Transcat, Inc. Aktie

Good afternoon, everyone. Welcome to the Transcat Fourth Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions] And as a quick reminder, today's conference is being recorded.

It is now my pleasure to introduce your host, Mr. John Howe, Senior Director of Financial Planning and Analysis. Mr. Howe, please go ahead.

Thank you, operator, and good afternoon, everyone. We appreciate your time and your interest in Transcat. With me here on the call today is our newly appointed President and CEO, Jaime Irick; and our CFO, Tom Barbato. We will begin with some prepared remarks and then open the call for questions.

Our earnings release crossed the wire this afternoon after the market closed. Both the earnings release and the slides that we will reference during our prepared remarks can be found on our website, transcat.com in the Investor Relations section.

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. 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 this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to compared GAAP measures in the tables accompanying the earnings release.

With that, I'll turn the call over to Transcat President and CEO, Jaime Irick.

Thank you, John. Good afternoon, everyone, and thank you for joining us on the call today. Before we walk through the quarter, I just want to spend a few minutes introducing myself. I joined Transcat at the end of March. And in the time since, I spent many days on the road, visiting our calibration labs and meeting with our talented team of employees, sitting down with our Board and getting in front of as many customers and partners as possible. I came in with a very high opinion of this company, and I leave each of these conversations more convinced that Transcat is the most attractive growth platform in our industry.

Two things attracted me to Transcat. First, the people, from the Board of Directors to the senior management team, to the technicians in our service centers and on the road, this is a high-performing organization with deep cultural commitment to integrity, technical excellence and customer service in the highly regulated industries we serve. Additionally, many of our employees are U.S. military veterans, which really resonated with me because I'm also a veteran and a West Point graduate, and that's a special part, just, of our population here at Transcat.

Second, the opportunity. Transcat is the established leader in a calibration services market with exceptional fundamentals, highly regulated end markets, durable secular tailwinds, recurring revenue streams and a long runway for both organic growth and disciplined consolidation. That opportunity also aligns directly with my background, driving profitable B2B growth at scale, executing strategic M&A and leading teams through technology-enabled transformations. My message to you today is straightforward. The strategy is working, and we are going to keep executing and accelerating against our 4 clear strategic imperatives: high single-digit service organic revenue growth, service gross margin expansion, strategic M&A and rentals growth.

With that, I will briefly turn to our financial results. Transcat delivered strong performance across our entire business portfolio in the fiscal fourth quarter. And as expected, service organic revenue continued growing in the high single digits. Consolidated revenue was up 16% to $89.3 million in the fiscal fourth quarter and increased 19% to $331.9 million for the full year, driven by double-digit revenue growth in both segments. Demand in highly regulated end markets, including life sciences, aerospace and defense, and energy remained strong and our differentiated value proposition continues to resonate throughout Transcat's addressable end markets. Given our organic growth and strategic acquisitions of top regional players, we believe Transcat gained market share in the calibration services market during fiscal 2026.

Consolidated gross profit grew 18% and gross margins expanded 50 basis points in the fiscal fourth quarter. We experienced similarly strong full year results as gross profit increased 21% with gross margin expansion of 50 basis points. Adjusted EBITDA grew 16% in the fiscal fourth quarter and 23% for the full fiscal year.

Let's take a closer look at our Service results. In the fiscal fourth quarter, Service revenue increased 18% and Service organic revenue grew 7%. The fourth quarter marked our 68th straight quarter of year-over-year growth. Service revenue grew 20% on a full year basis, driven by our differentiated value proposition, along with the continued successful integration and performance of our acquired companies. The recent acquisition of SCM Metrology and Laboratories is consistent with our M&A strategy and establishes Transcat's first operational presence in Latin America, advancing the strategy to grow alongside our customers in high-growth, highly regulated end markets. You can expect us to continue to complement our Service's organic growth with strategic M&A.

Service gross profit increased 16% in the fiscal fourth quarter and 16% full year. As expected, Service gross margins improved sequentially in the fiscal fourth quarter by 670 basis points. The Service segment has substantial runway for growth, both organically and through acquisition. Our acquisition pipeline positions us well to pursue strategic, accretive deals that generate real synergistic value. M&A will remain a cornerstone of how we grow.

