Transcat Inc (TRNS) 2019 Q1 法說會逐字稿

Greetings, and welcome to the Transcat, Inc.

First Quarter Fiscal Year 2019 Financial Results Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Craig Mychajluk.

Thank you.

You may begin.

Yes.

Thank you, and good morning, everyone.

We certainly appreciate your time today and your interest in Transcat.

With me here on the call, we have Transcat's President and CEO, Lee Rudow; and our CFO, Michael Tschiderer.

After formal remarks, we'll open up the call for questions.

If you don't have the news release that crossed the wire after markets closed yesterday, they can be found on our website at transcat.com.

The slides that accompany today's discussion are also on our website.

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 teleconference.

Those 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 Securities and Exchange Commission.

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.

I would like to point out as well that 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 this additional information in isolation or as a substitute for results prepared in accordance with GAAP.

We provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release.

With that, I'll turn the call over to Lee to begin the discussion.

Lee?

Thank you.

Thank you, Craig.

Good morning, everyone.

Thank you for joining us on the call today.

We'll follow the same format that we've used in the past.

I'll hit upon some highlights for the quarter, and then Mike will provide a more in-depth review of the financials, and I'll come back.

We'll wrap things up with an outlook for fiscal 2019.

We're pleased by the continued momentum and solid performance in the first quarter of fiscal 2019.

The strength of our value proposition, the focused execution of our strategic plan and inherent operating expense leverage in the Service segment drove double-digit operating income growth.

In addition to the operating income growth, we drove gross margin expansion in both segments of the business.

Service gross margin expanded 40 basis points to 25.5%.

Distribution gross margin expanded 140 basis points to 24.2%.

Consolidated gross margin expanded 90 basis points, 24.9%.

This all led to consolidated operating income growth of 44% or $2 million in the quarter and an operating margin increase of 160 basis points.

Even when normalizing first quarter operating income growth for the $322,000 one-off, noncash, stock option grant in last fiscal year's first quarter, consolidated operating income was up 17%.

Net income was $1.4 million, up 67%, and EPS grew 62% to $0.19 per diluted share in the first quarter.

We generated strong cash from operation and used cash to reduce debt and fund longer-term productivity enhancements and general operational excellence initiatives.

Relative to these investments it's important to note that while we're encouraged by the early gain, heavier lifting is expected ahead of us, and we're full steam ahead on leveraging technology, people and process improvements to drive differentiation.

On the acquisition front, at the end of the quarter, we completed the small tuck-in purchase of NBS Calibrations, Inc.

located just a few miles from our laboratory in Phoenix, Arizona.

NBS specializes in providing gas and liquid flowmeter calibration, a niche discipline, we previously outsourced.

We believe the new capability strengthens our value proposition and will increase our competitive advantage as we drive organic service sales growth.

Moving on to Service where we continue to take market share.

Our organic service segment growth in the first quarter of fiscal 2019 was nearly 5% and represented a 37th consecutive quarter of year-over-year service revenue growth.

The growth was primarily fostered by our performance in the highly regulated life science space, along with growth in aerospace and general and industrial market.

Even with moderate year-over-year organic Service revenue growth in the quarter, we demonstrated the inherent operating leverage in the Service segment with margin expansion of 70 basis points on operating income growth of nearly 21%.

New service wins in the quarter were strong.

And in combination with a solid pipeline of potential new service opportunity, we expect the new business to drive mid- to high-single-digit organic service growth rate and to support solid results for fiscal 2019.

Moving on to Distribution.

Distribution continues to deliver on our stated goal of generating steady gross profit performance, differentiation and a significant lead source for our Service segment and strong cash flow to support organic growth, acquisitions and operational excellence.

In the first quarter, the Distribution segment delivered on all 3 fronts.

We also benefited from a positive sales mix, including strong core end user sales, a 24% increase in rental revenue, and pricing enhancement initiatives that drove expansion in Distribution gross margin.

Also in the quarter, we completed the final stage in the full integration of Excalibur Engineering as we consolidated their facility in Irvine, California with our state-of-the-art lab in Los Angeles.

That operation was down for a bit in the quarter as we executed the move, but we believe we're back to business as usual here in the second quarter.

With that, I'll turn things over to Mike to discuss the first quarter results in more detail and then I'll come back to talk to the outlook.

Thanks, Lee, and good morning, everyone.

I will start on Slide 4 of the slide deck that we provided where we give some detail regarding our revenues for the first quarter of our fiscal year 2019, which ends on March 30, 2019.

