Transcat reports consolidated operating income growth of 40% and service segment revenue growth of 18% for fiscal 2020 second quarter
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 second quarter ended september 28, 2019 (the “second quarter”) of fiscal year 2020, which ends march 28, 2020 (“fiscal 2020”). results include the previously reported acquisitions of angel’s instrumentation, inc., effective august 31, 2018 and gauge repair service, effective april 1, 2019. lee d. rudow, president and ceo, commented, “our initiatives to diversify and differentiate our value proposition are clearly resonating in the market. we achieved strong service segment revenue growth, particularly on the organic side, and had meaningful margin expansion in both operating segments driving our strong bottom line results. “we continue to expand our market position, and while still early in the process, we are making strides every day in improving our margin profile. specifically, the early results of our ongoing technology and productivity initiatives are taking hold as demonstrated in this quarter’s service segment performance.” second quarter fiscal 2020 review (results are compared with the second quarter of the fiscal year ended march 30, 2019 (“fiscal 2019”)) ($ in thousands) change fy20 q2 fy19 q2 $'s % service revenue $ 23,502 $ 19,902 $ 3,600 18.1 % distribution sales $ 18,261 $ 18,977 $ (716 ) (3.8 %) revenue $ 41,763 $ 38,879 $ 2,884 7.4 % gross profit $ 10,445 $ 9,139 $ 1,306 14.3 % gross margin 25.0 % 23.5 % operating income $ 3,059 $ 2,176 $ 883 40.6 % operating margin 7.3 % 5.6 % net income $ 2,379 $ 1,488 $ 891 59.9 % net margin 5.7 % 3.8 % adjusted ebitda* $ 4,788 $ 4,015 $ 773 19.3 % adjusted ebitda* margin 11.5 % 10.3 % *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 record second quarter consolidated revenue of $41.8 million, up 7.4% or 5.5% when excluding acquired revenue. gross margin expanded 150 basis points. total operating expenses were up $0.4 million to $7.4 million; however, as a percent of revenue, operating expenses decreased 20 basis points to 17.7%. as a result, operating income increased more than 40% and operating margin expanded 170 basis points to 7.3%. net income grew nearly 60% and diluted earnings per share increased $0.12 to $0.32. the growth in net income continues to be aided by the increased discrete income tax benefits related to share-based awards that were greater than expected, due to second quarter stock option exercises by certain company officers. service segment delivers strong organic growth while focusing on productivity enhancements represents the accredited calibration, repair, inspection and laboratory instrument services business (56% of total revenue for the second quarter of fiscal 2020). ($ in thousands) change fy20 q2 fy19 q2 $'s % service segment revenue $ 23,502 $ 19,902 $ 3,600 18.1 % gross profit $ 6,012 $ 4,807 $ 1,205 25.1 % gross margin 25.6 % 24.2 % operating income $ 1,837 $ 1,125 $ 712 63.3 % operating margin 7.8 % 5.7 % adjusted ebitda* $ 3,101 $ 2,414 $ 687 28.4 % adjusted ebitda* margin 13.2 % 12.1 % *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 was $23.5 million, an increase of 18.1%, which reflects double-digit growth in both the u.s. and canada. organic service revenue growth was a strong 15.1% in the second quarter, in part reflecting new business from the highly regulated life sciences market and also from growth in other regulated sectors. on a trailing twelve-month basis, service revenue was $90.7 million, up 13.5% when compared with the trailing twelve-month period ending with the prior-fiscal year second quarter. service segment gross margin improved 140 basis points due to the early progress on the company’s various productivity initiatives, improved efficiency of recently hired technicians, and client-based lab contracts initiated in prior quarters achieving expected profitability after start-up costs trail off. segment operating income grew more than 63% and operating margin improved 210 basis points. distribution segment generated strong gross and operating margin performance represents the sale and rental of new and used professional grade handheld test, measurement and control instrumentation (44% of total revenue for the second quarter of fiscal 2020). ($ in thousands) change fy20 q2 fy19 q2 $'s % distribution segment sales $ 18,261 $ 18,977 $ (716 ) (3.8 %) gross profit $ 4,433 $ 4,332 $ 101 2.3 % gross margin 24.3 % 22.8 % operating income $ 1,222 $ 1,051 $ 171 16.3 % operating margin 