Transcat reports third quarter operating income increase of 20% on solid service organic growth and gross margin expansion
Rochester, n.y.--(business wire)--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 third quarter and nine-month period ended december 26, 2020 (the “third quarter”) of fiscal year 2021, which ends march 27, 2021 (“fiscal 2021”). results include the previously reported acquisition of tte laboratories, inc. (referred to as “pipettes.com”) effective february 21, 2020 and the acquisition of biotek services, inc. (“biotek”) effective december 16, 2020. “in an environment that continues to be significantly impacted by the covid-19 pandemic, our third quarter results demonstrated the resiliency of our business and effectiveness of our strategy as we delivered better than expected results,” commented lee d. rudow, president and ceo. “our service segment delivered another excellent quarter, growing revenue 12.2% and increasing gross margin by 590 basis points from the prior-year period. we were certainly encouraged by organic growth of 5.9% as our strategy to capture opportunities in highly-regulated end markets, including life sciences, continues to serve us well. our gross margin improvement was driven by technician productivity, expense reductions, operating leverage on our fixed costs and the strong performance of pipettes.com.” “our distribution segment continues to be negatively impacted by the current market environment but performed in line with our expectations. overall, our service segment performance drove third quarter consolidated operating income of $2.5 million, exceeding our expectations and growing 20% from prior year. year-to-date cash flow from operations of $15.6 million was nearly double from prior year and was used, in part, to fund technology investments and our acquisition strategy”. he added, “our pipettes.com business continues to deliver strong results and the recent acquisition of biotek increases our exposure to the growing pipettes market and broadens our geographic footprint. additionally, biotek gives us additional on-site technician capabilities, which is a perfect complement to the largely in-house technician business model at pipettes.com.” third quarter fiscal 2021 review (results are compared with the third quarter of the fiscal year ended march 28, 2020 (“fiscal 2020”)) ($ in thousands) change fy21 q3 fy20 q3 $'s % service revenue $ 24,776 $ 22,087 $ 2,689 12.2 % distribution sales 19,286 21,092 (1,806 ) (8.6 %) revenue $ 44,062 $ 43,179 $ 883 2.0 % gross profit $ 11,245 $ 9,928 $ 1,317 13.3 % gross margin 25.5 % 23.0 % operating income $ 2,519 $ 2,091 $ 428 20.5 % operating margin 5.7 % 4.8 % net income $ 1,761 $ 1,477 $ 284 19.2 % net margin 4.0 % 3.4 % adjusted ebitda* $ 4,562 $ 4,066 $ 496 12.2 % adjusted ebitda* margin 10.4 % 9.4 % *see note 1 on page 4 for a description of this non-gaap financial measure and page 10 for the adjusted ebitda reconciliation table. despite the ongoing impact from the covid-19 pandemic, consolidated revenue was up year-over-year for first time this fiscal year. consolidated gross profit increased $1.3 million, or 13.3%, and gross margin expanded 250 basis points on service segment improvement, which offset continued weakness in the distribution segment. operating expenses grew $0.9 million, or 11.2%, due to investments to further technology initiatives and incremental expenses related to acquired businesses. net income per diluted share was $0.23 compared with $0.20 in last fiscal year’s third quarter. service segment achieved strong revenue growth and gross margin expanded significantly represents the accredited calibration, repair, inspection and laboratory instrument services business (56% of total revenue for the third quarter of fiscal 2021). ($ in thousands) change fy21 q3 fy20 q3 $'s % service segment revenue $ 24,776 $ 22,087 $ 2,689 12.2 % gross profit $ 6,915 $ 4,866 $ 2,049 42.1 % gross margin 27.9 % 22.0 % operating income $ 1,956 $ 488 $ 1,468 300.8 % operating