Q3 2022 Transcat Inc Earnings Call
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Speaker 1: Greetings and welcome to the Transcat Incorporated 3rd Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
Greetings and welcome to the Transcanada incorporated third court quarter fiscal year 2022 financial results Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Speaker 1: If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad.
As a reminder, this conference is being recorded.
Speaker 1: It is now my pleasure to introduce your host, Mark Doheny, Chief Financial Officer. Thank you, Mark.
Now my pleasure to introduce your host Mark Doheny, Chief Financial Officer. Thank you Marc you may begin.
Speaker 2: Thank you operator and good morning everyone. We appreciate your time and your interest in Transcat. With me here on the call today is our President and CEO Lee Rudolph. We will begin the call with some prepared remarks and then we will open up the call for questions. Our earnings release crossed the wire after markets closed yesterday and can be found on our website www.transcat.com in the investor relations section.
Thank you operator, and good morning, everyone. We appreciate your time and your interest in train Scott with me here on the call today is our president and CEO Lee Rudow wheel.
We will begin the call with some prepared remarks, and then we will open up the call for questions. Our earnings release crossed the wire after markets closed yesterday and can be found on our website transcon dot com in the Investor Relations section the slides that accompany todays discussion are also posted on our website. If you would please refer to slide two as you are aware we may make forward.
Speaker 2: The slides that accompany today's discussion are also posted on our website.
Speaker 2: If you would, please refer to slide 2 as you are aware we may make forward-looking statements during the formal presentation and Q&A portion of this telecast.
Looking statements during the formal presentation and Q&A portion of this teleconference.
Speaker 2: Statements apply to future events which are subject to resident uncertainties, as well as other factors that could cause the actual results to get different materially from where we are today. These factors are outlined as new release, as well as the documents filed by the company with the SE-
Statements apply to future events, which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in the news release as well as with documents filed by the company with the SEC.
Speaker 2: You can find those on our website where we regularly post information about the company as well as on the SEC's website at SEC.gov. We undertake no obligation to publicly update or correct any of the forward-looking statements contained in this call, whether as a result of new information, future events or otherwise, except as required by law. Please review our forward-looking statements in conjunction with these precautionary factors. Additionally, during today's call, we will discuss certain non-GAAP measures. Would we believe will be useful in evaluating our...
You can find those on our website, where we regularly post information about the company as well as on the SEC's website at SEC Gov. We undertake no obligation to publicly update or correct aimed at forward looking statements contained in this call whether as a result of new information future events or otherwise except as required by law. Please review our forward looking.
<unk> in conjunction with these precautionary factors. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe will be useful in evaluating our performance.
Speaker 2: You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release.
Should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release with that I'll turn it over to Lee.
Speaker 3: Okay, thank you, Mark. Good morning, everyone. Thank you for joining us on the call today.
Okay. Thank you Mark good morning, everyone and thank you for joining us on the call today.
Speaker 3: In the third quarter of fiscal 2022, we continue to demonstrate the successful execution of our strategy by delivering strong service sales, by expanding addressable markets through strategic acquisitions that increase our capabilities, expertise, and geographic footprint.
In the third quarter of fiscal 2022, we continue to demonstrate the successful execution of our strategy by delivering strong service sales by expanding addressable markets through strategic acquisitions that increase our capabilities expertise and geographic footprint.
Speaker 3: In addition, our continued focus on effective capital allocation and structure combined with operational excellence and strong execution led to another quarter of margin expansion.
In addition, our continued focus on effective capital allocation and structure combined with operational excellence and strong execution led to another quarter of margin expansion.
Speaker 3: Consolidated revenue increased 16% to $50.9 million, a third quarter record for TransCat, and consolidated gross margin expanded 130 basis points to 26.8%.
Consolidated revenue increased 16% to $59 million, a third quarter record for Trans cat.
Consolidated gross margin expanded 130 basis points to 26, 8%.
Speaker 3: Adjusted EBIDA, a very important metric for us, given our level of acquisitive growth grew 20% from the prior year to $5.5 million.
Adjusted EBITDA, a very important metric for us given our level of acquisitive growth grew 20% from the prior year to $5.5 million.
Speaker 3: Our service segment continued to perform at a high level and recorded its 51st straight quarter of year over year revenue growth.
Our service segment continued to perform at a high level and recorded its 51st straight quarter of year over year revenue growth.
Speaker 3: Our new business pipeline remains strong throughout the third quarter and delivered growth of 22% which included double-digit organic growth of 10%.
Our new business pipeline remains strong throughout the third quarter and delivered growth of 22%, which included double digit organic growth of 10%.
