Q4 2022 Transcat Inc Earnings Call
[music].
Okay.
Greetings and welcome to transcribe incorporated fourth quarter and full fiscal year 2022 financial results.
At this time all participants are in a listen only mode. A 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.
Mind you. This conference is being recorded I would now like to turn the conference over to your host Tom Barbados Senior Vice President of Finance. Thank you you may begin.
Thank you Rob and good morning, everyone. We appreciate your time and your interest in trying to cat.
With me here on the call today is our president and CEO , Lee Rudow, and our CFO Mark Doheny.
We will begin the call with some prepared remarks, and then we'll open it up the call for questions.
Our earnings release crossed the wire after market closed yesterday and can be found in the Investor Relations section of our website Transcon Dot com.
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 looking statements during the formal presentation and Q&A portion of this teleconference.
These 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 in the documents filed by the company with the SEC.
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, which we believe will be useful in evaluating our performance.
You should not consider the presentation of these additional 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 compare GAAP measures in the tables accompanying the earnings release with that I'll turn the call over to Lee.
Okay. Thank you Tom I appreciate that good morning, everyone. Thank you for joining us on the call today.
Fiscal 2022 was a strong year for trans cat as we delivered well rounded financial performance across the board.
Consolidated revenue was up 18% to $205 million, a new record and milestone for transcon as we crossed the $200 million Mark for the first time.
Throughout the past year and into our new fiscal year demand for our services and products has remained strong.
Consolidated gross margin expanded 190 basis points to 28, 5% and was driven by margin expansion in both operating segments.
Adjusted EBITDA remains a very important metric for trans cat as we continued to execute our strategic acquisition plan to consolidate the fragmented calibration services industry and.
In fiscal 2022, adjusted EBITDA was grew 28% from the prior year to $26 $3 million.
For the full year, our service segment revenue increased 25% and we generated double digit organic service growth of 11, 6%.
We continue to benefit from strong demand in a highly regulated end markets, including medical device and pharmaceutical manufacturing and aerospace and defense manufacturing these markets, where the cost of failure is high and transcripts unique high end mission critical service resonates the most.
Our current pipeline of new service opportunities with active and growing.
In addition to our consistent service revenue growth. We are pleased with another year of service gross margin expansion.
Fiscal 2022 service gross margins hit a record level by increasing 160 basis points to 31, 9%.
Throughout the year, we successfully acquired and integrated three companies that have increased our capabilities expanded our addressable markets and allowed us to further leverage our existing infrastructure.
The next set of enterprise asset management acquisition, which close towards the end of the second quarter continues to perform ahead of expectations.
The acquisition was well received in the market and by our current customers and immediately supported the generation of new synergistic revenue.
Both the independent next our new business pipeline and the combined Nexstar Transkei <unk>, new business pipeline continued to grow at an impressive pace.
At the beginning of the fourth quarter, we announced the acquisition of tangent laps. The tangent acquisition gives us local capabilities into new geographic markets, one in Indianapolis and the other in Huntsville, Alabama.
Indianapolis has an attractive life science market and Huntsville has a large aerospace and defense market.
Tangent integration is ahead of schedule and we're pleased with the company's early performance.
Turning to the fourth quarter.
And our fourth quarter results. Our service segment continued to perform at a high level and recorded its 52nd straight quarter of year over year revenue growth.
In the fourth quarter, we generated 20% revenue growth and 8% organic service growth as demand in a highly regulated end markets remained strong.
We reported fourth quarter service gross margin of 33, 1% the strong momentum carried into the fourth quarter, particularly from a margin perspective was negatively impacted by the onset of the COVID-19 variant in late December and January we experienced a significant case surge, causing a record number.
<unk> of lab technicians, and administrators to be absent from work nearly 10% of our lab personnel was impacted.
While the challenge created inefficiencies in our calibration operation throughout the entire month of January our dedicated team rallied put in high levels of overtime and met the critical needs of our customers.
