Transcat, Inc. (TRNS) on Q4 2021 Results - Earnings Call Transcript

Operator: Greetings, and welcome to Transcat, Inc's. Fourth Quarter and Full Fiscal Year 2021 Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Mychajluk, Investor Relations for Transcat. Thank you. You may begin. Craig Mychajluk : Yes, thank you. And good morning, everyone. We certainly appreciate your time today and your interest in Transcat. With me here on the call today, we have our President, Chief Executive Officer, Lee Rudow; and our Chief Financial Officer, Mark Doheny. After formal remarks, we'll open the call for questions. If you don't have the news release that crossed the wire after markets closed yesterday, it can be found at our website at transcat.com. The slides that accompany today's discussion are also on our website. Lee Rudow: Thank you, Craig. Good morning, everyone. Thank you for joining us on the call today. Without question, our team is pleased with the fourth quarter results and the results for the full fiscal 2021 year. In both the fourth quarter and full fiscal 2021, we generate record revenue, record operating income, record service margins and record cash flow. The company fought through the challenges of the pandemic and demonstrated both the inherent resiliency of the business and the adaptability of our dedicated team. Our performance underscores the value of our services and validates the investments we've made in technology, infrastructure and the talent needed to effectively execute our strategic plan, especially this past year. Our Service segment continues to be our primary growth engine. The segment generated strong growth across every financial metric. And in the fourth quarter of fiscal 2021, we returned to double-digit organic revenue growth. It was our 48th straight quarter of service growth and resulted in Transcat passing the $100 million annual service revenue mark for service for the first time. Mark Doheny: Thanks, Lee, and good morning, everyone. I will start on Slide 4 of our earnings deck, which provides detail regarding our revenue for the fourth quarter and the full year. For the fourth quarter, consolidated revenue of nearly $49 million was up 7% on strong service revenue and sequentially improving distribution revenue. Turning to the segments. As we mentioned, we were very pleased with Service segment revenue growth of approximately 16%, with 10% organic growth and 6% coming from acquisitions. The strong organic growth was mainly driven by improving order trends and continued market share gains, and to a lesser degree, by an easier comparison to the prior year quarter as the service business began to feel the impact of the COVID-19 pandemic towards the second half of March 2020. Lee Rudow: Okay. Thank you, Mark. We entered fiscal 2022 with a strong balance sheet, strong organic sales pipeline and a very active acquisition pipeline. Operationally, we expect our fiscal 2021 gains in service gross margin to be largely sustainable. Operator: . Our first question comes from the line of Greg Palm with Craig-Hallum. Greg Palm: I guess, just to start off on services. I'm curious, what are you seeing in terms of growth by end market? 10% organic was a pretty solid number. And what I'm trying to figure out is that is it broad-based? Is it driven more by certain end markets like life sciences, what are you seeing? Lee Rudow: Really, I would characterize it, Greg, as broad-based. We are seeing some recovery in the industrial markets, which is always good for us. Life science has been consistent for years now. And so that's certainly playing a role. But overall, I would say that the double-digit growth is based upon recovery across the industrial marketplace, more than anything else from previous quarters. Greg Palm: Is that fair to say then that most of your end markets now are at or exceeding kind of that pre-pandemic level? Or do you still feel like there's some pent-up demand out there? Lee Rudow: It's hard to tell with certainty, but I think most have recovered somewhat. I think there probably is some pent-up demand. We'll see some of that throughout the year. I don't think oil and gas, for example, has fully recovered. I think it's taken steps in that direction. So a little bit of pent-up demand, some recovery, it's kind of a mix. Greg Palm: Okay. Got it. Makes sense. And then specifically on the margin, I just wanted to kind of clarify some comments. I thought Mark had said something about gross margins in service being sustainable, but the guidance kind of is vague in terms of expecting year-over-year improvement, but not to the same degree experienced last year. So can you just help us understand exactly what you mean by the comments there? Lee Rudow: Yes. So I think Mark and I both try to allude to the fact that we expect the company to continue to drive improvements in our margin. Now we're coming off of a year with a 500 basis point improvement. And so we're cautious in that. We don't want to send indicators that we expect to do that again. However, we do expect to improve. And as I've said in the past and Mark has said in the past, it's not going to always be quarter-to-quarter. But directionally, we have things in place. We are investing in technology. We are investing in automation to -- with the end purpose of driving margins, and we're going to get that done. That's our intention. So you're seeing some tempering based upon year-over-year improvement. We don't see that necessarily continuing at that rate, but we