Speaker 3: Service growth was driven by our ongoing success in the highly regulated and markets we serve, including life sciences. We continue to take market share by investing in and delivering our differentiated value proposition.
Services growth was driven by our ongoing success in highly regulated end markets, we serve including life Sciences, we continue to take market share by investing in and delivering a differentiated value proposition.
Speaker 3: Services are designed to minimize risk for our customers who generally operate in environments where the cost of failure is high. We believe transgotts attention to quality and state of the art capabilities. And our investment in leadership and expertise is second to none. And the
Services are designed to minimize risk for our customers, who generally operate environments, where the cost of failure is high we believe chance gets attention to quality and state of the art capabilities and our investment in leadership and expertise is second to none in the calibration industry.
Speaker 3: Transcats model continues to be trust in every measure.
Katz motto continues to be trust and every measure.
Speaker 3: In addition to strong service revenues in the third quarter week, expanded our service gross margin 180 basis points to 29.7%.
In addition to strong service revenues in the third quarter, we expanded our service gross margin 180 basis points to 29, 7%.
Speaker 3: Given the inherent inefficiencies created by the holiday season in the third quarter, we are particularly pleased with nearly achieving a 30% gross margin. Another interesting data point.
Given the inherent inefficiencies created by the holiday season in the third quarter, we were particularly pleased with nearly achieving a 30% gross margin another interesting data point.
Speaker 3: In comparison, between the current third quarter service margin to our third quarter gross margin only two years ago, margins have increased 770 basis points. The margin increase is a testament to our continuous improvement model and inherent operating leverage of our service business.
In comparison between the current third quarter service margin to our third quarter.
Gross margin only two years ago margins have increased 770 basis points. The margin increase is a testament to our continuous improvement model and inherent operating leverage of our service business.
Speaker 3: Turning to our recent acquisitions, Nexa Enterprise Asset Management, which we acquired on August 31st of last calendar year, is off to a great start.
Turning to our recent acquisitions next enterprise asset management, which we acquired on August 31st of last calendar year is off to a great start.
Speaker 3: Next, I add another differentiated high growth life science business to our service platform. There are five service tracks, optimized calibration and asset management programs focusing on preventive maintenance, reliability, quality, compliance, and data migration.
Next to add another differentiated high growth life science business to our service platform, they're five service tracks optimized calibration and asset management programs, focusing on preventive maintenance reliability quality compliance and data migration.
Speaker 3: Next is leadership team, both in the US and in Ireland, are impressive.
This leadership team both in the U S and in Ireland are impressive.
Speaker 3: Together we are confident we will capitalize on the synergistic growth opportunities and expanded market development opportunities that are clearly available as we work together.
Together, we are confident we will capitalize on the synergistic growth opportunities and expanded market development opportunities that are clearly available as we work together.
Speaker 3: On December 31st, we close the acquisition of PANGENT labs. The PANGENT business fits perfectly into our service segment's operational footprint in the US and expands our geographic footprint in two new locations.
On December .
31st we closed the acquisition of tangent laps, the tangent business fits perfectly into our service segments operational footprint in the U S and expands our geographic footprint into new locations.
Speaker 3: Indiana, which is attractive life science market, especially medical devices, and Huntsville, Alabama, which has a large aerospace and defense market.
Indiana, which is attractive life science market, especially in medical devices, and Huntsville, Alabama, which is a large aerospace and defense market.
Speaker 3: Turning to distribution, distribution revenue grew 7% in the third quarter. While modestly below our expectations, the business performed well, despite continued supply chain challenges, they extended vendor lead times.
Turning to distribution distribution revenue grew 7% in the third quarter, while modestly below our expectations. The business performed well despite continued supply chain challenges they extended vendor lead times still.
Speaker 3: Incoming orders in the third quarter were strong, and we enter our fiscal fourth quarter in a solid position with a record $9 million in backlog, up $3.3 million from the prior year.
Incoming orders in the third quarter were strong and we enter our fiscal fourth quarter in a solid position with a record $9 million in backlog up $3 $3 million from the prior year.
Speaker 3: Our balance sheet remains strong with a leverage ratio of just under 1.5 times. And with that, I'll turn things over to Mark for a more detailed look at our financial performance for the third quarter.
Our balance sheet remains strong with a leverage ratio of just under one five times and with that I will.
Turning things over to Mark for a more detailed look at our financial performance for the third quarter. Thanks.
Speaker 2: Thanks Lee. I will start on slide four of the Erning-Zec posted on our website, which provides detailed regarding a revenue on a consolidated basis and vice-segment for the third.