As expected we returned to gross margin expansion in February and March those service gross margins in the fourth quarter did not fully recover from january's Covid Spike.
Turning to our distribution segment in fiscal 2022 revenue grew 15% as demand levels recover from prior COVID-19 impacted periods.
In the fourth quarter distribution revenue grew 7%, even as vendor lead times and supply chain shortages made it challenging to fill open customer back orders.
We anticipate the current backlog level, which is at near record levels will create a future tailwind for distribution when supply and demand move towards a more balanced scenario.
As I said at the beginning of the call. We were very pleased with fiscal 2022 performance significant growth in revenue margins and EBITDA in conjunction with impactful progress on the acquisition front validated transcon strategy and effectiveness of its execution.
The next execution, the Nexsan acquisition, not only expanded our addressable market and improved our already strong value proposition, but in a sense also reframed the trans Cat story.
<unk> Dot com business, which we acquired just two years ago continued to grow at an accelerated pace to accommodate the growth in fiscal 2022, we relocated to an expanded Boston area facility.
We also began work on a newly leased organic calibration labs in South East, Florida, The New lab will take advantage of Florida is attractive and growing calibration markets. We expect the new lab to be opened early to mid summer.
Our balance sheet remains strong with a leverage ratio of just over 1.7 times, which positions us well to continue our acquisition strategy throughout the fiscal 2023 year and beyond.
That I will turn things over to Mark who will provide more detailed look at fiscal 2022 fourth quarter and full year financial performance.
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 fourth quarter and full year.
Fourth quarter consolidated revenue of $55 9 million was up 15% as we continued to see strong demand for both our services and products.
Looking at it by segment service revenue growth remained very strong at 20% with approximately 8% of the growth coming organically and the other 12% from acquisition, we continue to see robust demand across our highly regulated end markets and as we mentioned earlier the Nexsan business continues to perform very well and our recent tangent acquisition is off to a strong start.
Turning to distribution revenue of $21 2 million was up 7% as we saw improved demand from prior year and our base business and our rentals business continued to perform very well supply.
Supply chain conditions remain very challenged and vendor lead times continue to be extended as our year end backlog was up approximately 25% from the end of the prior fiscal year.
Finally on a full year basis total consolidated revenue was $205 million, an increase of over 18% compared to the prior fiscal year, which represents a new record high for Transcanada.
Our service business grew over 20% for the full year and importantly, we saw consistently strong demand throughout the year as we reported 20% year over year growth in every quarter of fiscal 2022 the distribution business was up over 15% for the full year as we were able to take advantage of improved demand, even with the challenging supply chain conditions.
Turning to slide five our consolidated gross profit for the fourth quarter of $16 7 million was up 19% from prior year and our gross margin expanded 120 basis points to 29, 8%.
Q4 service gross margin was 33, 1% and contracted 80 basis points from prior year. A result of the January Covid surge that Lee discussed earlier.
Put a little more color around the severity of this impact our January reported technician Covid cases easily spiked to pandemic highs and increased by more than 300% from prior year in January .
As a result of the increased level of overtime worked and the lower level of vacation time taken temporary really drove up our cost in the quarter and we ultimately we're not able to fully recover from the January gross margin shortfall, even as we returned to margin expansion in February and March.
Distribution segment gross margin of 24, 5% was up 350 basis points from prior year and was driven by strength at our high margin rentals business and a favorable sales mix.
For the full year, our consolidated gross profit increased 27% to $58 4 million.
And our gross margin improved 190 basis points to 28, 5%.
Our full year service gross margin hit a record high of 31, 9%, which represents an increase of 160 basis points from the prior year and an impressive 660 basis point increase from fiscal year 2020.
The continued improvements we have made to our service gross margin over an extended period of time demonstrates our ability to improve our technician productivity take.