Turning to Distribution. Distribution revenue grew 11% in the fiscal fourth quarter and 18% full year due to strong demand from rentals and product sales. Gross margins expanded 280 basis points versus prior year in the fourth quarter and 330 basis points full year, driven primarily by an increase in the mix of higher-margin rental revenue within the Distribution segment.

Overall, we are very pleased with our performance and optimistic about the future, given the momentum building in our Service segment.

With that, I will turn things over to Tom for a more detailed look at our fourth quarter and full year financial results.

Thanks, Jaime. I'll start on Slide 4 of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for the fourth quarter and full year of fiscal 2026. Fourth quarter consolidated revenue of $89.3 million was up 16% versus the prior year as both segments grew double digits. For the full year, consolidated revenue grew 19% to $331.9 million.

Looking at it by segment, Service revenue in the fourth quarter grew 18% with organic growth of 7% and the balance of the growth attributable to the Essco Calibration acquisition. Service revenue for the full year grew 20%.

Turning to Distribution. Fourth quarter revenue grew 11%, driven by strong performance in our rental channel and also strong product sales. Full year Distribution revenue grew 18%.

Turning to Slide 5. Our consolidated gross profit for the fourth quarter of $30.5 million was up 18% from the prior year, with consolidated gross margin expanding 50 basis points to 34.1%. For the full year, consolidated gross profit increased 21%, with full year gross margins expanding 50 basis points.

By segment, Service gross profit increased 16% in the fourth quarter and 16% on a full year basis. As expected, Service gross margins of 35.5% in the fourth quarter improved sequentially by 670 basis points in relationship to fiscal Q3 gross margins as we continue to leverage technician productivity and absorb the cost of onboarding new customer wins. Distribution segment gross margins of 31% expanded 280 basis points in the fourth quarter and 330 basis points on a full year basis, driven by the favorable mix shift of our higher-margin rental offerings.

Turning to Slide 6. Fourth quarter diluted earnings per share was $0.21 and for the full year, diluted earnings per share was $0.57. The year-over-year change reflects increased intangible amortization, stock-based compensation, interest expense and executive transition costs. We report adjusted diluted earnings per share to normalize for the impact of upfront and ongoing acquisition-related costs, executive transition costs as well as costs that are not directly tied to ongoing operations. Fourth quarter adjusted diluted EPS was $0.56 and for the full year, adjusted diluted earnings per share was $1.84.

Flipping to Slide 7, where we show our adjusted operating income, adjusted EBITDA and adjusted EBITDA margin. We use adjusted operating income, which is a non-GAAP measure as a measure of performance when evaluating our business segments. The company's management believes adjusted operating income and adjusted EBITDA are important measures of operating performance because it allows management, investors and others to evaluate and compare the performance of its core operations from period to period by excluding items that we do not believe are indicative of our core operating performance. In addition, these metrics are also indicators of the company's ability to generate cash.

Fourth quarter consolidated EBITDA of $14.8 million increased 16% from the same quarter in the prior year with 10 basis points of margin expansion. For the full year, adjusted EBITDA grew 23% to $48.7 million with adjusted EBITDA margins expanding by 40 basis points.

By segment, Service adjusted operating income was $11.2 million, up 9% in the fourth quarter and 6% for the full year, while Distribution adjusted operating income was $3.7 million, up 42% in the fourth quarter and 67% for the full year. A reconciliation of adjusted operating income and adjusted EBITDA to operating income and net income could be found in the supplemental section of this presentation.

Moving to Slide 8. Operating free cash flow for fiscal 2026 was $19.6 million, reflecting working capital investments supporting strong revenue growth in the second half of the year. Capital expenditures of $15.3 million continue to be centered around Service segment capabilities, rental pool assets, technology and future growth projects.

At quarter end -- on Slide 9, on quarter end, we had total debt of $99.9 million, $50.1 million available for borrowing under the secured revolving credit facility and a leverage ratio of 2.03x. The growth in adjusted EBITDA enabled Transcat to continue a sequential reduction in our leverage ratio. We believe we are well positioned to grow both organically and through acquisition and have the capital structure in place to support both.