Thanks, Lee I will start on slide four of the earnings deck posted on our website, which provides detail regarding our revenue on a consolidated basis and by segment for the third quarter.
Speaker 2: In the quality of revenue of 50.9 million was up 16% versus prior year on service segments ranked in the continued recovery of our distribution bid.
Consolidated revenue was $50 9 million was up 16% versus prior year and service segment strength and the continued recovery of our distributions.
Speaker 2: What we get by segment service revenue growth remain very strong at 22% with 10% of the growth coming organically, and the other 12% from it.
What can you get it by segment service revenue growth remained very strong at 22% with 10% of that growth coming organically another 12% from acquisition as Lee mentioned the next a business is performing well and drove the majority of the <unk> acquisition growth in the quarter.
Speaker 2: As Lee mentioned, the next business is performing well and draw the majority of the acquisition growth in the course.
Speaker 2: Turns to distribution, revenue of 20.7 million was up 7% versus the prior year. We thought improved market conditions across our base of business compared to a prior quarter that was impacted by the COVID-19 pandemic. However, as we also mentioned, vendor lead times extended even further as we progressed through the quarter and this did impact our growth rate, which we had expected to be above 10.
Turning to the distribution revenue of $20 7 million was up 7% versus the prior year, we saw improved market conditions across our base business compared to our prior quarter that was impacted by the COVID-19 pandemic. However, as we also mentioned vendor lead times extended even further as we progress through the quarter and the this did impact our growth rate.
Which we had expected to be above 10%.
Speaker 2: The good news is the orders were strong and in line with our expectations, increasing our backlog to a recognized...
The good news is the orders were strong and in line with our expectations, increasing our backlog to a recognizable.
Turning to slide five our consolidated gross profit of $13 6 million was up 21% from prior year and our gross margin expanded 130 basis points to 26, 8%.
Speaker 2: Turning to slide 5, our consolidated gross profit of $13.6 million was up 21% from prior year, and our gross margin expanded 130 basis points to 26.8%.
Speaker 2: Service gross margin expanded 180 basis points and hit a third quarter record, 29.7%. As we leveraged our fixed costs from the high level of organic growth, our technician productivity remained strong, and we benefited from accrued gross margins from our recent actions.
Service gross margin expanded 180 basis points and hit a third quarter record of 29, 7% as we leveraged our fixed costs from the high level of organic growth our technician productivity remains strong and we benefited from accretive gross margins from our recent acquisitions distribution segment gross margin of 22, 5% was flat to prior year.
Speaker 2: The distribution segment gross margin of 22.5% was flat to prior year and in line with our expectation.
And in line with our expectations.
Speaker 2: Turning to slide six, consolidate operating income of 2.4 million was down 6% from prior year. It is important to note that both consolidated and service segment operating income were unfavorably impacted by approximately $700,000 from purchase accounting of the next act.
Turning to slide six consolidated operating income of $2 4 million was down 6% from prior year. It is important to note that both consolidated and service segment operating income were unfavorably impacted by approximately $700000 from purchase accounting of the next acquisition.
Speaker 2: Of this $700,000, approximately $400,000 is intangible amortization expense which is largely related to the value of
This 700000, approximately 400000 as intangibles amortization expense, which is largely related to the value of acquired customer relationships and this will continue to be expense at approximately the same rate on a quarterly basis going forward. The other 300000 was amortization of the acquired <unk> backlog as we discussed last quarter her purchase.
Speaker 2: This will continue to be expected approximately the same rate on a quarterly basis going forward. The other 300,000 was amortization of the acquired Nexobac plug. As we discussed last quarter per purchase accounting rules, we are amortizing the acquired backlog of approximately $500,000 over the first five months post-acquisition, which reduces revenue and therefore-
Counting rules, we are amortizing the acquired backlog of approximately $500000 over the first five months post acquisition, which reduces revenue and therefore gross profit and operating income.
Speaker 2: The backlog will be fully amortized after January , so this will only impact one month of our fiscal fourth quarter.
The backlog will be fully amortized after January so this will only impact one months of our fiscal fourth quarter.
Speaker 2: Distribution, operating income of 700,000 improved from the prior year third quarter, which as I mentioned was still being impacted by the
Distribution operating income up 700000 improved from the prior year third quarter, which as mentioned was still being impacted by the pandemic.
Speaker 2: Turning to slide 7, Q3 net income of $1.6 million decreased 7% from prior year, and our diluted earnings per share came in at $0.21. Both net income and EPS were unfavorably impacted by the NEXA acquisition accounting I just described. We expect our full year fiscal 2022 tax rate to be in the range of 14% to 15%, which is unchanged from our previous expectation.