Take advantage of the inherent operating leverage in our business model as well as complete acquisitions, which are accretive to our margins.
Turning to slide six Q4, net income of $3 million decreased 5% from prior year and our diluted earnings per share came in at 40 cents, but both net income and earnings per share were negatively impacted by increased acquisition accounting costs as well as a modestly higher tax rate compared to the prior year.
Acquisitions will continue to be an important part of our go forward strategy. So with this in mind, we have introduced an adjusted diluted earnings per share metric, which normalizes for the impact of upfront and ongoing acquisition related costs Q4, adjusted diluted earnings per share was 54, which represents a 4% increase compared to Q.
Four of the prior fiscal year.
A reconciliation of our Q4 and full fiscal year 2022 adjusted diluted earnings per share to diluted earnings per share and net income can be found in the supplemental section of this presentation.
Finally, our full year net income increased 46% from prior year to $11 4 million as a reminder, our full year fiscal 2022 effective tax rate of 13, 7% was aided by discrete income tax benefits largely related to stock option exercises.
For our fiscal year 2023, we expect our income tax rate in the range of 22% to 24%.
Turning to slide seven 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 one of the best measures of our operating performance and ability to generate cash for fourth quarter consolidated adjusted EBITDA of $7 7 million was up 5% from the same quarter.
In the prior year, our distribution segment showed strong improvement from prior year, while our service segment EBITDA declined slightly as a result of the January COVID-19 surge in investments for future growth.
Full year EBITDA of $26 3 million was up 28% compared to the prior year and was driven by the significant year over year profit improvement in both operating segments as always a reconciliation of adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation.
Moving to slide eight cash flow from operations was in line with our expectations as working capital increased on the very strong organic revenue growth.
Full year capital expenditures were $10 2 million and continue to be centered around service segment capabilities, including automation rental pool assets and investments to support future growth as Lee mentioned earlier, we made several investments to improve our lab facility footprint throughout the year and in particular the fourth quarter.
These included the relocation of our Pipettes Boston area facility, the relocation of our Toronto based lab as well as beginning work on a new organic lab and southeast Florida.
We believe these recent investments increase our capacity and capabilities and leave us well positioned for strong future revenue growth for fiscal year 'twenty to 'twenty three we anticipate capex to be in the range of 8 million to $9 million.
Turning to slide nine and the balance sheet at year end, we had total net debt of $47 1 million with a leverage ratio of a little over 1.7 times, we had 41 million available from our credit facility at the end of the year and as previously announced we acquired tangent allows for $9 million at the beginning of our fourth quarter.
Which was largely funded from the revolving credit facility.
Lastly, we expect to file our Form 10-K on or around June seven with that I'll turn it back to you Lee Okay. Thank you Mark.
As we enter fiscal 2023, we are well positioned for profitable growth and we expect the strength of our value proposition to continue to increase for the past 10 years through various economic cycles and now a pandemic chance get has delivered consistent revenue growth and attractive margins, we attribute the long term.
Consistency to the inherent nature of our service business, which is driven by highly regulated recurring revenue streams. We are confident and expect this will continue.
Strong organic growth remains the centerpiece of our strategy, our new business pipeline is very active and this team knows how to win.
2023, we expect organic service growth in the high single digit range.
We also expect sustainable service margin improvement to continue over the longer term.
Future gains will be fostered by the inherent operating leverage in our service business model continuous process improvement automation and our new build a tech program.
On the acquisition front, we will continue to identify and pursue acquisition opportunities that expand our addressable markets leverage our current infrastructure and increase the trajectory of the business.
Our strong balance sheet is supportive of our acquisition strategy and our active M&A pipeline.
I'll conclude by saying that we entered our new year fiscal 2023 and are better positioned than ever to continue and even accelerate the sustainable growth journey that we've been on for the past decade.
And with that Rob you can open up the lines for questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tailwind at Kate Your line is in the question queue. You May press star two if he like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
My first question comes from Gerry Sweeney with Roth Capital. Please proceed with your question.