do see improvements. And that's what we're trying to convey. Greg Palm: But is the -- I guess, is the improvement commentary based on what you saw in last year's quarter? Or is it based on what you saw for the fiscal year? I'm just trying to gauge what kind of benchmark are we using? Are we using 30% as the improvement level or the 26% in change that you saw last quarter a year ago? Lee Rudow: Yes. I think you've got to get closer to the 30%. And like I said before, it could dip down 100 basis points here and there. We're in the 30% range, and I expect to stay there. And again, we alluded to the sustainability of the improvements we made. I think you're going to see that apparent in this upcoming year. So I think I'd guide you closer to the 30% then going back this time last year to 26? Mark Doheny: Yes. For the full -- just to be clear, that's for the full year. We have a full year of 30%. We just achieved that milestone. We expect improvement for the full year. And Greg, to your point around the Q1 guidance, we do expect improvement there, too. And if we were just sort of setting the tone that 500 basis points was an extremely good year. We expect improvement in both the quarter and the full year, but maybe not to that degree. Operator: Our next question comes from the line of Scott Buck with H.C. Wainwright. Scott Buck: It seems like a little bit of a slower start to M&A this calendar year. I'm curious, is that a reflection of the pricing environment? Or you get a little bit of a deer in the headlights from COVID with some of the potential targets? Lee Rudow: Yes. I wouldn't read into anything about -- relative to a slow start to the calendar year. It was about 2 quarters ago, almost 3 now that we hired a VP of Corporate Development for the express purpose of really taking advantage of what we thought was going to be a good opportune time in the market to make acquisitions. And in combination with the fact, Scott, that we were ready as a company to sort of get to the next level. And nothing has changed. So we've built a really nice pipeline. And I try to characterize that in our script, and I think you'll see a higher level of activity as the year progresses. So taking the 3 or 4 months at the beginning of calendar year, and I wouldn't characterize it as anything other than what it is, and it's a time when we have an active and well built pipeline, and I expect to see some results from that. Scott Buck: Okay. Good. I appreciate that color. Second one for me, how should we think about margin in distribution longer term? I mean, can they be maintained at these levels? Or are we likely to see some compression over time? Lee Rudow: I think our goal is to see stability in distribution, and that would be both from a revenue and a margin perspective. We have our rental program, which we launched about 4 or 5 years ago now for the purpose of keeping margins stable. It's not as strategic as it was for the company 10 years ago, distribution, but it does still provide us with a lot of leads and ample opportunity to sell service to customers who buy products from us. So we really want to see that business be stable over the next couple of years. And we've designed it. So we've invested so that it should get close to that stability. So that's what we would expect. I don't expect margins to increase significantly. I just -- it is satisfying. Scott Buck: And then are you guys having any challenges in sourcing inventory in distribution to meet some of this pickup in demand? Lee Rudow: Yes, we actually are. Mark, do you want to address that? Mark Doheny: Yes, no. I think it's -- what you're hearing and reading with all the other companies were sort of experiencing the same thing, nothing unique to us I would say. But between container shortages and COVID ramping up production in certain areas being difficult and drivers, yes, it's -- so our backlog in the distribution business is higher than it normally is. We've had some good orders recently, but we -- also, the lead times, it just takes longer from the time we tell our vendors we need something to the time we get it. And we hope that works itself out, but we're not immune to what's going on in the world there. Operator: Our next question comes from the line of Gerry Sweeney with ROTH Capital. Gerry Sweeney: I want to start with revenue. Just this is more out of curiosity, I guess, than anything. But how much of this jump is maybe we talked about a little bit of pent-up demand in the past versus maybe just general economic expansion? Lee Rudow: So Gerry, I said a little bit earlier, I really think it's a combination of both. We are seeing recovery in the industrial markets that has been helpful in terms of achieving growth. So that we would expect to continue. And without question, there's an element of pent-up demand as well. So I think you're seeing a blend. We're going to continue to guide towards -- and service business towards that mid- to high single-digit growth organically. And I think we're confident in that range. Gerry Sweeney: Got it. That's fair. And then just on the margin side, not to beat a dead horse, but any way you could maybe bucket out your maybe mix price versus productivity and enhancements. I know in the past, we talked about software calibration being a longer-term driver of margin improvement. And just want to see where there are... Mark Doheny: Gerry, this is Mark. For the quarter, it really was driven by technician productivity year-over-year. So doing -- achieving more standard