Turning to slide seven Q3, net income of $1 6 million decreased 7% from prior year and our diluted earnings per share came in at 21 cents. Both net income and EPS were unfavorably impacted by the Nexsan acquisition accounting I. Just described we expect our full year fiscal 2022 tax re.
<unk> to be in the range of 14% to 15%, which is unchanged from our previous expectation.
Speaker 2: Flip into slide 8, where we show our adjusted EBITDA and adjusted EBITDA margin. We use adjusted EBITDA, which is non-GAAP , to gauge the performance of our segments because we believe it's the best measure of our operating performance and ability to generate cash.
Flipping to slide eight where we show our adjusted EBITDA and adjusted EBITDA margin, we use adjusted EBITDA, which is non-GAAP to gauge the performance of our segments. Because we believe it is the best measure of our operating performance and ability to generate cash as.
Speaker 2: As we continue to execute on our acquisition strategy, this metric becomes even more important to highlight as it does adjust for one-time deal related transaction costs as well as the increased levels of non-cash expenses that will hit our income statement from acquisition per day.
As we continue to execute on our acquisition strategy. This metric becomes even more important to highlight as it does adjust for one time deal related transaction costs as well as the increased levels of noncash expenses that will hit our income statement from acquisition purchase accounting.
Speaker 2: With that in mind, Consolidated Adjusted EBITDA of $5.5 million was up 20% from prior year, and our Adjusted EBITDA margin increased to 10.7%. Both segments showed...
With that in mind consolidated adjusted EBITDA of $5 5 million was up 20% from prior year and our adjusted EBITDA margin increased to 10, 7%.
Both segments showed strong improvement from prior year.
Speaker 2: As always, a reconciliation of a justity bit to operating income and net income can be found in the supplemental section of this presence.
As always a reconciliation of adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation moves.
Speaker 2: Moving to slide nine, cash flow from operations was in line with our expectations as working capital increased on the very strong organic revenue.
Moving to slide nine cash flow from operations was in line with our expectations as working capital increased on the very strong organic revenue growth year to date Capex through the end of the third quarter was $5 9 million compared to $4 3 million in the prior year and continues to be centered around service segment capabilities technology, including automation and fee.
Speaker 2: Year-to-date CapEx through the end of the third quarter was $5.9 million compared to $4.3 million in the prior year and continue to be centered around service segment capabilities, technology, including automation, and future growth projects.
With your growth projects.
Speaker 2: Slide 10 highlights our strong balance sheet. At quarter end, we had total net debt of $38 million with a leverage ratio of a low under 1.5.
Slide 10 highlights our strong balance sheet at quarter end, we had total net debt of $38 million with a leverage ratio of a little under one five times.
Speaker 2: We had $48.3 million available from our credit facility at quarter end, and as previously announced, we acquired Tandon Lab for $9 million at the very beginning of our fourth quarter, which was largely funded from our revolving credit facility.
We had $48 $3 million available from our credit facility at quarter end and as previously announced we acquired candidate land for $9 million at the very beginning of our fourth quarter, which was largely funded from our revolving credit facility.
Speaker 2: Lastly, we expect to file our form 10-2 later today with that I'll turn it
Lastly, we expect to file our Form 10-Q later today.
With that I'll turn it back to you okay. Thanks Mark.
Speaker 3: In the fourth quarter of fiscal 2022, we expect both our operating segments to finish strong, capitalizing on our unique value proposition and taking market share in the highly regulated industries in which we compete. We expect fourth quarter service revenue growth to be in the high teens. We also expect service gross margin to be in the range of 35% as we leverage the typical January through March increase in service volume.
In the fourth quarter of fiscal 2022, we expect both our operating segments to finish strong capitalizing on our unique value proposition and taking market share in the highly regulated industries in which we compete we expect fourth quarter service revenue growth to be in the high teens. We also expect service gross.
And to be in the range of 35% as we leveraged the typical January through March increase in service volume.
Speaker 3: In addition, we expect to continue to organically develop our recently expanded addressable markets of pipette services and enterprise asset management services. Distribution revenue in the fourth quarter is expected to grow high single digits.
In addition, we expect to continue to organically develop our recently expanded addressable markets of pipe that services and enterprise asset management services distribution revenue in the fourth quarter is expected to grow high single digits.
Our strong balance sheet continues to be supportive of our active M&A pipeline.
The acquisition team has done an outstanding job identifying completing and integrating three deals in fiscal 2022, and Transcanada has developed a reputation for getting the right deals done the right way the trans cat way and that means focusing on growth synergies and leveraging the talent we acquire.
