratory instrument services business (53% of total revenue for the
first quarter of fiscal 2019).

               
($ in thousands) Change
FY19 Q1 FY18 Q1 $'s     %
 
Service Segment Revenue $ 19,325 $ 18,482 $ 843 4.6 %
Gross Profit $ 4,919 $ 4,636 $ 283 6.1 %
Gross Margin 25.5 % 25.1 %
 
Operating Income $ 1,068 $ 885 $ 183 20.7 %
Operating Margin 5.5 % 4.8 %
 
Adjusted EBITDA* $ 2,390 $ 2,216 $ 174 7.9 %
Adjusted EBITDA* Margin 12.4 % 12.0 %
 

*See Note 1 on page 4 for a description of this non-GAAP financial
measure and page
9 for the Adjusted EBITDA Reconciliation table.

Service revenue increased 4.6% to $19.3 million, which was comprised of
all organic revenue. Higher revenue was the result of new business from
the life sciences market and growth in general industrial manufacturing.
On a trailing twelve-month basis, Service segment revenue was $78.3
million, up 8.1% when compared with the trailing twelve-month period
ending with the prior- fiscal year first quarter.

Segment gross margin improved 40 basis points and operating margin
expanded 70 basis points due to the inherent operating leverage in the
segment combined with early operational excellence initiatives that
drove productivity improvements.

Distribution segment shows improved gross and operating margins

Represents the sale and rental of new and used professional grade
handheld test, measurement and control instrumentation (47% of total
revenue for the first quarter of fiscal 2019).

           
($ in thousands) Change
FY19 Q1 FY18 Q1 $'s   %
Distribution Segment Sales $ 17,333 $ 17,797 $ (464 ) (2.6 )%
Gross Profit $ 4,194 $ 4,055 $ 139 3.4 %
Gross Margin 24.2 % 22.8 %
 
Operating Income $ 957 $ 526 $ 431 81.9 %
Operating Margin 5.5 % 3.0 %
 
Adjusted EBITDA* $ 1,452 $ 1,145 $ 307 26.8 %
Adjusted EBITDA* Margin 8.4 % 6.4 %
 

*See Note 1 on page 4 for a description of this non-GAAP
financial measure and page 9 for the Adjusted EBITDA Reconciliation
table.

The modest decline in sales for the segment reflects lower sales of used
equipment that was mostly offset by solid core distribution demand and
increased rental revenue of 24% to $0.9 million quarter-over-quarter.
There was some sales disruption toward the end of the first quarter as
the Company consolidated its Irvine, CA operations with its Los Angeles,
CA location as part of the final integration of the Excalibur
Engineering, Inc. acquisition made in fiscal year 2017.

Segment gross margin expanded 140 basis points due to the mix of
products sold, inventory management, and pricing initiatives that were
implemented as part of the Company's ongoing operational excellence
program.

Strong Balance Sheet and Cash Flow Support Growth Strategy

Net cash provided by operating activities was $3.1 million, up from the
$2.9 million in cash that was used in operations in the prior-year
period. Capital expenditures were $1.9 million for the first quarter.
Investments were primarily for assets for the Company's rental business
and customer-driven expansion of Service segment capabilities.

At June 30, 2018, the Company had total debt of $21.5 million, with
$22.0 million available for borrowing under its secured revolving credit
facility. The Company's leverage ratio, as defined in its credit
agreement, was 1.28 at June 30, 2018, compared with 1.40 at fiscal 2018
year-end.

Outlook

Mr. Rudow added, "Acquisitions will continue to be incremental to our
overall growth expectations. Near quarter-end, we completed a small
tuck-in purchase, NBS Calibrations, Inc. ("NBS"), which will be
consolidated with our Phoenix, AZ facility. NBS both leverages our
existing infrastructure and adds a capability in liquid and gas flow
meter calibrations to our offerings. Historically outsourced, we now
have the capability in-house creating a niche service we can continue to
expand. In addition to closing NBS, our current acquisition pipeline is
active and we believe we have a strong balance sheet to execute our
growth strategy."

Mr. Rudow concluded, "We expect to deliver solid fiscal 2019 results.
Our strong and unique value proposition continues to resonate in the
market, and recent new business wins in our Service segment support our
confidence level. The Distribution business is also expected to continue
to generate significant cash, provide differentiation in the market and
foster Service growth opportunities. And, with a continued focus on
leveraging technology as a competitive advantage, over the long-term, we
believe we can drive higher margins in both segments."

Transcat expects its income tax rate to range between 25% and 27% for
full year fiscal 2019.

The Company's expected capital expenditure plan for fiscal 2019 remains
in the $7.0 million to $7.5 million range. Capital investments will be
primarily focused on technology infrastructure to drive operational
excellence and organic growth opportunities within both operating
segments, and for rental pool assets.