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

Thanks, Tom. This fiscal year's financial results reflect the underlying strength of our business, a diversified portfolio of products and services, a strong balance sheet and a consistent ability to deliver excellent performance, both organically and through acquisitions. Our unique positioning in attractive end markets, high recurring revenue business model and strategic acquisition pipeline support our long-term growth strategy and ability to increase market share. Given increased customer activity levels, solid retention and realization of new business wins, we expect to deliver a sequentially higher level of Service organic growth for fiscal first quarter. Strong first quarter performance will position us well to execute on high single-digit organic growth for the full year.

The momentum building in our Service segment, coupled with robust growth in rentals is driving our optimism for fiscal 2027 and beyond. Additionally, we are leveraging technology, data and AI as a competitive advantage by investing in capabilities, systems and improved customer-facing business processes. By utilizing technology and innovation, we can drive growth and improve efficiency across our business model. We view AI and technology as key tools for enhancing customer outcomes, increasing organization-wide productivity and supporting stronger margins.

Before we open the line for questions, I'll close with a few thoughts. 68 consecutive quarters of Service revenue growth is not an accident. It is a result of a clear strategy, disciplined execution and an exceptional team that has been doing the work for years. In my time at Transcat so far, I've seen firsthand the depth of capability and the cultural commitment that produced this track record. And I'm confident in our ability to build on it and to accelerate the performance moving forward.

Looking ahead, you can expect us to stay relentlessly focused on our 4 strategic pillars. We will drive high single-digit Service organic revenue growth, supported by strong customer retention, rising activity levels and win incremental market share. We will continue to improve Service gross margins by driving productivity and automation in our recurring revenue business model. We will continue to play offense on strategic M&A like our recent acquisition of SCM Metrology and Laboratories as the acquirer of choice in our market. Additionally, we remain focused on growing our high-margin rental business.

Finally, I want to thank our customers for the trust they place in us, our employees for the work they do every single day and our shareholders for the confidence they have shown in this company and our path forward. I'm energized about what we are going to accomplish together, and I look forward to updating you on our progress.

With that, operator, please open the line for questions.

[Operator Instructions] We'll go first this afternoon to Greg Palm with Craig-Hallum.

Yes. Jaime, officially welcome aboard. I wanted to start, you gave us a little bit of kind of a flavor on how you're thinking about things, and it doesn't sound like there's going to be a whole lot from a strategic standpoint that changes. But I'm assuming you've probably thought about some tweaks here and there. From an operational standpoint, what do you think can be improved upon most? Is it just in terms of kind of how you're running the business and how you maybe expand margins and profitability from here?

Yes. Greg, of course, with about 60 days in, there's a lot more I'll still learn. But let me say this, I grew up at General Electric, and I've been working on Lean Six Sigma and operational excellence for 20-plus years. I've run 5 different businesses in 5 different end markets. This is my sixth. So there are a lot of transferable areas around operational excellence. And the team has made great progress, as you know. But a couple of things that you can expect us to do more. Number one, organic growth has been a huge focus, and we've driven automation. I would say that underneath organic growth, there are areas to drive better efficiency as we go forward and things like tracking our deal pipelines, thinking about cycle time reduction, improving the customer experience. And a lot of those things, the team is on a path to do, and we plan to accelerate.

On the operational side, as far as Lean Six Sigma and continuous improvement, if you just look at our customer-facing business processes and by customer-facing processes, I mean, from the time we get an inquiry from a customer to the time they place an order, how do we make ourselves faster there with cycle time, how do we improve the quality for customers. When you look at our order to remittance or order to cash, how can we make that a faster process so we have better on-time delivery for customers, faster cycle times, and that's something that we will continue to be focused on.

And the last piece is if you just look at our innovation, we've done a lot of great work, I'd say, to be a leader in this industry on the service innovation that we bring to customers. And that's something we want to continue to drive as far as innovation from the customer back to our business and to our company. So those are a few things. We'll share a lot more detail, Greg, in the coming weeks and months.

Yes. Okay. Good color. Maybe flipping to the margins. Obviously, from a sequential standpoint, really nice improvement in the Service gross margins still down on a year-over-year basis. Maybe you can help us, I don't know, whether it's quantify or qualitatively start-up costs on some of the new business that you alluded to last quarter, but I don't necessarily want to pin you down to a time frame, but at what point do you start seeing the year-over-year improvement in Service gross margins? Because I think it's been, I don't know, 4 or 5 quarters since we saw that year-over-year expansion.

