Jul 25, 2018
Executives
Craig Mychajluk - Investor Relations Lee Rudow - President and Chief Executive Officer Mike Tschiderer - Chief Financial Officer
Analysts
Matt Koranda - ROTH Capital Partners Dick Ryan - Dougherty & Company Jim Marrone - Singular Research Steven Stern - Sterne Investment Advisory
Operator
Greetings and welcome to the Transcat, Inc. First Quarter Fiscal Year 2019 Financial Results Conference Call.
At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.
[Operation 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.
Craig Mychajluk
Yes, thank you and good morning everyone. We certainly appreciate your time today and your interest in Transcat.
With me here on the call, we have Transcat’s President and CEO, Lee Rudow; and our CFO, Mike Tschiderer. After formal remarks, we will open up the call for questions.
If you don’t have the news release that crossed the wire after markets closed yesterday, it can be found on our website at www.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 some 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 have provided reconciliations with non-GAAP to comparable GAAP measures in the tables accompanying the earnings release.
With that, I will turn the call over to Lee to begin the discussion. Lee?
Lee Rudow
Thank you. Thank you, Craig.
Good morning, everyone. Thank you for joining us on the call today.
We will follow the same format that we have used in the past often opted upon some highlights for the quarter and then Mike will provide a more in-depth review of the financials and I will come back. We will wrap things up with an outlook for fiscal 2019.
We are pleased by the continued momentum and solid performance in the first quarter 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, 25.5%, distribution gross margin expanded 140 basis points, 24.2%, consolidated gross margins expanded 90 basis points, 24.9%.
This all lead 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 non-cash 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 enhancement and general operational excellence initiatives.
Relative to these investments, it’s important to note that while we are encouraged by the early gain, heavier lifting is expected ahead of us and we are full steam ahead on leveraging technology, people and process improvement 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 flow meter calibration, a niche discipline we previously outsourced.
We believe the new capabilities strengthened 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 our 37th consecutive quarter of year-over-year service revenue growth.
The growth was primarily fostered by our performance in a highly regulated life science space along with growth in aerospace and general 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 opportunities, 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 to 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 three 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 and 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 are back to business as usual here in the second quarter.
With that I will turn the things over to Mike to discuss the first quarter results in more detail and I will come back to talk to the outlook.
Mike Tschiderer
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 of 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 two 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 of 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 will 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 used equipment sales softness or solid sales of our core products and increased revenue from the rental business.
Rental revenues grew year-over-year by 24%, almost $1 million for the quarter. Beyond differentiators in the marketplace, rentals continued 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 non-cash 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 purchase 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 in an 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 a 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 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.
Slide 7, we show adjusted EBITDA and adjusted EBIT margin. Among other measures, we use adjusted EBITDA, which is a non-GAAP measure to gauge your 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 the 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 at 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 inquiring acquiring assets for the rental business.
Our anticipated 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 anticipated CapEx spend levels to the various focused 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 to 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 will turn it back to you Lee.
Lee Rudow
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 our Service segment remain very compelling.
The segment is driven by regulation, in particular the highly regulated life science space. The segment is supported by recurring revenue stream and the segment maintains high margin and inherent operating leverage.
In addition, the industry remains fragmented and 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 three areas. To that point, we are pleased with our progress through 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 months and 24 months range when our goal will be to drive higher gross margins and operating margins throughout the organization. Our balance sheet remains strong as of the 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 are well-positioned to capitalize on growth opportunities and to deliver solid fiscal 2019. So with that operator, we can open the line for questions.
Operator
Great. Thank you.
At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Matt Koranda from ROTH Capital Partners.
Please go ahead.
Matt Koranda
Hey, good morning guys.
Lee Rudow
Good morning Matt.
Matt Koranda
Just wanted to start out with service growth, I know there is no change to the outlook there, but can you give a little color on sort of why growth may have been on the low end of your guidance given that you are taking share and still seeing strong growth and sort of the key for service market that you serve?