Webcast and Conference Call

Transcat will host a conference call and webcast on Wednesday, July 25,
2018 at 11:00 a.m. ET. Management will review the financial and
operating results for the first quarter, as well as the Company's
strategy and outlook. A question and answer session will follow the
formal discussion. The review will be accompanied by a slide
presentation, which will be available at www.transcat.com/investor-relations.
The conference call can be accessed by calling (201) 689-8471.
Alternatively, the webcast can be monitored at www.transcat.com/investor-relations.

A telephonic replay will be available from 2:00 p.m. ET on the day of
the call until Wednesday, August 1, 2018. To listen to the archived
call, dial (412) 317-6671 and enter conference ID number 13680879, or
access the webcast replay at www.transcat.com/investor-relations,
where a transcript will be posted once available.

NOTE 1 – Non-GAAP Financial Measures

In addition to reporting net income, a U.S. generally accepted
accounting principle ("GAAP") measure, we present Adjusted EBITDA
(earnings before interest, income taxes, depreciation and amortization,
and non-cash stock-based compensation expense), which is a non-GAAP
measure. The Company's management believes Adjusted EBITDA is an
important measure of operating performance because it allows management,
investors and others to evaluate and compare the performance of its core
operations from period to period by removing the impact of the capital
structure (interest), tangible and intangible asset base (depreciation
and amortization), taxes, and stock-based compensation expense, which is
not always commensurate with the reporting period in which it is
included. As such, the Company uses Adjusted EBITDA as a measure of
performance when evaluating its business segments and as a basis for
planning and forecasting. 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 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. See the attached Adjusted EBITDA Reconciliation table
on page 9.

ABOUT TRANSCAT

Transcat, Inc. is a leading provider of accredited calibration, repair,
inspection and laboratory instrument services. The Company is focused on
providing best-in-class services and products to highly regulated
industries, including life science, aerospace and defense,
pharmaceutical, medical device manufacturing and biotechnology. Transcat
provides permanent and periodic on-site services, mobile calibration
services and in-house services through 21 Calibration Service Centers
strategically located across the United States, Puerto Rico and Canada.
The breadth and depth of measurement parameters addressed by Transcat's
ISO/IEC 17025 scopes of accreditation are believed to be the best in the
industry.

Transcat also operates as a leading value-added distributor that
markets, sells and rents new and used national and proprietary brand
instruments to customers primarily in North America. The Company
believes its combined Service and Distribution segment offerings,
experience, technical expertise and integrity create a unique and
compelling value proposition for its customers.

Transcat's growth strategy is to leverage the complementary nature of
its two operating segments, its comprehensive service capabilities,
strong brand, enhanced e-commerce capabilities and leading distribution
platform to drive organic sales growth. The Company will also look to
expand its addressable calibration market through acquisitions and
capability investments to further realize its inherent leverage of its
business model.

More information about Transcat can be found at: Transcat.com.

Safe Harbor Statement

This news release contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are not statements of historical fact and thus are subject to
risks, uncertainties and assumptions. Forward-looking statements are
identified by words such as "expects," "estimates," "projects,"
"anticipates," "believes," "could," and other similar words. All
statements addressing operating performance, events or developments that
Transcat, Inc. expects or anticipates will occur in the future,
including but not limited to statements relating to anticipated revenue,
profit margins, sales operations, capital expenditures, cash flows,
operating income, growth strategy, segment growth, potential
acquisitions, integration of acquired businesses, market position,
customer preferences, outlook and changes in market conditions in the
industries in which Transcat operates are forward-looking statements.
Forward-looking statements should be evaluated in light of important
risk factors and uncertainties. These risk factors and uncertainties are
more fully described in Transcat's Annual Report and Quarterly Reports
filed with the Securities and Exchange Commission, including under the
heading entitled "Risk Factors." Should one or more of these risks or
uncertainties materialize, or should any of the Company's underlying
assumptions prove incorrect, actual results may vary materially from
those currently anticipated. In addition, undue reliance should not be
placed on the Company's forward-looking statements. Except as required
by law, the Company disclaims any obligation to update, correct or
publicly announce any revisions to any of the forward-looking statements
contained in this news release.

FINANCIAL TABLES FOLLOW.