In the first quarter, we delivered consolidated revenue of $36.7 million, up 1% over the first quarter of our fiscal 2018.

This consolidated total includes our Service segment and Distribution segment revenues, our 2 reportable segments.

As Lee mentioned, we had Service segment organic revenue growth of approximately 5%, which is the low end of our expected organic revenue growth rate of mid- to high single-digits.

We still expect to achieve our organic revenue growth goals for the full fiscal year 2019.

We mentioned the purchase of NBS Calibrations.

On June 28, we announced the purchase of certain assets of NBS effective on June 12, 2018.

The revenues of NBS were negligible in our first fiscal quarter and do not change any of our organic growth numbers for this quarter.

We believe this will be the case in our future quarters, so we'll continue to call our service revenue growth all organic if the revenues from NBS continue at their expected levels.

For our Distribution segment, revenue for the quarter decreased 2.6% to $17.3 million.

The decrease reflects lower sales of used equipment partially offsetting the used equipment sale softness, where solid sales of our core products and increased revenue from the rental business.

Rental revenues grew year-over-year by 24% to almost $1 million for the quarter.

The end differentiate us in the marketplace.

Rentals continue to provide an attractive margin profile, which helped the segment's gross margin and operating results as seen on the next slide, Slide 5.

On Slide 5, gross margin improvement and SG&A cost control drove operating income growth and margin expansion.

On the consolidated basis, in the first quarter, our operating income increased nearly 44% or $0.6 million, and operating margin expanded 160 basis points to 5.5%.

As we mentioned, we have to note that the last year's first quarter included a $322,000 one-off, noncash, stock-based compensation expense item.

But after normalizing for that item, we still saw strong leverage with consolidated operating income increasing 17%.

Distribution gross margin expanded 140 basis points to 24.2%, despite the lower sales.

This was due to the mix of the products sold, inventory purchased rebates received and pricing initiatives that were implemented as part of our ongoing operational excellence program.

That segment's operating income also increased hitting $1 million in the quarter with an operating margin of 5.5%, which is up 250 basis points.

Controlling expenses, including lower commissions paid on the lower used equipment sales contributed to those results.

The Service segment demonstrated operating leverage in the quarter with gross margin expanding 40 basis points and operating margin expanding 70 basis points.

We benefited from some of the early operational excellence initiatives that drove productivity improvements.

Slide 6 shows net income on a trailing 12-month and quarterly basis.

Net income for the year-over-year first quarter increased 67% to $1.4 million, which equates to $0.19 per diluted share, that's up $0.07.

The significant increase on both the trailing 12-month and quarterly basis reflects improved operating results as well as the positive impact from the U.S. Federal Tax Cuts and Jobs Act enacted in December of 2017.

The effective tax rate this quarter was 20.7% compared with 24.8% in the first quarter of last fiscal year.

Of note, our effective tax rate includes U.S. federal taxes, various state taxes and taxes on our Canadian operating entities' income.

Looking ahead, our income tax rate for full fiscal year 2019 is still expected to be in the range of 25% to 27%.

This combined rate includes U.S. federal state and Canadian.

On Slide 7, we show adjusted EBITDA and adjusted EBITDA margin.

Among other measures, we use adjusted EBITDA, which is a non-GAAP measure, to gauge the performance of our segments because we believe it is a good measure of our operating performance and is used by investors and others to evaluate and compare performance of core operations from period to period.

I encourage you to look at the supplemental slides that provide a reconciliation of adjusted EBITDA to the closest GAAP measures, which for us are operating income and net income.

On a consolidated basis, quarterly adjusted EBITDA was up 14% to $3.8 million, while adjusted EBITDA margin expanded 120 basis points to 10.5%.

Both segments contributed to this increase.

Slide 8 provides detail regarding our balance sheet and cash flow.

We generated strong cash from operations of $3.1 million in the first quarter, which was used to fund our growth-focused investments, drive our operational excellence initiatives and further reduce our debt.

First quarter capital expenditures were $1.9 million and primarily focused on customer-driven expansion of Service segment capabilities and acquiring assets for the rental business.

Unanticipated capital expenditure plan for fiscal 2019 remains in the $7 million to $7.5 million range.

And if you look on Slide 9, we provide a breakout of the anticipated CapEx spend levels to the various focus areas of fiscal year 2019.

At quarter end, we had total debt of $21.5 million with $22 million available under our revolving credit facility.