Speaker 3: From a margin perspective, we look to continue to demonstrate the sustainability of our margin gains. Current and future investments in automation, process improvement, and technology are designed to continue to expand our margins over the longer term. And with that operator, we can open the line for questions.
From a margin perspective.
We look to continue to demonstrate the sustainability of our margin gains current and future investments in automation and process improvement and technology are designed to continue to expand our margins over the longer term.
And with that operator, we can open the line for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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Speaker 4: Thank you. Our first question is from Greg Palm with Craig Hallam. Please proceed with your question. Yeah. Thanks, Haley and Mark.
Thank you. Our first question is from Greg Palm with Craig Hallum. Please proceed with your question.
Yeah. Thanks, Haley America, how are you guys doing.
Well great. Thanks.
Speaker 4: I guess just starting with the vendor lead times, I'm curious if you can kind of pinpoint, I don't know if that was Omicron related, I mean, it sounded like it was just overall supply chain, but can you pinpoint exactly what happened there? Have you seen maybe any difference, you know, in January or the year to date?
I guess, just starting with the the vendor lead times I'm curious if you can kind of pinpoint I don't know if that was omicron related I mean, it sounded like it was just overall supply chain, but can you pinpoint exactly what happened there have you seen maybe any difference you know in in January or year to date.
Speaker 3: Yeah, it's much of the same, Greg, that we've been talking about for the last couple quarters and really similar to what you see throughout the industrial marketplace, just a typical slowdown in getting orders from the vendor and from the vendor's vendor in many cases to us. But we have seen a bit of improvement, I would say, over the last couple of weeks.
Yeah. It's it's much of the same Greg that we've been talking about for the last couple of quarters and really similar to what you see throughout the industrial marketplace.
The typical slowdown in getting orders from the vendor and from the vendors vendor in many cases to us.
But we have seen a bit of improvement I would say over the last couple of weeks, we're starting to see things head in the right direction. So we're not overly concerned, but we'll get the orders out hopefully in the fourth quarter may even have some upside in the in the first quarter, but the orders are there to to deliver for sure.
Speaker 3: starting to see things head in the right direction. So we're not overly concerned. We'll get the orders out hopefully in the fourth quarter. Might even have some upside in the first quarter, but the orders are there to deliver for sure.
Speaker 4: and specifically within distribution. I mean, any sort of product lines that it was, you know, most specific to or where there's a just sort of across the board more of a general comment.
And specifically within distribution I mean, any sort of product lines that it was you know most specific two or worse or is it just sort of across the board more of a general comment.
Speaker 2: It's across the board, but I would say particularly acute in some of the electronics, heavy electronics and the higher end electronics. We probably saw more there, some of the stuff that we don't sell a huge amount of.
It's this is Martin Greg it's it's it's across the board, but I would say, particularly acute in some of the electronics heavy electronics in the higher end electronics, we probably saw more there on some of the stuff as you know.
We don't sell a huge amount of so I think it's it's you know it's across the board like you say, but particularly acute in the high end electronics equipment.
Speaker 2: So I think it's across the board, like you say, but particularly cute in the high-end electronics equipment.
Speaker 5: Yeah, makes sense. And then what about new business pipeline? Can you talk about that a little bit? And maybe just an update on on CBLs would be helpful as well.
Yeah that makes sense.
And then what about new business pipeline can you talk about that a little bit and maybe just an update on on C. B hours would be helpful as well.
Speaker 3: Right. Well, the new business pipeline is exactly where we want it to be. It's strong. It's as strong as it's been, you know, in my recent memory, we
Right, but the new business pipeline is exactly where we want it to be it's strong.
It's as strong as it's been.
In my recent memory.
We we indicated during the last quarter's call that we saw the pipeline building for Cbl's, which makes sense as we get past the.
Speaker 3: We indicated during the last quarter's call that we saw the pipeline building for CBLs, which makes sense as we, you know, get past the pandemic and we are seeing those opportunities come to fruition. It's a solid pipeline and it's especially solid around CBLs and so I think, you know, we expect to, you know, have our fair share of that market as things normalize. We feel pretty strong about it, pretty well.
Pandemic and we are seeing those opportunities come to fruition. It's a it's a solid pipeline and and it's especially solid around cbl's and so I think you know we expect to.
Have our fair share of that market as things.
Things normalize, we feel pretty pretty strong about it pretty well.
Speaker 4: Okay, good. All right, I'll leave it there. Good luck. Thanks. Okay. Thanks, Greg. Take care.
Okay. Good all right I'll leave it there good luck. Thanks.
Thanks take care.
Speaker 1: Thank you. Our next question is from Scott Buck with H.C. Wayne Wright. Please proceed.