 

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

         
(Unaudited)
First Quarter Ended
June 30,   June 24,
2018 2017
Service Revenue $ 19,325 $ 18,482
Distribution Sales   17,333   17,797
Total Revenue   36,658   36,279
 
Cost of Service Revenue 14,406 13,846
Cost of Distribution Sales   13,139   13,742
Total Cost of Revenue   27,545   27,588
 
Gross Profit   9,113   8,691
 
Selling, Marketing and Warehouse Expenses 4,032 4,092
General and Administrative Expenses   3,056   3,188
Total Operating Expenses   7,088   7,280
 
Operating Income   2,025   1,411
 
Interest and Other Expense, net   225   272
 
Income Before Income Taxes 1,800 1,139
Provision for Income Taxes   372   283
 
Net Income $ 1,428 $ 856
 
Basic Earnings Per Share $ 0.20 $ 0.12
Average Shares Outstanding 7,177 7,079
 
Diluted Earnings Per Share $ 0.19 $ 0.12
Average Shares Outstanding 7,438 7,200
 
 

TRANSCAT, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

           
(Unaudited)
June 30, March 31,
2018   2018
ASSETS
Current Assets:
Cash $ 486 $ 577
Accounts Receivable, less allowance for doubtful accounts of $296
and $296 as of June 30, 2018 and March 31, 2018, respectively 21,875 24,684
Other Receivables 1,105 1,361
Inventory, net 13,310 12,651
Prepaid Expenses and Other Current Assets   1,240       1,240  
Total Current Assets 38,016 40,513
Property and Equipment, net 17,691 17,091
Goodwill 32,739 32,740
Intangible Assets, net 5,115 5,505
Other Assets   949       973  
Total Assets $ 94,510     $ 96,822  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 12,303 $ 13,535
Accrued Compensation and Other Liabilities 3,757 5,240
Income Taxes Payable 411 232
Current Portion of Long-Term Debt   2,143       2,143  
Total Current Liabilities 18,614 21,150
Long-Term Debt 19,402 20,707
Deferred Tax Liability 1,704 1,709
Other Liabilities   1,919       1,908  
Total Liabilities   41,639       45,474  
 
Shareholders' Equity:
Common Stock, par value $0.50 per share, 30,000,000 shares
authorized;
7,198,513 and 7,155,050 shares issued and outstanding
as of June 30, 2018 and March 31, 2018, respectively 3,599 3,578
Capital in Excess of Par Value 15,197 14,965
Accumulated Other Comprehensive Loss (376 ) (281 )
Retained Earnings   34,451       33,086  
Total Shareholders' Equity   52,871       51,348  
Total Liabilities and Shareholders' Equity $ 94,510     $ 96,822  
 
 

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

           
(Unaudited)

For the First Quarter Ended

June 30,   June 24,
2018   2017
Cash Flows from Operating Activities:
Net Income $ 1,428 $ 856
Adjustments to Reconcile Net Income to Net Cash (Used in) Provided
by Operating Activities:
Loss on Sale of Property and Equipment 29 1
Deferred Income Taxes (5 ) 3
Depreciation and Amortization 1,567 1,487
Provision for Accounts Receivable and Inventory Reserves 39 21
Stock-Based Compensation Expense 268 499
Changes in Assets and Liabilities:
Accounts Receivable and Other Receivables 2,937 1,486
Inventory (614 ) (1,373 )
Prepaid Expenses and Other Assets 4 (246 )
Accounts Payable (1,300 ) (3,329 )
Accrued Compensation and Other Liabilities (1,470 ) (2,359 )
Income Taxes Payable   179       72  
Net Cash Provided by (Used in) Operating Activities   3,062       (2,882 )
 
Cash Flows from Investing Activities:
Purchase of Property and Equipment (1,918 ) (2,134 )
Proceeds from Sale of Property and Equipment   -       6  
Net Cash Used in Investing Activities   (1,918 )     (2,128 )
 
Cash Flows from Financing Activities:
(Repayment of) Proceeds from Revolving Credit Facility, net (770 ) 5,007
Repayments of Term Loan (536 ) (357 )
Issuance of Common Stock 66 610
Repurchase of Common Stock (143 ) (344 )
Stock Option Redemption   -       (90 )
Net Cash (Used in) Provided by Financing Activities   (1,383 )     4,826  
 
Effect of Exchange Rate Changes on Cash   148       (57 )
 
Net Decrease in Cash (91 ) (241 )
Cash at Beginning of Period   577       842  
Cash at End of Period $ 486     $ 601  
 
 

TRANSCAT, INC.