Our debt levels are down $1.3 million since the end of fiscal 2018, and our quarter end leverage ratio also decreased to 1.28:1.

We calculate this leverage ratio as our total debt on the balance sheet at a period end divided by the trailing 12 months adjusted EBITDA.

Other companies may calculate such a metric differently.

Our $50 million shelf registration statement filed in December 2017 remains effective, but unused at this date.

We continue to believe we have sufficient liquidity and a strong balance sheet for investment purposes that meet our strategic criteria.

And lastly, we expect to timely file our Form 10-Q on or about August 3.

With that, I'll turn it back to you, Lee.

Thank you, Mike.

Turning to the last slide.

We continue to build the business for the long-term and are encouraged by ongoing strength in the U.S. industrial market.

The attributes of over Service segment remain very compelling.

The segment is driven by regulation, in particular the highly regulated life science space.

This segment is supported by recurring revenue stream.

This segment maintains high margin and inherent operating leverage.

In addition, the industry remains fragmented.

It provides a real opportunity to execute our acquisition strategy.

For all these reasons, our Service segment continues to be our primary growth engine and our strategy is to drive double-digit growth through a blend of organic and acquired revenue stream.

Technology, talent, and process improvement are fundamental elements to our competitive advantage, and we will continue to invest in all 3 areas.

To that point, we're pleased with our progress to the planning and early implementation stages of operational excellence.

But there is a lot of work to be done and the meaningful drivers will become more impactful in the 12- to 24-month range, when our goal will be to drive higher gross margins and operating margins throughout the organization.

Our balance sheet remained strong as does our current pipeline of potential acquisition.

Both are supportive of an increased level of acquisition activity in the future.

All in all, I like our team, our strategy and our demonstrated track record of executing our plan.

As we work our way through the second quarter, we're well positioned to capitalize on both opportunities and to deliver a solid fiscal 2019.

So with that, operator, we can open the line for questions.

(Operator Instructions)

Our first question's from Matt Koranda from Roth Capital Partners.

Just wanted to start out with service growth.

I noticed no change to the outlook there, but could you give a little color on sort of why growth may have been on the low ends of your guidance given that you're taking share and still seeing strong growth in sort of the key core service markets that you serve?

Matt, this is Lee, and I'll address that.

So when you look at this business on a quarter-to-quarter basis, you're going to see some variability from time-to-time on the flow of revenue.

We're -- that doesn't concern us.

We -- as we mentioned in the press release and even in our script, we had a very high level of new service wins in the quarter and then -- and to some degree even in Q4 of the previous year, and these -- and sometimes these large opportunities and some of these wins just take time to work their way through the initiation stage.

So we see the 5% as in a vacuum and in and of itself.

Yes, that's on the low end.

But when we look at it in the light of the new business that we booked in the first quarter, it's no concern of ours at this point, and we think it's going to all flow us through.

So some of the timing, and another couple of weeks and it might have corrected itself.

So I just think, we'll attribute it to that and the natural fluctuations you can have from time-to-time and quarter-to-quarter.

Okay.

Makes sense.

And then just in terms of the -- I think you guys did call out and you mentioned it just now that the record level of bookings in the quarter, maybe, could you give a little color on sort of the mix of that new service business?

And how it might play out for Service operating margin since we head through fiscal '19 here?

Sure.

The mix of the new revenue that we referred to in terms of bookings, generally speaking, it follows the same pattern as it has in the recent past.

So it's weighted towards life science.

We've had a lot of success taking market share in that space, but we're also seeing an uptick in aerospace and some defense markets as well, even the industrial markets provided some uptick for us.

So it's really a blend highlighted and concentrated with life science.

From a margin perspective, I'll just state, generally speaking, we've been pleased with the margins that we're winning this new business at.

And our goal is to increase our margins.

And I don't see any of these new wins that's been counter to that in terms of that goal.

Okay.

Got it.

And then just in terms of on-site versus the other work you do.

I mean, just curious, is that some of the reason for the launch of that new business taking a little more -- a bit more time here?

Wanted to get your thoughts on that?

No, I wouldn't attribute it to the mix of on-site.

I would just attribute it to the general nature.

Some of these accounts are -- that we've won recently are a little bit larger than our typical profile, which is good news.

There is nothing wrong with that, and they take a little bit longer sometimes and some of that they take longer than you expect.

But when we look at the profile and the wins, and we dig a little bit deeper, again, no cause for concern.

We think it's going to play out well.

Great.