Yes. Greg, it's Tom. So to your point, I think a lot of what we're seeing in Q4 is similar to Q3, right? We've got -- we're onboarding a lot of new customers of all different shapes and sizes, right? And that was the primary thing that weighed on us in Q4. But I think you'll start seeing things normalize as we move forward into the -- certainly in the first half of fiscal '27, and we certainly expect to have on a full year basis, improving margins year-over-year in '27 versus '26.

Yes. Okay. And then just last one as it relates to M&A, I'm curious if the priorities have changed more so around who or what you might look to acquire. I thought the SCM acquisition was most notable because it's a brand-new geography for you. So just give us a little bit more color on kind of what the pipeline looks at and maybe more importantly, from a geographic standpoint, are there more areas internationally that you feel like are underserved and could provide an opportunity?

Yes. I think our M&A strategy, Greg, remains sound, right, and consistent. I think we're going to look for opportunities to expand into geographies that we're not currently serving. I think that applies both within the U.S. as well as outside the U.S. where it makes sense. I think we'll continue to look to increase our capabilities and take on -- either be able to keep more work within the Transcat network or bring on incremental capabilities that are nice adjacencies to what we do today. And then opportunities to leverage our existing infrastructure. We've talked with you about bolt-ons in the past, right? And that will continue to be an important part of our overall strategy.

So I think what you're hearing is consistency, and we've got a strategy that has served us well in the past, and we think will continue to serve us well going forward.

We'll go next now to Max Michaelis at Lake Street Capital Markets.

Congrats on the solid quarter. And then first question for me. It sounds like Q1 is off to a good start, solid activity levels from the customers. But can you give us a sense of if you're pulling any demand forward or how we should be thinking about the rest of the year? And I guess anything you could share there would help.

No, it's certainly not pulling demand forward. I think to Jaime's prepared comments, right, we're seeing really good activity levels. Our pipeline is in great shape. We're seeing those opportunities convert to wins. And we're just -- we're seeing the benefits of all the hard work we did last year to kind of rebuild the pipeline coming out of the first half, which was heavily impacted by macroeconomic headwinds as a result of the tariffs, which we've talked about for the past year or so. But we definitely are -- like where we sit right now, and we're very comfortable with the guidance that we've given for Q1 and certainly more importantly, the guidance we've given for the full year.

Great. And then last one for me, sort of what you kind of did with the Service segment. Anything -- any color you can add on the rental business going into fiscal year '27? And then what did it grow in Q4?

Yes. So a couple of things there, right? So the rental business continues to perform well, right? We don't talk specifically about the growth of the rental business. But as you know, as the rental business grows, Distribution grows, right? So directionally, Distribution had a great year last year, had a great fourth quarter, and we continue to expect that business to perform well going forward. We've talked about it being kind of a low double-digit growing business, and that will support good performance in Distribution in fiscal '27 as well.

We'll go next now to Ted Jackson with Northland Securities.

Jaime, congrats on the quarter and getting into the saddle and doing your first call.

Thank you. Thanks, Ted.

I have just a couple of little questions. With regards to the guide for the first quarter being up, I mean, my model doesn't go back that far, but in the last like 6 years of my model, you've had one time where that actually ever been in print. And I just -- maybe is there any particular vertical or segment? Or is there anything to hang our hat on with regards to kind of what's kind of breaking that seasonal trend for the company? That's my first question.

Yes. So Ted, I just want to -- I want to start by just clarifying the comment that Jaime made, right, is that basically, what he's saying is that the rate of growth in Q1, organic growth, we expect to be higher than it was in Q4, right? So we grew 7% organically in Q4. We expect our growth in Q1 year-over-year to be -- organically to be higher than 7%. So I just want to make sure that, that came across.

No, I didn't catch. No, not to me. Okay. So that kind of takes that whole question out. Another question then is you highlighted 3 areas of strength, which are life sciences, aerospace and defense and energy. And I don't recall you ever mentioning energy as a vertical. And so maybe a little bit of color around what's going on within that market? What's your exposure to it? What kinds of things are you testing for? Are there regulatory considerations in those markets that are similar to what you get in the life sciences, aerospace and defense? Just some color around that would be great.