hours, less hours. And then leverage -- and when you start growing 10% organically, as Lee talked about before and the team has talked about before, you have a lot of inherent leverage on our fixed cost. Those 2 things drove the vast majority of the past quarter and really for the full year, improvements. So that's what I would continue to highlight. Gerry Sweeney: Got it. And I don't want to put numbers in anyone's mouth, but I -- for some reason, the 35% gross margins long-term was a number that just kind of stuck in my head. I'm not sure if that's the exact number. And obviously, I think software calibration and automation plays a big role into that. Is that what we're going to look towards maybe medium to long term? Lee Rudow: When we think about margin enhancement and margin growth, we started this, call it a journey, for lack of a better word, back when we hit around 24 some odd percent. And we had a pretty good plan in place, Gerry, to get us to 30. We got there probably earlier than we expected. And so that's good news. But we're not done. And so the question is, what's achievable? And how long is it going to take? I think we're going to stick to the idea that we're going to have improvement over time. It's going to be really consistent. And I don't think it's unrealistic or unachievable to get into the mid-30s. I think that's a conversation that we're having internally. It's not going to be quarter-to-quarter. We don't have time frames on it, whether it be a year or 2 or 3, but at some point in the future, I anticipate that we'll be having that conversation. And so you probably heard mid-30s as a -- something that was mentioned in the last meeting, during one of the Q&A sessions. And it's part of the conversation. Gerry Sweeney: Got it. That's fair. Again, I don't want to put any numbers in anyone's mouth, but that's what the number I got in my head. And then just on the labor side, any issues in actually acquiring labor, everything seems to be tightening up across the board. And listen, great quarter. I think a lot of blue sky ahead of you. What I'm trying to figure out is maybe even set the table a little bit that, as you said, things question -- don't look at things quarter-to-quarter, look at it more year-to-year. And in the past, you've sometimes higher chunks, we'll say, of technicians and it hit margins. Just curious if there's -- if that could be in the play at some point, so no one gets surprised, et cetera? Lee Rudow: Yes. So it's a great question. And anyone who has studied this company knows that when we have to hire a lot of people at one time, there can be short-term deflation in margins, that could be a quarter or two. It takes a couple of quarters to get a tech up and running. The more growth you achieve organically, the more you're going to need technicians. Technicians are never easy to find. So there's always going to be those training periods as you hire a large number of technicians. But that shouldn't take our eye off the ball, which is longer term, efficiency in the operation and automation and margin enhancement. So that's why we always say, let's not look at this quarter-to-quarter. High rates of growth do sometimes have a short-term dampening effect on margins. Now as we get better at what we do and put more technology to our operation, we should be able to offset that better than we've been able to do in the past. So that will be a factor as well that we would look to achieve. Gerry Sweeney: Got it. And again, great quarter, and I actually look at hiring as a positive so... Lee Rudow: Yes, exactly. Operator: Our next question comes from the line of Mitra Ramgopal with Sidoti & Company. Mitra Ramgopal: First, just on the higher CapEx and investments in technology infrastructure, if you can give us a sense in terms of where that might entail and in terms of helping you facilitate expansion via M&A and also overall improving margins further? Mark Doheny: Yes. I would say, we do -- we’re forecasting that we'll spend a little more this year in the $7.5 million to $8.5 million range. We're going to continue invest in technology. We've talked about that. We'll continue to invest in rental pool assets, maybe even slightly more than the prior year as it grows very quickly. I mentioned in my prepared remarks that automation -- calibration automation, there will be investments in that area. And that's going to have a year-over-year impact more than we invested in the prior year. So nothing really out of the ordinary. The good news, it's really centered around initiatives that are going to help us long term. So that's what I -- how I would answer that question. Mitra Ramgopal: Okay. Noted. And then, Lee, just a real big picture question. If you can give us a sense as to how much you think maybe the competitive environment has changed as a result of the pandemic and maybe opportunities that you have now from an M&A standpoint or even just maybe if you're seeing any willingness of some potential cost measures as it relates to sourcing that might have been existing before? Lee Rudow: Well, from an M&A perspective, Mitra, we did anticipate some quarters ago sometime last year, longer-term that the pandemic was going to have the type of effect on the market and smaller competitors that might perhaps make available some acquisitions that wouldn't otherwise be available to us. And people would get tired, and it would be a difficult challenge for smaller companies. And I think all that's come to fruition. We have an active