On Distribution, just wanted to clarify, when you say the Excalibur consolidation into Fullerton may have impacted sales, I think you're referring to used equipment.

Was that the primary driver of softness in used equipment sales and distribution during the quarter.

Correct.

When -- in that particular case, where we were shut down for a few days and moving equipment and consolidating, it did have a small impact on our used equipment business.

And of the shortfall in revenue that was probably 50% of it, and so that probably won't come back and -- but we're up to normal rate -- normal run rates now.

The other shortfall we had was really in lower margin, what we call, rep reseller business, which we really don't concentrate on by design because of the nature of the margins.

So we focused in the quarter on the higher-margin revenue streams, that core end user business, the rental business, and that's why our gross profit margin was up and the gross profit dollars were up.

So that why we're really pleased with Distribution in that respect.

Got it.

That's helpful.

And then just one more on Distribution and the growth outlook that you guys provided in the deck here, low-single-digit to mid-single digit growth seems to imply a pickup for the remainder of the year.

So Just wanted to get a sense for sort of your visibility into that and sort of other drivers of that, essentially expected to be sort of more used in rental?

Or is there something on the new equipment front that you're seeing as well?

Yes, Matt, this is Mike.

It's kind of a combination of things.

I think we will see some further upticks in the growth of the rental business.

Keeping in mind that it has a small top line impact, but it impacts margin more significantly.

I think as we look at order levels in back orders and open orders, we believe that it's going to get us back to that low- to mid-single-digit growth that we've kind of talked about for a full year for that particular segment.

Okay.

And then just one housekeeping one on NBS.

Was the purchase price booked in fiscal Q1 or it will be next quarter?

I just didn't see it broken out in the cash flow.

No, it was so small, we just put it as part of CapEx in cash flow statement.

So it was booked.

But it's just so small, we're just taking the simplified approach putting it into the CapEx number.

So you won't see any other formal disclosure or a pro forma that might be required with a larger acquisition.

Okay.

And then no change to the full year CapEx guide either?

So I assume that's not really all that impactful, I guess, and in terms of...

No.

We kind of look at it as one of those opportunities that it's -- just something that happened to be acquisition of certain assets of a business, it could have been something else that was opportunistic.

It happened to be a small company.

Matt, if you recall, the drivers behind of our acquisition strategy are threefold, right.

We look for geographic expansion where we can achieve that.

We look for tuck-in, bolt-on type acquisitions, and we're always looking to increase our expertise and capabilities.

So even though NBS was a small company, that's really in close proximity to our Phoenix labs, but really easy bolts-on for us.

And then we picked up this niche capability in flowing and gas calibration.

So that's going to be something that we don't have to outsource anymore, and it's going to queue us up nicely for potential opportunities.

So small in terms of dollars, but I think the potential is a good one.

So that's kind of a -- it's a kind of acquisition that we can make very, very easily with very little risk that benefits the company.

Our next question is from Dick from Dougherty & Company.

Assuming, I guess, my questions are back on the new business opportunities and the strong pipeline you talked about.

Is this kind of a bulge in the quarter, if it's a record level?

Or how has the trend been?

I know you're not quantifying the new business opportunities, but how has the trend been?

And also you mentioned larger opportunities versus let's say smaller transactional sorts of pickups.

Can you provide a little more perspective on that as well?

Sure, Dick.

So This is Lee.

And I would characterize the new business as this.

When we look quarter-to-quarter, you get a pulse for the organization by looking at the pipeline that exists, that the quotes that you're involved with, proposals that you're making.

And then the confirmations, we call it bookings for lack of better way where we receive the PO for the intent to have workflow our way.

In first quarter, when we say we had record levels, that's because the combination of those wins, certainly would indicate that -- that work's going to flow through in the remainder of the year.

It's going to be we -- there were 2 or 3 significantly sized wins relative to what we do and how we do it, that I think stand out.

That's a good thing.

But it doesn't mean that on the lower end, that at the 20 to 120 or even transactional business that we go after as well, by any means, decrease.

So I think you see a healthy flow across the transactional business that, what we call, 20 to 120 in the larger accounts.

They had different timings in terms of how they play out and when they start and how the on-boarding of those accounts go and that can fluctuate a month here, a month there.

Sometimes we call it revenue realization, right.

You got the order booked, but for something either on her end or most likely on the customer's end, it takes a little bit of time to get started, to get systems.

If you're doing a permanent on-site, for example, to establish some computers and connectivity and somethings, assets perhaps.

So quarter-to-quarter, I don't tend to focus on that number.