Yes. I would say that we've been talking about energy a bit over the past 6 months or so because we're starting to see strong demand signals there. And it really kind of runs the gamut from power generation and power creation all the way to power consumption and power conditioning. And we see that playing out, as an example in data centers, right, where the quality of the power coming into those facilities needs to be monitored, conditioned and there's equipment required to ensure that those power supplies and the usage are able to be measured, right? And all of that equipment requires calibration.

It also has been a large catalyst for our growth in rentals as well because that equipment that's needed isn't needed every day. It might be needed for 2 weeks every quarter, right? So it doesn't make sense to buy the equipment and we make it available to rent, and we've been really successful in that space.

And Ted, related to you -- I'm glad Tom clarified. Thank you, Tom, on the first question you asked. What I would say is we look at upstream KPIs, so what happens activity pipeline before we actually get an order or ship something, we're seeing widespread activity across all of the segments that we participate in, inclusive of energy.

Okay. And then my last, just a clarification. You had commented that you look for low double-digit growth in rental. When you look at -- when you make a statement like that, is that organic?

It is, yes. It's all organic.

[Operator Instructions] We'll go next now to Martin Yang with Oppenheimer.

First question on SCM. Can you maybe give us a bit more context on where do you see the opportunity and how big of an end market there is in the adjacent regions and whether or not the deal valuation is comparable to those you're seeing in the states?

So I think, Martin, one of the things that makes Costa Rica unique is the free trade zones that exist there, right? And I was just amazed the first time I went down there to drive around, they call them parks, right? These free trade parks. And just to drive around these parks that are all within, I'll just say, 3 to 5 miles of SCM's location and to see the concentration and density of life sciences and med device customers and the investments they're making in new facilities and new capabilities. And it just -- it was exciting to see in such a tight geography. And then to get to meet and understand the SCM business and their focus on quality and customer service, and there's just such a good alignment.

And they service customers outside of Costa Rica as well, right? So Latin America is a fairly tight geography. So they're doing business in Panama and Colombia and Dominican Republic and other places as well. But it's just -- there was just such good alignment in terms of their customer base, the market opportunity that exists there, the culture that they have. I mean -- and now, I mean, they're just so excited to be part of the Transcat team. I mean, Jaime and I were there the day of the closing and the excitement level was just -- it was off the charts, right? Because Transcat has such great brand recognition everywhere you go. And for a company like that and people early in their careers to be able to be part of the industry leader, I think, is exciting for them. So it was just -- it was a great experience. It was great to see that excitement and to see it carry through now that we're a couple of months into it.

And your question on deal valuation, I think this is one that kind of put us back into more of our historical range of deal multiples, and it really presents a good opportunity for us to generate a nice return on investment.

Yes. And Martin, I'd add, well said by Tom, and as Tom and I had a chance to travel down my first month to Costa Rica. It's clear -- it's very early, but it's clear just from inbound calls that we've received post the deal closing that there are going to be multinationals that we will now have the opportunity to grow with in ways we did not before in Latin America. So that's very exciting to me and to us. Again, it's very early, but early indication in some of these upstream KPIs that we look at are trending positive.

My other question also regards M&A. As you tour through the different regional labs, can you remind us where do you still see ample growth opportunities? What regions make you most excited about expansion?

Yes. So it's pretty consistent with what we've talked about before, Martin, right? Certainly, we want to be in Northern California, right, to support the significant concentration of life sciences as well as technology companies in that area. Dallas is another area that we have significant interest in. Atlanta and the fourth one is the Mid-Atlantic area, like, I think, around Baltimore. You've got a lot of life sciences there. You've got companies like -- or businesses like Johns Hopkins and a lot of core pharmaceutical and med device companies there. So those are the 4 that we talk about very consistently. And they're all geographies that we certainly want to be in at some point in time.

And gentlemen, it appears we have no further questions this afternoon. Mr. Howe, I'd like to turn things back to you for any closing comments, sir.

All right. Thank you all for joining us for today's call. We look forward to sharing more on our story at upcoming investor events, including facility tours, institutional investor conferences and non-deal roadshows across key cities throughout the United States in the summer and fall of 2026.

We will also be attending Craig-Hallum's 23rd Annual Institutional Conference in Minneapolis on May 28, and Stifel's Boston Cross Sector One-on-One Conference on June 2. We look forward to discussing our recent results with investors at each conference.