Lee Rudow
Matt this is Lee and I will address that. So when you look at this business on a quarter-to-quarter basis, you are going to see some variability from time to time on the flow of revenue.
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 to some degree even in Q4 of the previous year and at least and sometimes these large opportunities and some of these will just take time to work their way through the initiation stage. So we see the 5% as in a vacuum 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 through. So some of it’s timing and another couple of weeks and you might have correct itself, so I just think we will attribute it to that and the natural fluctuation is going to happen time-to-time, quarter-to-quarter.
Matt Koranda
Okay, thanks. And then just in terms of the – I think you guys did call out, 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 margins as we head through fiscal ‘19 here?
Lee Rudow
Sure. So the mix of the new revenue that we referred to in terms of bookings, generally speaking follows the same pattern as it has in the recent past, so it’s weighted towards life science, we have had a lot of success taking market share in that space.
But we are 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 will just say generally speaking we have been pleased with the margins that we are winning the new business there.
And our goal is to increase our margins and I don’t see any of these new wins that have been counter to that in terms of that goal.
Matt Koranda
Okay, got it. And then just in terms of the onsite versus the other work you do, I mean, I am just curious is that some of reason for the launch of that new business taking a little bit more time here?
Lee Rudow
No, I wouldn’t attribute to the mix of onsite. I would just attribute it to the general nature, some of these accounts are that we have 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 in selected 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.
Matt Koranda
Great. On distribution, just wanted to clarify when you say the Excalibur consolidation into Fullerton may have impact sales, I think you are referring to used equipment, was that the primary driver of softness in used equipment sales and distribution during the quarter?
Lee Rudow
Correct. In that particular case, where we were shutdown for a few days and moving equipment and consolidating, I 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 – some of that probably won’t come back and but we are up to normal rate, normal run-rate now. The other shortfall we have is really in low margin of what we call, rep, reseller business which we really don’t concentrate on by design, because of the nature of the margin.
So, we focused in the quarter on the higher margin revenue streams, the core end-user business, the rental business and that’s why our gross profit margin went up and the gross profit dollars were up so that we are really pleased with the distribution that I expect.
Matt Koranda
Got it. That’s helpful.
And then just one more on distribution and the growth outlook that you guys provided in the deck here at 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 – are the drivers of that essentially expected to be sort of more used in rental, or is there something on the new equipment front that you are seeing as well?
Mike Tschiderer
Yes, hey, 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 impact margins more significantly. I think as we look at our order levels and 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 have kind of talked about for a full year for that particular segment.
Matt Koranda
Okay. And then just one housekeeping one on MBS, was the purchase price booked in fiscal Q1 or will it be next quarter, I just didn’t see you broken out in the the cash flow?
Mike Tschiderer
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 are just taking the simplified approach putting it into the CapEx number.
So, you won’t see any other formal disclosure or pro formas that might be required with a larger acquisition.
Matt Koranda
Okay. And then no change to the full year CapEx guide either, so I assume it’s not really all that impactful, I guess then?
Mike Tschiderer
No, we kind of look at it as one of those opportunities that it’s just something that happen to be acquisition of certain assets of the business. It could have been something else that was opportunistic and happen to be a small company.
Lee Rudow
Matt, if you recall the drivers behind 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 are always looking to increase our expertise and capabilities.
So, even though, NBS is a small company, there is really close proximity to our Phoenix Labs, but really easy bolt-on for us and then we picked up this niche capability in flowing and gas calibrations, 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 as small in terms of dollars, but I think the potential is a good one. So, that’s a kind of acquisition that we can make very, very easily with very low risk that benefits the company.
Matt Koranda
Okay, great. I will get back in queue guys.
Thanks.
Lee Rudow
Thanks Matt.
Operator
Our next question is from Dick Ryan from Dougherty & Company. Please go ahead.
Dick Ryan
Thank you. 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 the record level or how is the trend band, I know you are not quantifying the new business opportunities, but how was the trend band 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?