Adjusted EBITDA Reconciliation Table

(Dollars in thousands)

(Unaudited)

       
Fiscal 2019
 
Q1 Q2 Q3 Q4 YTD
Net Income $ 1,428 $ 1,428
+ Interest Expense 206 206
+ Other Expense / (Income) 19 19
+ Tax Provision   372           372  
Operating Income $ 2,025 $ 2,025
+ Depreciation & Amortization 1,567 1,567
+ Other (Expense) / Income (19 ) (19 )
+ Noncash Stock Compensation   269           269  
Adjusted EBITDA $ 3,842 $ 3,842
 

Segment Breakdown

 
Service Operating Income $ 1,068 $ 1,068
+ Depreciation & Amortization 1,189 1,189
+ Other (Expense) / Income (13 ) (13 )
+ Noncash Stock Compensation   146           146  
Service Adjusted EBITDA $ 2,390 $ 2,390
 
Distribution Operating Income $ 957 $ 957
+ Depreciation & Amortization 378 378
+ Other (Expense) / Income (6 ) (6 )
+ Noncash Stock Compensation   123           123  
Distribution Adjusted EBITDA $ 1,452 $ 1,452
 

Fiscal 2018

 
Q1 Q2 Q3 Q4 YTD
Net Income $ 856 $ 781 $ 1,831 $ 2,454 $ 5,922
+ Interest Expense 236 281 250 251 1,018
+ Other Expense / (Income) 36 (10 ) 61 (27 ) 60
+ Tax Provision   283     406     512     825     2,026  
Operating Income $ 1,411 $ 1,458 $ 2,654 $ 3,503 $ 9,026
+ Depreciation & Amortization 1,487 1,497 1,543 1,464 5,991
+ Other (Expense) / Income (36 ) 10 (61 ) 27 (60 )
+ Noncash Stock Compensation   499     332     264     316     1,411  
Adjusted EBITDA $ 3,361 $ 3,297 $ 4,400 $ 5,310 $ 16,368
 

Segment Breakdown

 
Service Operating Income $ 885 $ 790 $ 1,063 $ 2,420 $ 5,158
+ Depreciation & Amortization 1,110 1,107 1,126 1,054 4,397
+ Other (Expense) / Income (28 ) 4 (45 ) 8 (61 )
+ Noncash Stock Compensation   249     168     134     155     706  
Service Adjusted EBITDA $ 2,216 $ 2,069 $ 2,278 $ 3,637 $ 10,200
 
Distribution Operating Income $ 526 $ 668 $ 1,591 $ 1,083 $ 3,868
+ Depreciation & Amortization 377 390 417 410 1,594
+ Other (Expense) / Income (8 ) 6 (16 ) 19 1
+ Noncash Stock Compensation   250     164     130     161     705  
Distribution Adjusted EBITDA $ 1,145 $ 1,228 $ 2,122 $ 1,673 $ 6,168
 

TRANSCAT, INC.

Additional Information - Business Segment Data

(Dollars in thousands)

(Unaudited)

         
Change
SERVICE FY 2019 Q1 FY 2018 Q1 $'s   %
 
Service Revenue $ 19,325 $ 18,482 $ 843 4.6 %
Cost of Sales $ 14,406   $ 13,846   $ 560   4.0 %
Gross Profit $ 4,919 $ 4,636 $ 283 6.1 %
Gross Margin 25.5 % 25.1 %
 
Selling, Marketing & Warehouse $ 2,100 $ 2,072 $ 28 1.4 %
General and Administrative Expense $ 1,751   $ 1,679   $ 72   4.3 %
Operating Income $ 1,068 $ 885 $ 183 20.7 %
% of Revenue 5.5 % 4.8 %
                     
Change
DISTRIBUTION FY 2019 Q1 FY 2018 Q1 $'s %
Distribution Sales $ 17,333 $ 17,797 $ (464 ) (2.6 %)
Cost of Sales $ 13,139   $ 13,742   $ (603 ) (4.4 %)
Gross Profit $ 4,194 $ 4,055 $ 139 3.4 %
Gross Margin 24.2 % 22.8 %
 
Selling, Marketing & Warehouse $ 1,932 $ 2,020 $ (88 ) (4.4 %)
General and Administrative Expense $ 1,305   $ 1,509   $ (204 ) (13.5 %)
Operating Income $ 957 $ 526 $ 431 81.9 %
% of Sales 5.5 % 3.0 %
                     
Change
TOTAL FY 2019 Q1 FY 2018 Q1 $'s %
 
Total Revenue $ 36,658 $ 36,279 $ 379 1.0 %
Total Cost of Sales $ 27,545   $ 27,588   $ (43 ) (0.2 %)
Gross Profit $ 9,113 $ 8,691 $ 422 4.9 %
Gross Margin 24.9 % 24.0 %
 
Selling, Marketing & Warehouse $ 4,032 $ 4,092 $ (60 ) (1.5 %)
General and Administrative Expense $ 3,056   $ 3,188   $ (132 ) (4.1 %)
Operating Income $ 2,025 $ 1,411 $ 614 43.5 %
% of Revenue 5.5 % 3.9 %
 

View Comments and Join the Discussion!