pipeline that we are pursuing and working. And I think that an uptick in M&A activity will be a byproduct of some of those factors, the COVID effect. But it's also a factor of the fact -- it's also a factor that we're facing on that. We've hired, as I mentioned before, a VP to drive those initiatives for us. So it's a combination of right time, right efforts, right investment, and I think you'll see an uptick in some activity levels. Mitra Ramgopal: And then just on the perhaps increased willingness of maybe to customers now or clients as it relates to outsourcing the services to you? Lee Rudow: Right. We haven't seen a major shift or change so far in the fiscal year or even in Q4 in terms of outsourcing. We'll always be well positioned to do what we call our client-based labs when there's a market for it. But we do expect to achieve our organic growth rates, whether it's from client-based labs, which is a byproduct of outsourcing or any of our other activities to achieve organic growth. So one way or the other. But I can't note a specific change in the last 60 days. That may occur later in the year, and I would certainly talk about it when that happens. Operator: Our next question comes from the line of Dick Ryan with Colliers Securities. Richard Ryan: Lee, as a follow-up to the CBL, how many of those are you operating now? And what kind of margin contribution do they bring in? Is it additive or dilutive to the core margins you see? Lee Rudow: Dick, we've got about 20 of those going nationwide, which is the same number we had last year. We've not lost any of them in the 9.5 years I've been here, and we've gained some through the years, obviously. From a dilutive standpoint, the margins tend to be in range of our normal margins. I think it could be 100 basis points less, depending on the particular customer. But as you know, these are very sticky, and there's a high lifetime value of these customers. So sometimes, that's the benefit that you get. But yes, I would say that the number is in the 20 range. Richard Ryan: Okay. So on the CapEx for the rental pool assets, it's growing rapidly, small base. Any kind of ballpark of how you position that business and what rental could contribute 3, 5 years down the road? How big of a market is that you're trying to achieve? Lee Rudow: Great. Our story, Dick is going to be about the same as it's been in the past. And we launched that business back in '16 with the idea of stabilizing distribution, bridging together our distribution segment with our Service segment, there was a sort of a myriad of benefits that we're looking to achieve. And nothing has really changed. I mean, I don't see us -- it's not part of our current strategic plan to be a $50 million revenue rental company. It's not unlikely -- it's not -- it is realistic, however, to say that we could go from where we are today, which is $5 million, $6 million rental company, let's say, to a $10 million revenue company, that very much is part of our plan. So I think modest growth, so that continues to stabilize that business, help stabilize that business for the express purpose of helping to generate leads and cash flow so that we can grow our service business. That's our strategy. That's rentals part in that strategy, and I think it's going to continue. Operator: . Our next question comes from the line of Kara Anderson with B. Riley Securities. Kara Anderson: Just one more on M&A from me. Just curious if there's an appetite for an availability of larger acquisition opportunities out there? Lee Rudow: So Kara, I appreciate the question. So our pipeline today is rather different than it was a year ago at this time for 2 reasons. One, there are more opportunities that we're looking at today from a volume perspective. And again, that's based upon the initiatives we've launched to make it so. But within the pipeline itself, we are looking at larger opportunities. And when we say larger, we're talking our average size in the past has been the $3 million to $5 million revenue range. We've done something a little larger. But I think our -- I would characterize our current pipeline as having similar type deals in it and some larger type deals that are closer to sort of the $8 million to $10 million range, $10 million to $12 million range. So it's kind of -- it sort of runs the gamut, but I do think there's some interesting opportunities, and we just have to eventually see if it's a good match and if we can get some deals done. Kara Anderson: Got it. And then just one last one on the guide for distribution growth in the high teens range. It imply a sequential decrease from the fourth quarter. Can you help me with that? Why would that be the case as you look more towards a recovery or seasonality offsetting it? Mark Doheny: Yes. It's just the normal seasonality of the business. Kara, I would describe that as -- yes, just -- I mean there's posted factors, but you'll -- that's the normal seasonality of the business. Operator: There are no further questions in the queue. I'd like to hand the call back to management for closing remarks. Lee Rudow: Well, this is Lee. I appreciate everyone being on the call today. Thank you for joining us. Feel free to check with us any time. Otherwise, I guess we'll speak with everyone after we release our first quarter results. Thanks again for participating. Operator: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
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Transcat, Inc. (NASDAQ:TRNS) Earnings Report Analysis