margin 7.9 % 2.2 % adjusted ebitda* $ 3,446 $ 1,866 $ 1,580 84.7 % adjusted ebitda* margin 13.9 % 8.4 % *see note 1 on page 4 for a description of this non-gaap financial measure and page 10 for the adjusted ebitda reconciliation table. service segment revenue increased 12.2% and included $1.4 million of incremental revenue from acquisitions. service segment organic revenue growth was 5.9%, reflecting continued market share gains and more favorable timing of december holidays compared with the prior year. service revenue for the trailing twelve month period was $97.3 million, up 5.4%. service segment gross margin improved 590 basis points due to continued productivity initiatives, more seasoned technicians, the operating leverage we achieved from organic growth and the strong performance of pipettes.com. distribution revenue and margins continue to be impacted by the covid-19 pandemic represents the sale and rental of new and used professional grade handheld test, measurement and control instrumentation (44% of total revenue for the third quarter of fiscal 2021). ($ in thousands) change fy21 q3 fy20 q3 $'s % distribution segment sales $ 19,286 $ 21,092 $ (1,806) (8.6%) gross profit $ 4,330 $ 5,062 $ (732) (14.5%) gross margin 22.5% 24.0% operating income $ 563 $ 1,603 $(1,040) (64.9%) operating margin 2.9% 7.6% adjusted ebitda* $ 1,116 $ 2,200 $(1,084) (49.3%) adjusted ebitda* margin 5.8% 10.4% *see note 1 on page 4 for a description of this non-gaap financial measure and page 10 for the adjusted ebitda reconciliation table. distribution segment sales continued to be negatively impacted by the covid-19 pandemic, with reduced demand from oil and gas related businesses and other industrial manufacturing sectors. encouragingly, rental revenue of $1.4 million was up 12.2% over the prior-year period. distribution gross margin reflects lower volume from core product sales and reduced co-operative advertising and rebate programs as vendors reduced these programs to lower their costs. nine month review (results are compared with the first nine months of fiscal 2020) total revenue was $124.6 million, a decrease of 2.2%, primarily due to lower demand for distribution products as a result of the pandemic that commenced at the beginning of the company’s fiscal 2021 year. despite lower revenue, consolidated gross profit was up $1.7 million, or 5.7%, and gross margin expanded 190 basis points to 25.8%. consolidated operating expenses increased $2.3 million, or 9.7%, as the company continued to invest in technology initiatives and acquisitions. as a result, operating income was $6.6 million compared with $7.1 million in last fiscal year’s period. net income was $4.6 million, or $0.61 per diluted share, compared with $5.6 million, or $0.75 per diluted share. adjusted ebitda was $13.3 million compared with $12.8 million in prior-year period. see note 1 on page 4 for a description of this non-gaap financial measure and page 10 for the adjusted ebitda reconciliation table. strong balance sheet and liquidity year-to-date net cash provided by operations nearly doubled to $15.6 million from the prior-year period and was used, in part, to fund $4.3 million of capital expenditures, the $3.5 million acquisition of biotek and to reduce debt. capital expenditures were primarily focused on technology, service segment capabilities and rental pool assets. at the end of the third quarter, transcat had $26.8 million available for borrowing under its secured revolving credit facility. total debt of $24.4 million was down $5.9 million from fiscal 2020 year-end. the company’s leverage ratio, as defined in its credit agreement, was down to 1.24 at quarter end compared with 1.53 at fiscal 2020 year-end. outlook mr. rudow concluded, “the results of the third quarter were excellent and we are pleased with our service segment’s return to organic growth and its continued margin expansion. our balance sheet is solid and the m&a pipeline is growing and active. we are confident that our disciplined