Thank you. Our next question is from Scott Buck with H C. Wainwright. Please proceed with your question.
Speaker 6: All right, good morning, guys. Thanks for the time. First question for me, I'm curious if you could, you know, give a little color on what the incremental opportunities are to expand margin on, or further expand margin on the services side. You know, it seems like this quarter was mostly volume-driven, but are there any other kind of incremental, you know, pieces that you think can push kind of full-year margin to mid-30s or even high-30s over time?
Hi, Good morning, guys. Thanks for the time.
First question for me I'm curious if you could.
Give a little color on what the incremental opportunities are to expand margin on or further expand margin on the services side. It seems like this quarter was mostly volume driven but are there any other kind of incremental.
Pieces that you think can push down our full year margin to mid thirty's or or even high thirties overtime.
Speaker 3: Right. Yes, Scott. So this is Lee. And yeah, we will always you know, as volume increases, we'll get that inherent leverage that that's always going to be a positive for us. But yeah, we're deep into developing our automation platform, which we've really been talking about for the last couple of years. It's a it's a slow moving, but ongoing initiative that over time, you know,
Yeah, Scott. So this is Lee and yeah, we will always as volume increases, we'll get that inherent leverage that that's always going be a positive for us, but yeah. We're we're deep into.
Developing our automation platform of which we've really been talking about for the last couple of years. It's a it's a slow moving but ongoing initiative that overtime you know.
Speaker 3: has an opportunity to really give a lift into our margins. And we do see getting to higher rates, the mid 30s as you mentioned, and automation will participate. There's also opportunities on a technology side to improve processes and improve some of the tools that we're using, and all these things, ultimately drive margin. What products go to what labs, how we batch those calibrations, and how we get them through our labs, there's opportunities to pick up efficiency there as well.
It's an opportunity to really give a lift into our margins and we do see getting to you know higher rates. The mid thirties, as you mentioned and and automation will participate theres also opportunities on the technology side to improve processes and improve some of the tools that we're using and all of these things ultimately drive margin.
You know what what products go to what labs, you know, how how we batch the those calibrations and how we get them through our labs theres opportunities to pick up efficiency there as well.
Speaker 3: You know, we're doing different training programs with our technicians to get them on board and get them ramped up faster, trained and developed more efficiently. All that leads to efficiencies around margin. So yeah, there's a runway there and over time, you know, we expect to see, you know, continuous improvement.
You know, we're doing different training programs with our tech to with our technicians to get them onboard and get them ramped up faster trained and developed more efficiently all of that leads to efficiencies around margin. So yeah. There's a there's a runway there and overtime, we expect to see continuous improvement.
Great. That's really helpful. Lee and second could you provide a little bit of help around the backlog I think this is the first time, you've given the distribution backlog number at least in some time you know how should we think about that in terms of cadence and when that should actually flow through.
Speaker 6: Great. That's really helpful, Lee. And second, could you provide a little bit of help around the backlog? I think this is the first time you've given a distribution backlog number, at least in some time. You know, how should we think about that in terms of cadence and when that should actually flow through the P&L?
The P&L.
Speaker 2: Yeah, you're right. We do disclose it, of course, in the queue every quarter. But because it was such a meaningful number, we did disclose it. And the way to think about that, Scott, is.
Yeah, It's it's you're right, we do disclose and of course in the Q every quarter, but because it was such a meaningful number.
We didn't disclose it and the way to think about that Scott is there's not a big backlog reduction baked into what we're thinking for the fourth quarter, because we're still concerned about the supply chain like we said in the first few resubmit may have gotten a little better.
Speaker 2: There's not a big backlog reduction baked into what we're thinking for the fourth quarter because we're still concerned about the supply chain. Like we said in the first few weeks, it may have gotten a little better. But that's up roughly a little over $3 million from prior years. So that's the way to think about how, at a minimum, the supply chain is impacting us. And we would expect hopefully some this quarter and next quarter and beyond to have upside to subsequent quarters here just because of that.
But you know that's up roughly a little over $3 million from from prior years. So that's you know that's the way to think about how at a minimum the supply chain is impacting us and we would expect hopefully some this quarter and next quarter and beyond to have upside.
Two subsequent quarters here just because of the.
Speaker 2: sort of uncertainty in the supply chains, you know, and I'm not going to be precise about that right now.
Sort of uncertainty in the supply chains, you know and that's not going to be precise.
Nice about that right now.
Speaker 6: Sure. No, I appreciate that, Mark. And then last one for me, given how active you guys have been on the acquisition front over the last, you know, six months or so, and what, you know, sounds like continues to be a healthy pipeline, can you remind us how you think about ROI on these acquisitions? Right. Yeah.