The pulse is good.

The bookings were good.

The pipeline's good.

And so when Mike and I make the comment that we're not concerned with our goal of the mid- to high-single-digit organic growth, that's -- we're factoring all those elements.

Okay.

And in your part of the value proposition that's having distribution generate leads, is that starting to be seen with some of this new business and potentially with some of these larger wins?

I can't speak to that specifically.

I don't have that kind of information in front of me.

I don't recall seeing information regarding a lead that led to one of these bigger accounts.

I can tell you that, the sales cycle on the larger, say, $0.5 million or $600,000, $700,000 a year, even up to $1 million a year accounts.

The sales cycle's longer.

So chances are, top of mind, as I think about these accounts.

We've been working with some of them for even up to a couple of years.

That's not atypical in any way.

I will say, in general, and you're right, Dick, the distribution for us in a sense that it provides lead is a true differentiator.

When we look at who we compete with, 3 national companies and smaller owner-operators, none of them, to best my knowledge, have that advantage, have that lead source that we do.

That's going to continue to be a differentiator for us, independent of the fact that I can't say like the last 3 big wins came from that, but lot of our growth comes -- well, a significant material amount of our growth does come from those leads and as interactions that we have on a distribution, but...

Yes.

I think from what we've been able to see in just some of the data supports, it's kind of the same.

We've had had some larger wins, but that overall mix of where an opportunity starts from continues to be strong and continues to be different for us than others have.

It's not like because we're having a few large wins that, that mix or that differentiation has changed significantly, Dick.

Okay.

And where do think you're taking market share from?

Is It from the larger competitors or the smaller ones?

I feel pretty comfortable saying from our larger competitors.

And you have to remember that our value proposition, starting from the distribution piece is rooted in of our quality.

So for the last decade, I mean, we have spent an awful lot in terms of infrastructure to support, what we call, being the highest quality in the industry.

And I think, part of what's going on is that, as the economy picks up and it's healthier, industrial markets are strong, people are able to -- people are looking at our quality in a different way.

Their business is good.

And in some cases, they're willing to pay a higher margin to come onboard with us and get the quality services that we offer because it's an advantage for them in terms of how they produce their products.

So I think some of it is economic energy and momentum, it's helping us.

Because we do have a, in our opinion, a better higher quality product that people are spending money on today, that maybe didn't -- in tighter economies didn't happen.

Because I think that part of it, I think we continue to outperform because we continue to invest in this business.

So we spend millions of dollars a year, as you know, in capital, to increase our capabilities, in our efficiency, in our effectiveness and this is resonating.

And as expected, it takes time.

But the market is seeing that, that we're offering a really solid service and we've invested in our business, so I would attribute some to that as well.

Our next question is from Jim Marrone from Singular Research.

Gentlemen, I guess, the next obvious question is just as far as outlook as far as acquisitions are concerned, as you're high in the market, are you looking to do a geographical expansion?

Or would it be in regards to a product line?

And if so, would it -- do you have a sense on would it be on the service side or on the distribution side?

As well as it's from the distribution side, are you looking more at the rental market?

And perhaps if you could just give us some color?

As far as -- as well, in addition, as you're looking at the market, if you can give me a sense of what the valuations are like out there, the attractive multiples?

And how would you go about perhaps financing that?

Do you have enough cash generated internally?

Or would you look for outside financing?

Okay.

A lot of questions.

Let me try to -- If I can remember them all.

Michael, help me.

I'll try to knock one-off at a time.

So it's likely, Jim, that as we make acquisitions, they're going to be on the service side of the business.

That is historically what we've done and it's likely to be what we do in the future.

Service is our primary growth engine, as we say, from time-to-time.

And therefore, that's where we're likely to make an acquisition.

There are still 3 primary drivers, I just mentioned them.

Geography is one of them.

So there is 6 or 7 gaps in our footprint in the United States and I just rattle a couple of them off just for interest purposes, the Florida area, Atlanta, Dallas, Northern California, Midwest, and perhaps, Minneapolis, Maryland, possibly Virginia.

So these are gaps in our geographic footprint that I'd like to see covered.

And we would certainly do that via acquisition if the opportunity presents itself.

So yes, service, geographic expansions, but like in the case of NBS, if I can pick up a niche service that makes sense and the numbers work out, we'll do that as well.

From a multiple perspective, we've been very disciplined over the last 5 years or so.

And we pay -- we typically pay 4 to 6 sets.