Good morning, Lee and Mark Thanks for taking my call.
Good morning, Jerry.
Lee you sounded like you have some very good confidence in the organic growth going forward. This year, just curious as to how much visibility you have with your clients obviously.
We all know it's a very good regulated end markets, but just curious if you have.
Months in advance multiple right.
Yeah, I get it I get the question Yeah, So Gary I think.
When it comes to our service segment, we've got pretty decent pre a fair amount of visibility into the future at least up to probably a quarter or two you know in this business depending on the size of the opportunity the cycle can be extended even beyond 12 months at times, but the transactional business.
It tends to turn from from quote to order you know in a quarter or so so we look at our pipelines and they pretty much color you know at least a couple of quarters out, but not even three quarters. So we get a pretty good feel the pulse and good visibility in the service is not the case with distribution, we have much less visibility maybe 60 to 90.
Days out of it but service is different we got pretty decent visibility well. The other piece I'd mentioned Lee. This is mark Gerry that you know, it's a highly revenue stream that we have so there's a we mentioned or we monitor our retention rates pretty closely.
Certainly above 90% mid ninety's, so even though it's not you know quote unquote in the books.
In all likelihood you're going to repeat and that gives us extra confidence look forward cars.
Got it.
Switching gears next.
The asset management services, a little bit different sort of <unk>.
All right.
Well is that.
In the prepared remarks.
It's going well.
Could you maybe give a little bit more detail.
Uptake by some of your clients or you know, how that's progressing how you're sort of rolling that out how we should think of it right.
Yeah.
When we acquired Nex, what we liked was.
They have what they call it five or six service tracks around calibration not the calibration itself, but all the ancillary type of services data management reliability compliance and all the other managed services around calibration did a really nice job of growing their business around the value proposition that offer those services.
And so we expected them to grow at let's just say X rate based upon their historical performance. We believed when we made the acquisition that the possibility exists that they could accelerate that growth by virtue of having access to our customer base and that we could also.
Celebrate our growth at some point in the future by having their suite of services that are so very complementary to ours and so we've only had them for under year about nine months or so and that has come to fruition. So what we tried to convey in the press releases that we are definitely seeing our customers accepting the narrative around their ancillary services.
And their services in a vacuum so to speak.
Their pipeline has developed.
In large measure at a higher rate due to having access to our customers. So there are synergies that are absolutely being executed and I think I would we use the comment.
It met and beat our expectations and I'll stick with that it's been going very well.
Is there.
Our competitive advantage that having an extra few all Brian could you bundles from the opportunities with your <unk>.
Some of your.
Existing or even.
Prospective customers.
Without question, we specifically use the line and intended to use the line that our value proposition.
Is strong and continues to get stronger and we anticipate that that value proposition is going to increase and what we mean by that is when we sit in front of a customer today, whether it be a half a million dollar customer three quarters a million dollar customer and we have a next a person at the table with us our chances of winning that order increase and our value proposition gets stronger and our ability to communicate.
The combined value.
Our ability to do that will help.
Increase our growth rates, they're synergistic grocery so yes, we absolutely believe that's the case and that is happening.
And then one final question just this may be a little bit more for mark.
Gross margin.
I know they were down 80% our.
80 basis points, I'm, sorry year over year, but it sounds like a lot of that was for all of that was attributable to the spike in COVID-19.
Wood margins.
Have been better this quarter.
If you backed out some of those headwinds associated with Covid.
Yeah.
Yeah I mean, the good news is we saw margin expansion in February and March and we would constantly say that gross margin would have expanded if it wasn't for the January cobot shortfall.
Got it okay.
I'll jump back in queue. Thank you.
Thanks sure. Thanks.
Our next question comes from Greg Palm with Craig Craig Hallum Capital Group. Please proceed with your question.