6.7 % 5.5 % adjusted ebitda* $ 1,687 $ 1,601 $ 86 5.4 % adjusted ebitda* margin 9.2 % 8.4 % *see note 1 on page 4 for a description of this non-gaap financial measure and page 9 for the adjusted ebitda reconciliation table. distribution segment gross profit increased 2.3% and gross margin expanded 150 basis points despite lower sales, due to the mix of products sold, including solid growth in rentals. the company’s equipment rental business continued to expand with sales up 32% to $1.3 million in the quarter. six month review (results are compared with the first six months of fiscal 2019) total revenue was $84.2 million, an increase of 11.4%, or $8.6 million, primarily due to the factors described above in the second quarter fiscal 2020 review. consolidated gross profit was up $2.2 million, or 12.3%, to $20.5 million, and gross margin expanded 20 basis points to 24.4%. consolidated operating expenses increased $1.4 million or 10.2% as the company continued to invest in its operating infrastructure. however, as a percentage of total revenue, consolidated operating expenses were 18.4%, down 20 basis points. as a result, operating income increased $0.8 million or 19.4%, and operating margin expanded 40 basis points to 6.0%. net income was $4.1 million, or $0.55 per diluted share, compared with $2.9 million, or $0.39 per diluted share. adjusted ebitda was $8.7 million, or 10.4% of revenue, compared with $7.9 million, or 10.4% of revenue. see note 1 on page 4 for a description of this non-gaap financial measure and page 9 for the adjusted ebitda reconciliation table. balance sheet and cash flow overview transcat acquired infinite integral solutions inc. (“iis”), a canadian software company with an application to facilitate the automation of various calibration disciplines, effective july 19, 2019. total consideration for the shares of iis was c$1.4 million, subject in part to the achievement of certain milestones, and was funded with debt. in the second quarter, c$0.6m of the purchase price was paid. also in the second quarter, $0.5 million of cash was used to fund the release of certain purchase agreement holdbacks from the august 2018 angel’s instrumentation, inc. acquisition. at september 28, 2019, the company had total debt of $24.7 million, with $18.9 million available under its secured revolving credit facility. the company’s leverage ratio, as defined in its credit agreement, was 1.32 at september 28, 2019, compared with 1.12 at fiscal 2019 year-end. capital expenditures were $4.0 million for the first six months of fiscal 2020, with investments focused on customer-driven expansion of service segment capabilities and the company’s rental business. outlook mr. rudow concluded, “we believe we are well on pace to achieve record results in fiscal 2020. we have a high level of confidence and expect to continue to take market share in calibration services, especially in the life science and other regulated sectors where our commitment to quality reduces our customers’ risk. we also believe we are well positioned to achieve strong organic service growth for the remainder of this fiscal year. “we plan to continue to build the business for the long term and believe our investments in people, operational excellence and technology will position transcat to further capitalize on organic and acquired opportunities.” transcat adjusted its expected income tax rate for full year fiscal 2020 down to 18% to 19% from the previously provided range of 21% to 22%, largely due to the increased discrete income tax benefit received for certain share-based awards in the second quarter. the company’s capital expenditure plan for fiscal 2020 remains in the $7.8 million to $8.2 million range. capital investments are expected to be primarily focused on technology infrastructure to drive operational excellence, fund 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, october 23, 2019 at 11:00 a.m. et. management will review the financial and operating results for the second 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, october 30, 2019. to listen to the archived call, dial (412) 317-6671 and enter conference id number 13694759, 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-based compensation 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, 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,” “plans,” 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, the commercialization of software products, 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, 