Lee Rudow
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 are involved with, proposals that you are making and then the confirmations we will call bookings for lack of a better way where we received the PO for the intent to have workflow our way.
In the first quarter, when we say we had record levels that’s because the combination of those wins certainly would indicate that was going to flow-through in the remainder of the year. It’s going to be we – there were two or three significantly size wins relative to what we do and how we do it, but I think stand out that’s the good thing.
But it doesn’t mean that on the lower end of the 20 to 120 or even transactional business that that we go after as well by any means decreased. So I think you will see a healthy flow across the transactional business what we call 20 to 120 and 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 or month there, some times we call it revenue realization, right. You got the order book, but for something either on our end or most likely on the customers end, it takes a little bit time to get started, to get systems if you are doing it permanent onsite for example to establish some computers and connectivity and something 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 is good.
And when Mike and I make the comment that we are not concerned with our goal of mid to high single-digit organic growth that’s we are factoring all of those elements.
Dick Ryan
Okay. And part of the value proposition is having distribution generate leads, is that starting to be seen with some of this new business and potentially with some of these larger wins?
Lee Rudow
I can’t speak to that specifically, I don’t have that kind of information in front of me and I don’t recall seeing information regarding a lead that lead to one of these bigger accounts. I can tell you that both the sales cycle on the large say $0.5 million or $600,000, $700,000 a year even up to $1 million account.
The sales cycle is longer, so chances are top of mind as I think about these accounts we have been working on some of them for even up till a couple of years. That’s not atypical in any way.
I will say in general and you are right Dick, the distribution for us in the sense that it provides lead is a true differentiator. When we look at who we compete with, there are three national companies and smaller owner operators, none of them to the best of 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 fact that I can’t say like the last three 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 those interactions that we have on the distribution…
Mike Tschiderer
Yes. I think from what we have been able to see and just some of the data supports, it’s kind of the same.
We have 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 are having a few large wins that that mix for that differentiation has changed significantly there.
Dick Ryan
Okay. And where do you think you have taken market share from, is it from the larger competitors or the smaller ones?
Lee Rudow
I feel pretty comfortable things from our larger competitors. You have to remember that our value proposition aside from the distribution piece is rooted in our quality.
So for the last decade I mean we have spent an awful lot in terms of infrastructure to support what we call the highest quality in the industry. And I think part of what’s going on is that as the economy picks up and the 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 are 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 and in terms of how they produce their products. So I think some of it is the economic energy and momentum is helping us, because we do have in our opinion a better, higher quality product that people are spending money on today that maybe didn’t and tighter economies didn’t have, because I think that’s part of it, I think we continue to outperform, because we continue to invest in this business.
So we spend millions of dollars as you know on capital to increase our capabilities and our efficiency and our effectiveness and this is resonating. And as expected it takes time but the market is seeing that we are offering a really solid service that we have invested in our business, so I am going to attribute some to that as well.
Dick Ryan
Okay, great. Thank you.
Mike Tschiderer
Thank you, Dick.
Operator
Our next question is from Jim Marrone from Singular Research. Please go ahead.
Jim Marrone
Yes. Good morning gentlemen, I guess the next obvious question is just as far as outlook as far as acquisitions are concerned as you are already in the market are you looking to do geographical expansion or would it be in regards to a product line and if so would it - do you have a sense on what it will be on the service side or on the distribution side as well as it’s in the distribution side are you looking more at the rental market and perhaps if you could just give us some color as far as well in addition as you are looking at the market if you could 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?
Lee Rudow
Okay. A lot of questions, let me try to – if I can remember them all, Mike will help me.
I am sorry not one-off at a time. So, it’s likely Jim that as we make acquisitions, they are going to be on the service side of the business that is historically what we have 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 are likely to make an acquisition. There are still three primary drivers I just mentioned them.
Geography is one of them, so there is six or seven gaps in our footprint in the United States and I just rattle couple of them 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 would like to see covered.