Yeah. Good morning, everyone. Thanks for taking the questions here.
Hey, Greg.
I guess, just maybe starting with kind of what you're seeing in in real time I'm curious if you can comment on what you're seeing in terms of revenue trends quarter to date within service and whether that is consistent with kind of your guidance commentary for the year and is it fair to say that those.
Gross margin increases within service have continued into April and at least the first few weeks of me.
Yeah.
So to the degree that I can add color.
We guide this year, they're a little bit of guidance that we offer is in the range.
High single digit growth we.
We do that Greg thinking and having a fair amount of confidence that we'll be able to achieve that throughout the course of the year. So.
Organically on service. So we go into first quarter, we have a nice pipeline of new business, a nice flow of revenue.
No you're not going to.
Is that going to be linear every quarter is not going to grow at the same rate, but I think when all is said and done from the visibility we have today, we feel pretty comfortable with the high single digit organic growth range for for service as far as margin goes.
We've been increasing our gross margin for several years now.
Again, not every single quarter, but the trend throughout you know sort of an annual basis has been positive for us and we see that continuing it's not necessarily going to be at the same rate. It was but we want to have.
Consistent gradual improvement in our margins. We believe this business can get into the mid Thirty's over time, we're still confident it can do that we would expect this year to have some margin improvement doesn't necessarily mean Q1 or Q2 Q3, but when all said and done we're gonna be heading in the direction sort of upward into the right over.
Time to improve this operation from all the things that we listed in our commentary. So yeah, I think we see that as a consistent message from from my perspective.
Okay. Good.
And digging into the the new Greenfield web and in Florida, I guess my my first question is.
When you decide to do that is it because you don't think that there are maybe any good acquisition opportunities in that region and then secondly, how much of that you know opening of a new of a new lab is driven by actual customer demand I mean, so when that's open theoretically do you.
Have a big pipeline of business, that's ready to go or do you sort of go win that after the case.
Yeah. It's a great question and there is a combination of factors that drive it one without question is we if we thought we could make an acquisition in that territory that made sense. It was a good value that met our strategic goals, we probably would've done that that is our preference, but in the case of southeast, Florida. We really made we made the decision we just had to be there.
There's enough life science business in that area that that we just couldn't wait any longer.
So it's a combination of not finding the right acquisition, but also we have anchor customers in that area. So there are several customers with meaningful volume that we are servicing somewhat inefficiently from outside of Florida, and so by opening up a lab I mean literally in some cases down the street from current customers with decent volume it just.
Made sense I don't like to open up organic labs, but if you have enough anchor customers and you think there's enough growth. So yes, we have the anchor customers, but also the entire southeast region really from coast to coast in Florida.
There's a lot of opportunity to grow that business and we and we like we like what we see when we look at our pipeline of opportunity so existing customers' opportunities and we didn't find the right acquisition. The combination of those three factors are what really drove us to to open up an organic lab.
Okay. It makes sense and then just I guess last one can you just sort of update us on the pipeline and what your thoughts are or are there as we progress throughout the calendar here.
Right, we talked we talked about when we entered the year, we said our pipeline for Cbl's.
<unk> was active and we anticipated you know.
Selling some of these opportunities like we had done prior to Covid, we had a very hot CBL market for the couple of years just prior to the pandemic, we have a solid pipeline for <unk>, we've already won.
Several deals so far this year that will play out and impact this year and so I think we're sort of back on the CBL track now CBS is just one.
Type of sale that we make it tends to be higher volume, we get very embedded just to remind people, we get very embedded very sticky sort of win with a long.
Lifetime value and so yeah, we're I would say, we're doing well with <unk> with wins and with pipeline.
Okay, Great all right I'll hop back in the queue best of luck going forward. Thanks.
Alright, great. Thank you.
Yeah.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question comes from Metro Rama Rama Paul with Sidoti. Please proceed with your question.