If we were unable to answer any of your questions, please reach out to our IR firm, MZ Group, who would be more than happy to assist. Thanks again for your interest.

Thank you, Mr. Howe. Again, ladies and gentlemen, that will conclude the Transcat Fourth Quarter Fiscal Year 2026 Financial Results Call. Again, thanks so much for joining us, everyone, and we wish you all a great remainder of your day. Goodbye.

Good afternoon, ladies and gentlemen. Welcome to the Transcat Third Quarter Fiscal Year 2026 Financial Results Conference Call. As a reminder, today's conference is being recorded. It is now my pleasure to introduce your host for today, Mr. John Howe, Senior Director of Financial Planning and Analysis. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. We appreciate your time and your interest in Transcat. With me here on the call today is our President and CEO, Lee Rudow, and our Chief Financial Officer, Tom Barbato. We will begin the call with some prepared remarks, and then we will open the call for questions. Our earnings release crossed the wire after markets closed this afternoon. Both the earnings release and the slides that we will reference during our prepared remarks can be found on our website, transcat.com in the Investor Relations section.

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. 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 this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to compared GAAP measures in the tables accompanying the earnings release. With that, I'll turn the call over to Lee.

Okay. Thank you, John. Good morning, everyone. We appreciate you joining us on the call today. Transcat delivered strong performance across our entire business portfolio in the third quarter. Consolidated revenue was up 26% to $83.9 million, driven by double-digit revenue growth in both our distribution and service segments. Our organic service growth returned to more historic levels growing 7%. Consolidated gross profit grew 28% and gross margins expanded 60 basis points.

Adjusted EBITDA grew $2.2 million or 27.2% in the quarter, to $10.1 million. Our strong third quarter financial results were driven by 4 key factors: one, strong demand for our core calibration services in the highly regulated end markets we serve, including life science, aerospace and defense and energy; two, our unique value proposition and differentiated brand; three, significant growth and positive mix change in our instrument rental channel; and four, the strong performance by both our recently acquired companies, Martin calibration and ESCO calibration. The acquisitions expand Transcat's geographic footprint and technical capabilities.

We're working very closely with both companies to accelerate the capture of both sales and cost synergies. I'd like to take a moment and thank our entire Transcat team for their ability to execute well and drive meaningful growth despite what continues to be an uncertain geopolitical and policy environment. They are an impressive group. Turning to our service results in the third quarter. As I mentioned, organic growth grew 7% and contributed to an overall growth in our Service segment of 29%. The quarter marked our 67th straight quarter of year-over-year growth, almost 17 years. As we anticipated and despite a fair amount of continued economic uncertainty, realization of service orders that were delayed in the first 2 quarters of our fiscal year began to trend positive in the third quarter. The trend was most evident in the highly regulated life science space and the aerospace events markets.

Demand for Transcat services remains high, and we expect the growth momentum established in the third quarter to continue through the fourth quarter, as we close out our fiscal year. Service margins declined in the third quarter, but that is not uncommon in periods when we are onboarding elevated levels of new customers. Depending on the size and the complexity of the new business, as we've seen in the past, we would expect productivity and cost to normalize over time.

Overall, the Service segment continues to have a substantial runway ahead for growth, both organically and through acquisition. So at the last 10-plus years, we've demonstrated our ability to identify acquire, integrate and synergistically grow accretive acquisitions. This will continue to be an important element of our go-forward growth strategy. Turning to distribution in the third quarter. Distribution revenue grew 20% from high demand in both rentals and product sales. Gross margin expanded 330 basis points versus prior year, driven primarily by an increase in the mix of higher-margin rental revenue within the Distribution segment.

With that, I'll turn things over to Tom for a more detailed look at our third quarter financial results.

Thanks, Lee. I'll start on Slide 4 of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for the third quarter of fiscal 2026. Third quarter consolidated revenue of $83.9 million was up 26% versus the prior year as both segments grew double digits. Looking at it by segment, service revenue grew 29% with organic revenue growth of 7% and the balance of the growth the result of the Martin calibration and ESCO calibration acquisitions.