focus on highly-regulated end markets and our new customer pipeline positions us well for strong organic growth as we continue to operate in a very challenging environment. “while we have navigated the current operating environment well to date, we remain cautious of the potential impacts of the covid-19 pandemic on our business. for the fourth quarter of fiscal 2021, we expect solid service revenue growth versus last year’s fourth quarter. we expect improvement in service gross margin year-over-year, but not to the same degree we have experienced in the last two quarters, largely due to more difficult technician productivity comparisons and the anniversary of our acquisition of pipettes.com, which occurred in february of 2020. distribution is expected to continue to be negatively impacted by the current operating environment. we expect consolidated operating income for the fourth quarter of fiscal 2021 to be similar to the fourth quarter of fiscal 2020.” transcat expects its income tax rate for fiscal 2021 to a range between 22% to 23%. the company expects capital expenditures to be approximately $6.0 million to $6.5 million for full fiscal 2021. capital investments are expected to be primarily for technology, growth-oriented opportunities within both operating segments, and rental pool assets. maintenance and existing asset replacements are expected to be consistent with fiscal 2020 at approximately $1.0 million to $1.5 million. webcast and conference call transcat will host a conference call and webcast on wednesday, february 3, 2021 at 11:00 a.m. et. management will review the financial and operating results for the third 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 through wednesday, february 10, 2021. to listen to the archived call, dial (412) 317-6671 and enter conference id number 13714787, 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, non-cash stock compensation expense, restructuring expense, and non-cash loss on sale of building), 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, stock-based compensation expense and other items, 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, rather 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 below. 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, particularly the life science industry, which includes pharmaceutical, biotechnology, medical device and other fda-regulated businesses; as well as aerospace and defense, and energy and utilities. transcat provides periodic on-site services, mobile calibration services, pickup and delivery, in-house services at its 22 calibration service centers strategically located across the united states, puerto rico and canada, and services at 20 imbedded customer-site locations. 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 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 the 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,” “plans,” “aims” and other similar words. all statements addressing operating performance, events or developments that transcat expects or anticipates will occur in the future, including but not limited to statements relating to anticipated revenue, profit margins, the impact of and the company’s response to the covid-19 pandemic, the commercialization of software projects, 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 include those 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, which speak only as of the date they are made. 