Yes, hi, good morning, and thanks for taking the questions. Just a couple for me just coming back to the storage and the omicron the impact in the quarter. Obviously, it created some inefficiencies and impacted margins, but was there also any impact in terms of revenue given the labor shortage, you alluded to and maybe not being able to.
Get as much.
Are all of the work done as you would've liked.
Yeah, I would say the demand stayed consistently strong as Lee said in the opening opening comments.
I will say this that the the growth was higher in February and March as we worked some Moreover time is.
Particularly in January and throughout the quarter.
So on an overall basis I would say it was it didn't really have an impact.
On the revenue for the quarter demand was still strong there I was just the timing of when the revenue got got shipped in the quarter I would say.
Okay, No that's great. Thanks, and then on.
On the pipette business.
And it's growing.
Faster than you expected and hence the headquarter relocation et cetera, just curious how you see that.
Business.
That's all good catalysts for you as you look out to the organic growth you're expecting.
Right, but we liked the business.
We liked it when we acquired it.
It fits really well with our value proposition, it's a life science oriented business again has the recurring revenue streams that criticality that we look for so when we look at the pipe bets dot com business and the the bolt on to that which was biotech.
And we look at next we're looking at what we would call expanded addressable markets. These are markets that we didn't formally.
You know service and now we do and so I think it.
We will help message that the growth that we're looking for in the business.
And.
It opens us up to a market that we would otherwise be and so we like the growth rates and they're very supportive of our overall strategy.
Okay. Thanks, and then finally I might've missed this if you mentioned it earlier on the distribution side and our backlog was really strong heading into the fourth quarter. Just curious as you enter fiscal 'twenty three what's that looking like.
You know again, we have the backlog issue, but we look at bookings everyday and we call a booking new business opportunity that we have one order in hand needs to be shipped and so really so far I would characterize our bookings levels being solid and stable and so no big surprises.
So we just have a bigger backlog as the supply chain challenges continue we would expect at some point, we'll get those out but we're in the same position as everybody in our industry. You know I would say in some cases, even more favorable because of our size and our ability to make strategic buys and get some movement of product, but still a challenge, but we haven't seen it yet on the booking side. So the bookings have been pretty.
Pretty stable.
Okay, and then given the labor shortage you experienced this last quarter is that sort of made you more inclined to be aggressive in terms of Uh huh.
Hiring more in house or training more in house tax.
Well you know I'm not sure it's directly related to the labor shortage in January that was very much pandemic related.
To a degree that Pandemics are something we need to think about long term I guess, the short answer would be yes, but we're always thinking about labor and I mentioned in our script Mitra that we started this past year. After many years of planning and many years of.
Strategizing, we started the build of Tech program here, we call. It translate University, it's out of our Houston Lab, we've already put through I think 28 technicians through that program in the last two quarters and we're going to continue to build our own technicians theres lots of advantages to doing that.
We can teach them how to operate automation right away, which makes some operators.
Versus full full full technician status they come in at a lower cost. These are hungry people, who are excited to be here and be part of the industry that we work in and to the degree we can keep this program going and finding these these applicants.
The program has done really well and these are these have proven to be productive people I think it bodes well for US I also think it's a differentiator.
Anybody else, that's doing it especially to a degree that we are and so to degree we can build these tax that'll help support the growth opportunities that will need a service and that positions us very well, it's it's a differentiator for us.
Okay. Thanks, a lot thanks.
Again for taking the questions.
My pleasure take care.
We have reached the end of the question and answer session I'd now like to turn the call back over to management for closing comments.
Thanks, Rob well, thanks to everybody for joining us on today's call. We appreciate your continued interest in Trans Cat of course will be participating at the 19th Craig Hallum Institutional Investor Conference on Wednesday June 1st feel free to check in with US at the conference or sign up for a one on one with US otherwise we look forward to speaking with everybody.
When we talk after our first quarter results. So thanks again for participating.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.