And we would certainly do that via acquisition if the opportunity presents itself. So yes, service geographic expansion but like in the case of NBS if I can pick up a niche service that makes sense and the numbers work out we will do that as well.
From a multiple perspective we have been very disciplined over the last 5 years or so and we typically pay 4 to 6 I don’t know and the single example where we paid outside of that range. I am not saying we would infer the right company, where we stretch a little bit for a company into the perfect fit and we really thought will that benefit our company, sure.
But typically we are in the 4 to 6 range and we stayed that way. The pipeline of future opportunities I think is very solid right now.
And we expect to be active in that market and we are certainly at all given times working to make sure that we are positioned well to take advantage of acquisition opportunity. I think I have got your question?
Mike Tschiderer
Thank you. And just one more related to how we would finance that acquisition and the ones that we typically buy these tuck-ins or geographic expansion of capabilities, we likely would use our debt facility, Jim have $20 million available on our revolver facility right now.
So cash/debt is what we would likely use for the kind of acquisitions is that we have historically made and probably we would likely make into the future.
Lee Rudow
One thing we focus on Jim is to add a little color is our sweet spot has been in the past and will likely be in the near future in the let’s call $5 million range. We haven’t typically acquired companies that we would call you that’s the form type deal, so we have got really good and improved our integration process relative to these smaller deals.
But they are accretive day one 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 are accretive, but we are acquiring because we want to grow them. And so we are not – we have backed away from deals that we didn’t think were in the right territory or the right place or offer the right services and we didn’t think we can grow them, so that’s the key element, growth and stay in our sweet spot for the near future.
Jim Marrone
Yes, 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?
Lee Rudow
Jim, the current strategy is to continue with our plan as it 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 [indiscernible] of a customer, what we will call sponsor.
So we would have perhaps a company we do business with in the U.S. It sets us up once as we come to European country to support their calibration needs there.
We would likely do that in the form of permanent onsite. So, I see our expanding into 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 are going to focus our efforts in the near-term.
Jim Marrone
Yes, that’s great. Thank you, gentlemen.
Lee Rudow
Alright. Thank you, Jim.
Operator
[Operator Instructions] Our next question is from Steven Stern from Sterne Investment Advisory [ph]. Please go ahead.
Steven Stern
Good morning and congratulations on a good quarter. 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 profit and we do have a very successful Canadian exposure in the company.
Any thoughts on the impact of specifically the Canadian chitchat on tariffs?
Mike Tschiderer
Yes, Steven, this is Mike. Good question and it’s very timely of course.
What we really see with tariffs impacting us is we are starting to get notices from some of our suppliers that are going to be either impacted by tariffs or want to raise prices, because now even if they are 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 are going to have to pay from the incoming cost is going to be passed on to customers.
So, we don’t see it as a negative impact of the profitability, if anything in fact, it probably raised the gross level of revenue, but it will 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 in 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 are pretty insulated there, we don’t think it will be a big impact cost wise if anything in Canada it’s going to be just more the uncertainty for the general economy of Canada.
Steven Stern
And the impact would be on the distribution sector and not in services at all, is that correct?
Mike Tschiderer
Yes, I think if anything we are going to see it in distribution first and the most, service that probably is a lag further down the road at much lower levels as a company may not be producing as much and they may not have as many instruments to be calibrated, but it’s much less impact to us and there is much more of a lag to that than the actual impact on distribution for sure.
Steven Stern
Thank you very much.
Lee Rudow
Thanks Steven.
Operator
This concludes the question-and-answer session. I would like to turn the floor back over to management for any closing comments.
Lee Rudow
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 will be available on August 15, we are going to be participating in the CFA Minneapolis conference and then on September 6 we are going to be at the Dougherty conference.
So feel free to check in with us any time at either of the conferences or just give us a call, reach out to us, we are happy to talk to you. We look forward to talking to everybody again after second quarter and again thanks for participating today.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time.
Thank you for your participation.