No I appreciate that Marc and then last one for me given how active you guys had been on the acquisition front over the last you know six months or so and then what you know it sounds like continues to be a healthy pipeline can you remind us how you think about ROI on these acquisitions.
Right, Yeah, well of course, we model.
Speaker 3: our potential returns and how we look at ROI and ROIC all the time. And so we take these models, we build models around how the businesses are performing at the time we purchase them. And that has to be obviously very, we look at that carefully. We bake in what we're gonna do with the business, the potential synergies that are in business and we build models into the future. Look at this kind of cash flow, we come up with a IRR that's acceptable for us. The minimum IRR is usually in the 15 to 17% range, but typically we look much higher than that. But that's kind of a threshold for consideration from our perspective.
Our potential returns and how we look at ROI and ROIC see all the time and so we take these models we build models around how the businesses are performing at the time, we purchased them and that that has to be obviously very when we look at that carefully we bake in what we're going to do with the business of potential synergies.
<unk> that are in the business and we build models into the future. We will get this kind of cash flow, we come up with a I R. That's acceptable for us a minimum IRR is usually in the 15% to 17% range, but typically we look much higher than that but that's kind of a threshold for consideration from our perspective.
Speaker 6: Okay, perfect. Again, appreciate the time, guys. Thank you very much. Yep, no problem. Thank you.
Okay perfect again I appreciate the time guys. Thank you very much yeah no problem. Thank you got it.
Speaker 1: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad.
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Speaker 1: Thank you. Our next question comes from Mitra Ramgopal with Sidoti. Please proceed with your question.
Thank you. Our next question comes from Mitra Ram Gopal with Sidoti. Please proceed with your question.
Speaker 7: Yes, hi, good morning. Thanks for taking the questions person on the distribution side. I know you mentioned it came in a little later than you're expecting, but just looking in terms of the year over year numbers and where you were maybe a year ago. It seems like you've certainly.
Yes, hi, good morning, Thanks for taking the questions first one on the distribution side I know you mentioned it came in a little lighter than you were expecting but just looking in terms of the year over year numbers, and where you were maybe a year ago. It seems like you're certainly.
Speaker 7: well off of the lows and just wondering how you see it going forward. I know you have a good backlog to work off but longer term if you think this business is stabilized and you have more visibility now.
Improved well off of the lows and just wondering how you see it going forward I know you have a good.
Backlog to work off but longer term. If you think this business has stabilized and you have more visibility now.
Speaker 3: Yeah, I appreciate the the question and we're not concerned about our distribution business. I mean, there's a there's a supply chain challenge that's relatively short term that we're dealing with that everybody's dealing with.
Yeah I appreciate the question and we're not concerned about our distribution business I mean, there's a there's a supply chain challenge that's relatively short term that we're dealing with it everybody's dealing with.
Speaker 3: You know, we will we'll continue to work through that as best we can. The business is stable. The margins of good, really distribution business, Mitra. It's not exactly what we have wanted it to do for the last three or four years. We put a game plan in place in 2016, socialized it with our shareholders and said, look, we want this business to be stable. We're not looking to grow it. We could if we wanted to, but it's not strategic for us. You know, our story is about service.
We will continue to work through that as best we can the business is stable the margins of good really distribution business Mitra has done exactly what we wanted it to do for the last three or four years, we put a game plan in place in 2016 socialized it with our shareholders and say look we want this business to be stable, we're not looking to grow it.
If we wanted to but it's not strategic for US you know our stories about service expanding our margins organic growth acquisitive growth and continuing to do really well in that service industry and that's what we've done that's what our stories about and yes distribution as the factor we don't have any concerns about that at the present time will.
Speaker 2: expanding our margins, organic growth, the positive growth, and continuing to do really well in that service industry, and that's what we've done. That's what our story is about, and distribution is a factor. We don't have any concerns about that at present time. We'll keep plowing through the short-term challenges and continue to drive the strategic focus to our service. Yeah, I think it's important that this supports our service business. Yep, absolutely. We're generating, we're still comfortable, and that's the...
Keep plowing through the the short term challenges and continue to drive the strategic focus to a service yeah. I think it's important that this supports our surface business, yes, absolutely generating we're still comfortable that that that distribution business is a differentiator in the marketplace for us exactly I mean as a reminder.
Speaker 3: Business is a differentiator in the marketplace for us exactly. I mean as a reminder
Speaker 3: We don't know of another company in the service business that does what we do the way we do it that has a supporting distribution business. So we've got a lot of open doors as a byproduct of selling products, and that's doing exactly what we want it to do, so that's really good.