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. financial tables follow. transcat, inc. consolidated statements of income (in thousands, except per share amounts) (unaudited) (unaudited) second quarter ended six months ended september 28, september 29, september 28, september 29, 2019 2018 2019 2018 service revenue $ 23,502 $ 19,902 $ 45,900 $ 39,227 distribution sales 18,261 18,977 38,258 36,310 total revenue 41,763 38,879 84,158 75,537 cost of service revenue 17,490 15,095 34,516 29,501 cost of distribution sales 13,828 14,645 29,145 27,784 total cost of revenue 31,318 29,740 63,661 57,285 gross profit 10,445 9,139 20,497 18,252 selling, marketing and warehouse expenses 4,231 4,020 8,703 8,052 administrative expenses 3,155 2,943 6,777 5,999 total operating expenses 7,386 6,963 15,480 14,051 operating income 3,059 2,176 5,017 4,201 interest and other expense, net 297 195 582 420 income before income taxes 2,762 1,981 4,435 3,781 provision for income taxes 383 493 338 865 net income $ 2,379 $ 1,488 $ 4,097 $ 2,916 basic earnings per share $ 0.32 $ 0.21 $ 0.56 $ 0.41 average shares outstanding 7,331 7,200 7,293 7,187 diluted earnings per share $ 0.32 $ 0.20 $ 0.55 $ 0.39 average shares outstanding 7,484 7,520 7,441 7,486 transcat, inc. consolidated balance sheets (in thousands, except share and per share amounts) (unaudited) september 28, march 30, 2019 2019 assets current assets: cash $ 920 $ 788 accounts receivable, less allowance for doubtful accounts of $392 and $338 as of september 28, 2019 and march 30, 2019, respectively 26,699 27,469 other receivables 988 1,116 inventory, net 15,325 14,304 prepaid expenses and other current assets 2,409 1,329 total current assets 46,341 45,006 property and equipment, net 21,189 19,653 goodwill 34,889 34,545 intangible assets, net 4,341 5,233 right to use asset, net 7,424 - other assets 821 793 total assets $ 115,005 $ 105,230 liabilities and shareholders' equity current liabilities: accounts payable $ 11,139 $ 14,572 accrued compensation and other liabilities 6,289 5,450 income taxes payable - 228 current portion of long-term debt 1,940 1,899 total current liabilities 19,368 22,149 long-term debt 22,722 19,103 deferred tax liability 2,460 2,450 lease liability 5,920 - other liabilities 1,879 1,898 total liabilities 52,349 45,600 shareholders' equity: common stock, par value $0.50 per share, 30,000,000 shares authorized; 7,357,973 and 7,210,882 shares issued and outstanding as of september 28, 2019 and march 30, 2019, respectively 3,679 3,605 capital in excess of par value 17,007 16,467 accumulated other comprehensive loss (537 ) (611 ) retained earnings 42,507 40,169 total shareholders' equity 62,656 59,630 total liabilities and shareholders' equity $ 115,005 $ 105,230 transcat, inc. consolidated statements of cash flows (in thousands) (unaudited) for the six months ended september 28, september 29, 2019 2018 cash flows from operating activities: net income $ 4,097 $ 2,916 adjustments to reconcile net income to net cash provided by operating activities: loss on sale of property and equipment 240 6 deferred income taxes 10 (1 ) depreciation and amortization 3,303 3,067 provision for accounts receivable and inventory reserves 201 74 stock-based compensation expense 305 606 changes in assets and liabilities: accounts receivable and other receivables 778 856 inventory (807 ) (1,172 ) prepaid expenses and other assets (1,149 ) 101 accounts payable (3,433 ) (706 ) accrued compensation and other liabilities (475 ) (1,271 ) income taxes payable (236 ) 389 net cash provided by operating activities 2,834 4,865 cash flows from investing activities: purchase of property and equipment (4,048 ) (3,703 ) proceeds from sale of property and equipment 184 - business acquisitions, net of cash acquired (452 ) (3,614 ) payment of contingent consideration & holdbacks related to business acquisition (484 ) - net cash used in investing activities (4,800 ) (7,317 ) cash flows from financing activities: proceeds from revolving credit facility, net 4,598 3,517 repayments of term loan (938 ) (1,071 ) issuance of common stock 1,372 132 repurchase of common stock (2,822 ) (143 ) net cash provided by financing activities 2,210 2,435 effect of exchange rate changes on cash (112 ) 11 net increase/(decrease) in cash 132 (6 ) cash at beginning of period 788 577 cash at end of period $ 920 $ 571 transcat, inc. adjusted ebitda reconciliation table (dollars in thousands) (unaudited) fiscal 2020 q1 q2 q3 q4 ytd net income $ 1,718 $ 2,379 $ 4,097 + interest expense 244 243 487 + other expense / (income) 41 54 95 + tax provision (45 ) 383 338 operating income $ 1,958 $ 3,059 $ 5,017 + depreciation & amortization 1,622 1,681 3,303 + other (expense) / income 159 (54 ) 105 + noncash stock compensation 203 102 305 adjusted ebitda $ 3,942 $ 4,788 $ 8,730 segment breakdown service operating income $ 738 $ 1,837 $ 2,575 + depreciation & amortization 1,220 1,246 2,466 + other (expense) / income 77 (38 ) 39 + noncash stock compensation 112 56 168 service adjusted ebitda $ 2,147 $ 3,101 $ 5,248 distribution operating income $ 1,220 $ 1,222 $ 2,442 + depreciation & amortization 401 436 837 + other (expense) / income 83 (17 ) 66 + noncash stock compensation 91 46 137 distribution adjusted ebitda $ 1,795 $ 1,687 $ 3,482 fiscal 2019 q1 q2 q3 q4 ytd net income $ 1,428 $ 1,488 $ 1,569 $ 2,660 $ 7,145 + interest expense 206 197 250 250 903 + other expense / (income) 19 (2 ) 45 29 91 + tax provision 372 493 530 695 2,090 operating income $ 2,025 $ 2,176 $ 2,394 $ 3,634 $ 10,229 + depreciation & amortization 1,567 1,500 1,666 1,628 6,361 + other (expense) / income (19 ) 2 (45 ) (29 ) (91 ) + noncash stock compensation 269 337 363 358 1,327 adjusted ebitda $ 3,842 $ 4,015 $ 4,378 $ 5,591 $ 17,826 segment breakdown service operating income $ 1,068 $ 1,125 $ 578 $ 2,431 $ 5,202 + depreciation & amortization 1,189 1,116 1,248 1,201 4,754 + other (expense) / income (13 ) (1 ) (35 ) (20 ) (69 ) + noncash stock compensation 146 174 190 192 702 service adjusted ebitda $ 2,390 $ 2,414 $ 1,981 $ 3,804 $ 10,589 distribution operating income $ 957 $ 1,051 $ 1,816 $ 1,203 $ 5,027 + depreciation & amortization 378 384 418 427 1,607 + other (expense) / income (6 ) 3 (10 ) (9 ) (22 ) + noncash stock compensation 123 163 173 166 625 distribution adjusted ebitda $ 1,452 $ 1,601 $ 2,397 $ 1,787 $ 7,237 transcat, inc. additional information - business segment data (dollars in thousands) (unaudited) change service fy 2020 q2 fy 2019 q2 $'s % service revenue $ 23,502 $ 19,902 $ 3,600 18.1 % cost of service revenue $ 17,490 $ 15,095 $ 2,395 15.9 % gross profit $ 6,012 $ 4,807 $ 1,205 25.1 % gross margin 25.6 % 24.2 % selling, marketing & warehouse expenses $ 2,227 $ 2,031 $ 196 9.7 % general and administrative expenses $ 1,948 $ 1,651 $ 297 18.0 % operating income $ 1,837 $ 1,125 $ 712 63.3 % % of revenue 7.8 % 5.7 % change distribution fy 2020 q2 fy 2019 q2 $'s % distribution sales $ 18,261 $ 18,977 $ (716 ) (3.8 %) cost of distribution sales $ 13,828 $ 14,645 $ (817 ) (5.6 %) gross profit $ 4,433 $ 4,332 $ 101 2.3 % gross margin 24.3 % 22.8 % selling, marketing & warehouse expenses $ 2,004 $ 1,989 $ 15 0.8 % general and administrative expenses $ 1,207 $ 1,292 $ (85 ) (6.6 %) operating income $ 1,222 $ 1,051 $ 171 16.3 % % of sales 6.7 % 5.5 % change total fy 2020 q2 fy 2019 q2 $'s % total revenue $ 41,763 $ 38,879 $ 2,884 7.4 % total cost of revenue $ 31,318 $ 29,740 $ 1,578 5.3 % gross profit $ 10,445 $ 9,139 $ 1,306 14.3 % gross margin 25.0 % 23.5 % selling, marketing & warehouse expenses $ 4,231 $ 4,020 $ 211 5.2 % general and administrative expenses $ 3,155 $ 2,943 $ 212 7.2 % operating income $ 3,059 $ 2,176 $ 883 40.6 % % of revenue 7.3 % 5.6 % transcat, inc. additional information - business segment data (dollars in thousands) (unaudited) change service fy 2020 ytd fy 2019 ytd $'s % service revenue $ 45,900 $ 39,227 $ 6,673 17.0 % cost of service revenue $ 34,516 $ 29,501 $ 5,015 17.0 % gross profit $ 11,384 $ 9,726 $ 1,658 17.0 % gross margin 24.8 % 24.8 % selling, marketing & warehouse expenses $ 4,613 $ 4,131 $ 482 11.7 % general and administrative expenses $ 4,196 $ 3,402 $ 794 23.3 % operating income $ 2,575 $ 2,193 $ 382 17.4 % % of revenue 5.6 % 5.6 % change distribution fy 2020 ytd fy 2019 ytd $'s % distribution sales $ 38,258 $ 36,310 $ 1,948 5.4 % cost of distribution sales $ 29,145 $ 27,784 $ 1,361 4.9 % gross profit $ 9,113 $ 8,526 $ 587 6.9 % gross margin 23.8 % 23.5 % selling, marketing & warehouse expenses $ 4,090 $ 3,921 $ 169 4.3 % general and administrative expenses $ 2,581 $ 2,597 $ (16 ) (0.6 %) operating income $ 2,442 $ 2,008 $ 434 21.6 % % of sales 6.4 % 5.5 % change total fy 2020 ytd fy 2019 ytd $'s % total revenue $ 84,158 $ 75,537 $ 8,621 11.4 % total cost of revenue $ 63,661 $ 57,285 $ 6,376 11.1 % gross profit $ 20,497 $ 18,252 $ 2,245 12.3 % gross margin 24.4 % 24.2 % selling, marketing & warehouse expenses $ 8,703 $ 8,052 $ 651 8.1 % general and administrative expenses $ 6,777 $ 5,999 $ 778 13.0 % operating income $ 5,017 $ 4,201 $ 816 19.4 % % of revenue 6.0 % 5.6 %