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, whether as the result of new information, future events or otherwise. financial tables follow. transcat, inc. consolidated statements of income (in thousands, except per share amounts) (unaudited) (unaudited) third quarter ended nine months ended december 26, december 28, december 26, december 28, 2020 2019 2020 2019 service revenue $ 24,776 $ 22,087 $ 72,297 $ 67,987 distribution sales 19,286 21,092 52,276 59,350 44,062 43,179 124,573 127,337 cost of service revenue 17,861 17,221 51,413 51,737 cost of distribution sales 14,956 16,030 41,012 45,175 32,817 33,251 92,425 96,912 gross profit 11,245 9,928 32,148 30,425 selling, marketing and warehouse expenses 4,675 4,463 13,040 13,166 administrative expenses 4,051 3,374 12,547 10,151 8,726 7,837 25,587 23,317 operating income 2,519 2,091 6,561 7,108 interest and other expense, net 219 194 779 776 income before income taxes 2,300 1,897 5,782 6,332 provision for income taxes 539 420 1,199 758 net income $ 1,761 $ 1,477 $ 4,583 $ 5,574 basic earnings per share $ 0.24 $ 0.20 $ 0.62 $ 0.76 average shares outstanding 7,437 7,367 7,415 7,316 diluted earnings per share $ 0.23 $ 0.20 $ 0.61 $ 0.75 average shares outstanding 7,580 7,557 7,532 7,470 transcat, inc. consolidated balance sheets (in thousands, except share and per share amounts) (unaudited) (audited) december 26, march 28, 2020 2020 assets current assets: $ 1,034 $ 499 30,562 30,952 860 1,132 12,437 14,180 2,317 1,697 47,210 48,460 property and equipment, net 21,292 20,833 goodwill 43,945 41,540 intangible assets, net 7,325 7,977 right of use asset, net 10,205 8,593 other assets 793 719 $ 130,770 $ 128,122 liabilities and shareholders' equity current liabilities: $ 9,844 $ 11,947 7,856 6,907 289 86 2,046 1,982 20,035 20,922 long-term debt 22,317 28,362 deferred tax liabilities 3,100 3,025 lease liabilities 8,753 6,832 other liabilities 4,058 1,894 58,263 61,035 shareholders' equity: 3,721 3,691 18,820 17,929 (410 ) (1,010 ) 50,376 46,477 72,507 67,087 $ 130,770 $ 128,122 transcat, inc. consolidated statements of cash flows (in thousands) (unaudited) for the nine months ended december 26, december 28, 2020 2019 cash flows from operating activities: net income $ 4,583 $ 5,574 adjustments to reconcile net income to net cash provided by operating activities: loss on sale of property and equipment 65 253 deferred income taxes 75 22 depreciation and amortization 5,596 4,951 provision for accounts receivable and inventory reserves 699 311 stock-based compensation expense 875 610 changes in assets and liabilities: accounts receivable and other receivables 902 398 inventory 2,072 341 prepaid expenses and other assets (678 ) (689 ) accounts payable (2,103 ) (3,679 ) accrued compensation and other liabilities 3,391 347 income taxes payable 170 (204 ) net cash provided by operating activities 16,647 8,235 cash flows from investing activities: purchase of property and equipment (4,295 ) (5,001 ) proceeds from sale of property and equipment - 184 business acquisitions, net of cash acquired (3,447 ) (452 ) payment of contingent consideration & holdbacks related to business acquisition - (864 ) net cash used in investing activities (7,742 ) (6,133 ) cash flows from financing activities: (repayments of) proceeds from revolving credit facility, net (4,504 ) 122 repayments of term loan (1,477 ) (1,416 ) issuance of common stock 649 1,625 repurchase of common stock (1,287 ) (2,822 ) net cash used in financing activities (6,619 ) (2,491 ) effect of exchange rate changes on cash (751 ) (195 ) net increase (decrease) in cash 535 (584 ) cash at beginning of period 499 788 cash at end of period $ 1,034 $ 204 transcat, inc. adjusted ebitda reconciliation table (dollars in thousands) (unaudited) fiscal 2021 q1 q2 q3 q4 ytd net income $ 798 $ 2,024 $ 1,761 $ 4,583 + interest expense 224 233 203 660 + other expense / (income) 19 84 16 119 + tax provision (77 ) 737 539 1,199 operating income $ 964 $ 3,078 2,519 $ 6,561 + depreciation & amortization 1,871 1,864 1,861 5,596 + restructuring expense 360 - - 360 + other (expense) / income (19 ) (85 ) (15 ) (119 ) + noncash stock compensation 312 366 197 875 adjusted ebitda $ 3,488 $ 5,223 $ 4,562 $ 13,273 segment breakdown service operating income $ 1,129 $ 2,977 1,956 $ 6,062 + depreciation & amortization 1,394 1,359 1,372 4,125 + restructuring expense 193 - - 193 + other (expense) / income (15 ) (57 ) (8 ) (80 ) + noncash stock compensation 162 196 126 484 service adjusted ebitda $ 2,863 $ 4,475 3,446 $ 10,784 distribution operating income $ (165 ) $ 101 563 $ 499 + depreciation & amortization 477 505 489 1,471 + restructuring expense 167 - - 167 + other (expense) / income (4 ) (28 ) (7 ) (39 ) + noncash stock compensation 150 170 71 391 distribution adjusted ebitda $ 625 $ 748 1,116 $ 2,489 fiscal 2020 q1 q2 q3 q4 ytd net income $ 1,718 $ 2,379 $ 1,477 $ 2,493 $ 8,067 + interest expense 244 243 216 231 934 + other expense / (income) 41 54 (22 ) 113 186 + tax provision (45 ) 383 420 905 1,663 operating income $ 1,958 $ 3,059 $ 2,091 $ 3,742 $ 10,850 + depreciation & amortization 1,622 1,681 1,648 1,707 6,658 + other (expense) / income 159 (54 ) 22 (112 ) 15 + noncash stock compensation 203 102 305 274 884 adjusted ebitda $ 3,942 $ 4,788 $ 4,066 $ 5,611 $ 18,407 segment breakdown service operating income $ 738 $ 1,837 $ 488 $ 2,609 $ 5,672 + depreciation & amortization 1,220 1,246 1,206 1,257 4,929 + other (expense) / income 77 (38 ) 13 (72 ) (20 ) + noncash stock compensation 112 56 159 143 470 service adjusted ebitda $ 2,147 $ 3,101 $ 1,866 $ 3,937 $ 11,051 distribution operating income $ 1,220 $ 1,222 $ 1,603 $ 1,133 $ 5,178 + depreciation & amortization 401 436 442 450 1,729 + other (expense) / income 83 (17 ) 9 (40 ) 35 + noncash stock compensation 91 46 146 131 414 distribution adjusted ebitda $ 1,795 $ 1,687 $ 2,200 $ 1,674 $ 7,356 transcat, inc. additional information - business segment data (dollars in thousands) (unaudited) change service fy 2021 q3 fy 2020 q3 $'s % service revenue $ 24,776 $ 22,087 $ 2,689 12.2 % cost of service revenue 17,861 17,221 640 3.7 % gross profit $ 6,915 $ 4,866 $ 2,049 42.1 % gross margin 27.9 % 22.0 % selling, marketing & warehouse expenses $ 2,527 $ 2,331 $ 196 8.4 % general and administrative expenses 2,432 2,047 353 17.2 % operating income $ 1,956 $ 488 $ 1,468 300.8 % % of revenue 7.9 % 2.2 % change distribution fy 2021 q3 fy 2020 q3 $'s % distribution sales $ 19,286 $ 21,092 $ (1,806 ) (8.6 %) cost of distribution sales 14,956 16,030 (1,074 ) (6.7 %) gross profit $ 4,330 $ 5,062 $ (732 ) (14.5 %) gross margin 22.5 % 24.0 % selling, marketing & warehouse expenses $ 2,148 $ 2,132 $ 16 0.8 % general and administrative expenses 1,619 1,327 229 17.3 % operating income $ 563 $ 1,603 $ (1,040 ) (64.9 %) % of sales 2.9 % 7.6 % change total fy 2021 q3 fy 2020 q3 $'s % total revenue $ 44,062 $ 43,179 $ 883 2.0 % total cost of revenue 32,817 33,251 (434 ) (1.3 %) gross profit $ 11,245 $ 9,928 $ 1,317 13.3 % gross margin 25.5 % 23.0 % selling, marketing & warehouse expenses $ 4,675 $ 4,463 $ 212 4.8 % general and administrative expenses 4,051 3,374 677 20.1 % operating income $ 2,519 $ 2,091 $ 428 20.5 % % of revenue 5.7 % 4.8 % transcat, inc. additional information - business segment data (dollars in thousands) (unaudited) change service fy 2021 ytd fy 2020 ytd $'s % service revenue $ 72,297 $ 67,987 $ 4,310 6.3% cost of service revenue 51,413 51,737 (326) (0.6%) gross profit $ 20,884 $ 16,250 $ 4,634 28.5% gross margin 28.9% 23.9% selling, marketing & warehouse expenses $ 7,302 $ 6,944 $ 358 5.2% general and administrative expenses 7,520 6,243 1,277 20.5% operating income $ 6,062 $ 3,063 $ 2,999 97.9% % of revenue 8.4% 4.5% change distribution fy 2021 ytd fy 2020 ytd $'s % distribution sales $ 52,276 $ 59,350 $ (7,074) (11.9%) cost of distribution sales 41,012 45,175 (4,163) (9.2%) gross profit $ 11,264 $ 14,175 $ (2,911) (20.5%) gross margin 21.5% 23.9% selling, marketing & warehouse expenses $ 5,738 $ 6,222 $ (490) (7.9%) general and administrative expenses 5,027 3,908 1,119 28.6% operating income $ 499 $ 4,045 $ (3,546) (87.7%) % of sales 1.0% 6.8% change total fy 2021 ytd fy 2020 ytd $'s % total revenue $ 124,573 $ 127,337 $ (2,764) (2.2%) total cost of revenue 92,425 96,912 (4,487) (4.6%) gross profit $ 32,148 $ 30,425 $ 1,723 5.7% gross margin 25.8% 23.9% selling, marketing & warehouse expenses $ 13,040 $ 13,166 $ (126) (1.0%) general and administrative expenses 12,547 10,151 2,396 23.6% operating income $ 6,501 $ 7,108 $ (607) (8.5%) % of revenue 5.3% 5.6%