You know, we don't know of another company in the service business. It does what we do the way we do it that has a supporting distribution business. So we've got a lot of open doors.
By product of selling products and that's that's doing exactly what we wanted to do so that's that's really good.
Speaker 7: No, that's great, thanks and actually, you know, you're able to fix a margin expansion, improve both gross margin and overall operate up margin. We're seeing a lot of companies struggling right now with labor costs, supply disruptions, etc. Just curious if you're just not seeing that impact, or you're just giving your model, you're able to more than offset or mitigate it.
No that's great thanks and actually.
You were able to speak up margin expansion improved both gross margin and overall op margin and we're seeing a lot of companies are struggling right now with labor costs supply disruptions et cetera, just curious a if you're just not seeing that impact or you're just giving your Molly you were able to more than offset or mitigate it.
Speaker 3: Well, labor costs for TransCut are going to go up like they are for everyone. I mean, that's just that's the environment within which we're working. So far, we haven't had issues passing that on to the customers and getting the right price that we need.
Well the labor costs for Transcatheter Gonna go up like they are for everyone. I mean, that's just that's the environment within which we are working so far we haven't had issues.
Issues, passing that on to the customers and getting the right price that we need.
Speaker 3: you know, relative to our labor going up. So we're in a good spot in our industry. We've been in a good spot so far, and we don't see anything that, you know, on the horizon that's gonna change that. I guess over time, you know, we'll keep a close look on our labor costs, but yes, there is pressure. We're reacting to it like most good companies are, and so far we've been able to pass that along to the customer without a major concern.
No relative to two are our labor going up so we're in a good spot in our industry. We've been in a good spot so far and we don't see anything that you know on the horizon, that's going to change that.
I guess over time, you know, we'll keep a close look on on our labor costs, but yes. There is pressure we're reacting to it like most most of the companies are and so far we've been able to pass that along to the customer without a major concern.
Speaker 7: And then finally, on the next acquisition, you mentioned integration coming along nicely. Just curious if you're already starting to generate some cross-selling opportunities.
And then finally on the next acquisition you mentioned it integration I'm coming along nicely just curious if if you're already starting to generate some cross selling opportunities.
Any update on that would be great. Yeah, well. We are in we are at a faster rate than we even anticipated. So almost from day one opportunities surface that we thought they would be helpful. In helping us land and I think within the first 30 days of the acquisition. We had you know material wins.
Speaker 3: Yeah, well, we are and we are at a faster rate than we even anticipated. So almost from day one, opportunities surfaced that we thought they would be helpful in helping us land. And I think within the first 30 days of the acquisition, we had, you know, material wins by virtue of working together. And it's going both ways.
Virtue of working together and it's going both ways. So we have we have set up a next a nicely with some of our customers and vice versa. So I don't think I'm I'm not to get overly optimistic but the early read has been stronger than we could've anticipate I think it's been really really powerful so let's let's let's keep working it I did the management teams worked well together, we recognize that the synergies are there.
Speaker 3: So we have set up Nexa nicely with some of our customers and vice versa. So I don't think.
Speaker 3: I'm not to get overly optimistic, but the early read has been stronger than we could have anticipated. I think it's been really, really powerful. So let's.
Speaker 3: keep working it. The management teams work well together. We recognize that synergies are there between our companies, just like when we acquired them. So everything's going according to plan.
There between our companies just like when we acquired them. So everything is going according to plan.
Speaker 7: Thank you. Thanks for taking the questions on the room. Please.
It's been positive okay. Thanks, thanks for taking the questions no problem.
Yeah.
Speaker 1: Thank you. There are no further questions at this time. I would like to turn the floor back over to Lee Ruto for any closing. Thank you.
Thank you there are no further questions at this time I would like to turn the floor back over to Lee Rudow for any closing comments.
Speaker 3: Well, we appreciate everybody joining us on the call today and your interest in TransCat.
Well, we appreciate everybody joining us on the call today and your interest in Trans Cat.
Speaker 3: We'll be participating in the Roth Conference on March 14th and 15th and the Siddoti Spring virtual conference on March 23rd and 24th. So if you're attending those conferences, please feel free to check in with us. Otherwise, we look forward to talking to everybody again if there are forth quarter results. Again, thanks. Thanks for participating in the call. Take care.
We'll be participating in the Roth conference on March 14th and 15th in the Sidoti Spring Virtual conference on March 23rd and 24. So if you're attending these conferences. Please feel free to check in with US otherwise, we look forward to talking to everybody again after our fourth quarter results again, thanks, thanks for participating in the call.
Take care.
Speaker 1: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.