  • Earnings per share (EPS) of $0.64 was reported, slightly below the estimated $0.66, marking a negative surprise of 3.03%.
  • Revenue for the quarter was $77.13 million, surpassing the estimated $76.40 million by 0.44%.
  • The company has a price-to-earnings (P/E) ratio of 44.23, indicating a premium valuation by investors.

Transcat, Inc. (NASDAQ:TRNS) operates within the Zacks Instruments - Control industry, providing calibration and laboratory instrument services across various industries. Headquartered in Rochester, New York, Transcat is committed to quality and precision, competing vigorously in the instrumentation and control sector to maintain its market position.

On May 19, 2025, Transcat reported an EPS of $0.64, slightly below the estimated $0.66, resulting in a negative surprise of 3.03%, as highlighted by Zacks. This EPS also represents a decline from the $0.77 reported in the same quarter the previous year. In the preceding quarter, the company faced a larger negative surprise of 15.09%, with an EPS of $0.45 against an expected $0.53.

Despite the earnings miss, Transcat's revenue for the quarter ending March 2025 was $77.13 million, exceeding the estimated $76.40 million by 0.44%. This improvement from the $70.91 million reported a year ago indicates some progress, although the company has only surpassed consensus revenue estimates once in the last four quarters, pointing to challenges in meeting market expectations.

Transcat's financial metrics reveal more about its performance. The company's P/E ratio is 44.23, suggesting a premium valuation by investors. Other ratios, such as the price-to-sales ratio of 2.78 and the enterprise value to sales ratio of 3.00, reflect the company's valuation in relation to its sales. The enterprise value to operating cash flow ratio of 23.97 indicates the company's cash flow generation relative to its valuation.

The financial health of Transcat is supported by a low debt-to-equity ratio of 0.23, showing conservative debt usage. A current ratio of 2.42 suggests strong liquidity, enabling the company to effectively cover its short-term liabilities. Additionally, an earnings yield of 2.26% provides insight into the return on investment for shareholders.

Transcat, Inc. Surpasses Q4 Expectations with Strong Financial Performance

  • Transcat, Inc. reported significant year-over-year growth with an EPS of $0.77, surpassing the estimated EPS of $0.52.
  • The company also exceeded revenue expectations, reporting $70.91 million for the quarter, a 14.3% increase year-over-year.
  • Strategic acquisitions and an extra week in the fiscal year 2024 contributed to Transcat's impressive performance, alongside strong valuation metrics such as a P/E ratio of approximately 80.33 and a P/S ratio of about 4.22.

Transcat, Inc. (NASDAQ:TRNS), a leading provider in the instrument control industry, has recently reported its financial results for the fourth quarter ending March 2024. The company specializes in accredited calibration services, cost control, optimization services, and the distribution and rental of professional-grade handheld test, measurement, and control instrumentation. Transcat's performance in this quarter has been particularly noteworthy, with the company not only surpassing Wall Street expectations in terms of earnings per share (EPS) and revenue but also demonstrating significant year-over-year growth.

On Monday, May 20, 2024, TRNS reported an EPS of $0.77, which exceeded the estimated EPS of $0.52. This performance marks a substantial improvement from the previous year's EPS of $0.48, showcasing an earnings surprise of 48.08%. Such a remarkable increase in EPS year-over-year indicates that Transcat is on a solid path of growth and profitability. The company's ability to consistently outperform consensus EPS estimates, as it has done for the fourth consecutive quarter, reflects its strong financial health and operational efficiency.

In addition to its impressive EPS figures, Transcat also reported revenue of $70.91 million for the quarter, surpassing the estimated revenue of $68.59 million. This represents a significant year-over-year revenue increase of 14.3%, with the figures reaching $70.91 million. The revenue performance exceeded the Zacks consensus estimate by 3.14%, further highlighting Transcat's ability to exceed market expectations. This consistent ability to surpass consensus revenue estimates over the last four quarters underscores the company's robust growth trajectory and its competitive edge in the Instruments & Control industry.

The financial results for the fourth quarter also reflect the positive impacts of the acquisitions of TIC-MS, Inc., SteriQual, Inc., and Axiom Test Equipment, Inc. These strategic acquisitions, finalized throughout the fiscal year 2024, have contributed to the company's performance, indicating effective integration and leveraging of new assets to fuel growth. Additionally, the fiscal year 2024 included an extra week, making it a 53-week year, which may have also played a role in the reported growth and margin expansion.

Transcat's valuation metrics, including a P/E ratio of approximately 80.33 and a P/S ratio of about 4.22, suggest it is valued higher than the market average. However, the company’s robust financial performance and minimal debt, with a low debt-to-equity ratio of 0.018 and a solid current ratio of around 3.14, underscore its financial stability and growth potential. These strengths, along with its consistent ability to exceed expectations and strategic acquisitions, position Transcat well for future success in its industry.