I don't know of a single example where we paid outside of that range.

I'm not saying we wouldn't for the right company.

Would we stretch a little bit for a company with a perfect bid, and we really thought would be of benefit to our company?

Sure.

But typically, we're in the 4 to 6 range and we'll stay that way.

The pipeline of future opportunities, I think, is very solid right now and we expect to be active in that market.

I know we're certainly -- I'll give it time to see how it's working to make sure that we're positioned well to take advantage of acquisition opportunities.

I think I've got your questions.

I mean...

I think there was just one more related to how we would finance that acquisition.

And the ones that we typically buy is these tuck-ins or geographic expansion capabilities, we likely would use our debt facility.

Jim, we have $20 million available on our revolver facility right now.

So cash/debt is what we will likely use for the kind of acquisitions that we've historically made and probably would likely make into the future.

And one thing we focused on Jim, just to add a little color, is our sweet spot has been in the past and will likely be in the near future in the -- it costs $5 million range.

We haven't typically acquired companies that we would call back-to-farm type deals.

So we've got really good and improved our integration process relative to these smaller deals, but they're accretive day 1. And they add value to our company and they really kind of augment and support our organic growth activity because one of the bars we set for ourselves is not only to acquire these companies because they're accretive, but we acquire them because we want to grow them.

And so we're not -- we have backed away from deals that we didn't think we're in the right territory or in the right place or offer the right services and we didn't think we could grow them.

So that's the key element.

Growth and stay in our sweet spot for the near future.

Got it.

That's great.

I think that did answer all my questions.

Just one quick follow-up.

Could you also consider any markets outside the U.S. and/or as well any new industries that you see have potential out there?

Jim, the current strategy is to continue with our plan as is now.

Eventually, will Transcat be a global service company?

That may actually occur in time.

And if it does, it's likely going to be on the coat tails of a customer, what we will call, sponsor.

So we would have perhaps the company we do business within the U.S. that sets [us up] and wants us to come to European country to support their calibration needs there.

We would likely do that in the form of permanent on-site.

So I see us -- I see our expanding the global markets.

But right now, our strategic plan focuses on domestic growth.

There is a lot of low hanging fruit in this country and in North America, and I would walk away thinking that, that's where we're going to focus our efforts in the near term.

(Operator Instructions) Our next question is from Steven Stern from Stern Investment Advisory.

My question is on tariffs.

What is, which of course, is influx as we talk.

But has any work been done internally on possible impact or exposure on sales, expenses, and ultimately profits?

And we do have a very successful Canadian exposure in the company.

Any thoughts on the impact of specifically the Canadian chitchat on tariffs?

Yes, Steve, this is Mike.

Good question and is very timely of course.

What we really see with tariffs impacting us is, we're starting to get notices from some of our suppliers that are going to be either impacted by tariffs or who want to raise prices because now even if they're a U.S. manufacturer, they know that the price has gone up, so they can raise their prices.

But we really believe that anything that we're going to have to pay from that incoming cost is going to be passed on to customers.

So we don't see it as a negative impact to the profitability.

If anything, in fact, it probably raise the gross level of revenue, but it would probably likely raise cost at the same level with no impact on profit.

Related to Canada, we don't do a lot of cross border with Canada.

So we would think that there won't be any impact in Canada.

The only thing that is a little bit uncertain is the general economy and the impact that Canada may see as certain sectors are worried.

So it's kind of a broader issue than just us.

But because we're pretty insulated there, we don't think it'll be a big impact cost wise.

If anything in Canada, it's going to be just more of the uncertainty for the general economy of Canada and how that impacts us.

The impact would be on the Distribution sector and not in Services at all.

Is that correct?

Yes, I think, if anything we're going to see it in Distribution first and the most.

Service, there probably is a lag further down the road at much lower levels as the company may not be producing as much and it may not have as many instruments to be calibrated.

But it's a much less impact to us and there's much more of a lag to that than the actual impact on Distribution for sure.

This concludes the question-and-answer session.

I'd like to turn the floor back over to management for any closing comments.

Okay.

Well, thank you all for joining us on the call.

We appreciate your continued interest and support.

For those of you in the Minneapolis area, we'll be available on August 15.

We are going to be participating in the CFA Minneapolis conference.

And then on September 6, we're going to be at the Dougherty conference.

So feel free to check in with us anytime at either of this conferences or just give us a call, reach out to us.

We'll be happy to talk to you.

We look forward to talking to everybody again after second quarter.

And again, thanks for participating today.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.