Turning to distribution. Revenue of $30.2 million grew 20%, driven by strong performance in both traditional product sales in rentals. Turning to Slide 5. Our consolidated gross profit for the second quarter of $25.3 million was up 28% from the prior year. Service gross profit increased 25% from the prior year. We continue to leverage higher levels of technician productivity and our differentiated value proposition. The service gross margins historically lagged as we incur start-up costs related to the onboarding of new customers.

Distribution segment gross profit of $9.8 million was up 34% with 330 basis points gross margin expansion, driven by growth in the higher-margin rental channel. Turning to Slide 6. Q3 net loss of $1.1 million decreased versus prior year, driven by higher amortization expense related to both the Martin and ESCO calibration acquisitions. The 2 largest in Transcat's history, as well as higher levels of interest expense and onetime charges related to the execution of the CEO succession plan. Our search committee is evaluating both internal and external candidates for our next CEO, and the process is nearing completion.

In addition, we reported adjusted diluted earnings per share to normalize for the impact of upfront and ongoing acquisition-related costs as well as costs that are not directly tied to ongoing operations. Q3 adjusted diluted earnings per share was $0.26.

Flipping to Slide 7, where we show our adjusted EBITDA and adjusted EBITDA margin. We use adjusted EBITDA, which is non-GAAP to gauge the performance of our business because we believe it is the best measure of our operating performance and ability to generate cash. As we continue to execute on our acquisition strategy, this metric becomes even more important to highlight as it does adjust for onetime deal-related transaction costs as well as increased levels of noncash expenses that will hit our income statement from acquisition purchase accounting.

Third quarter consolidated adjusted EBITDA of $10.1 million increased 20% -- 27% from the same quarter in the prior year, with 10 basis points of margin expansion. 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 8. Operating cash flow was slightly lower versus prior year as net cash from operations increased but was offset by higher capital expenditures in line with expectations and continue to be centered around Service segment capabilities, rental pool assets, technology and future growth projects.

Slide 9 highlights our strong balance sheet. At quarter end, we had total debt of $99.9 million. $50.1 million available for borrowing under the secured revolving credit facility and a leverage ratio of 2x. The growth in adjusted EBITDA and associated margin enabled Transcat to continue a sequential reduction in our leverage ratio. We believe we are well positioned to grow both organically and through acquisition. Lastly, our 10-Q was filed today after the market closed. With that, I'll turn it back to you, Lee.

Okay. Thank you, Tom. In the third quarter, we returned to more historic organic service growth levels by achieving 7% growth, and we are off to a good start in the fourth quarter as we continue to experience an increased level of customer activity, strong retention and realization of new business. For these reasons, we reaffirm our fourth quarter organic service revenue growth expectations to be in the high single-digit range.

As fiscal 2026 comes to a close, we anticipate our results for the year will once again be a testament to our resilience and our differentiated business model that is anchored by recurring revenue streams, driven by both regulation and the high cost of failure. We maintain a strong and stable balance sheet that supports our demonstrated growth strategy, our ability to acquire and integrate companies that increase our geographic footprint, and colitis or just bolt on to existing infrastructure. This drives both consistent value and synergistic growth opportunities.

We have a strong acquisition pipeline that will enable opportunities to expand our addressable markets and increase market share. Over the past couple of years, we've invested in leadership, technology and overall process improvement. We are well positioned for the age of AI as our data sets are much improved and already contributing to incremental business insights that make Transcat a very difficult company to compete with.

We believe our investments are and will continue to drive differentiation for Transcat and foster our ability to continue to generate sustainable long-term value for our shareholders. With that, operator, we can open the line for questions.

[Operator Instructions] We'll go first this afternoon to Greg Palm of Craig-Hallum. Greg?

Congrats on getting back to that high single-digit revenue growth in the quarter for segment, maybe starting there, it would be nice if you could just maybe sort of bucket out the various drivers that enabled you to return to that growth sounded like it was just sort of a ramp-up of everything you've been talking about, but I'm not sure if there was anything specific you wanted to highlight?

No, Greg, I mean, I think as we talked about in the past, we some of these decisions have been delayed. We had kind of coming into the quarter. We had some income paper in some cases, and we knew that those would ramp throughout the quarter. There were other deals we anticipated would come to fortune and they did. So we feel good about the performance. I think we did what we said we were going to do. And we expect, as Lee mentioned in his prepared remarks, that will continue into Q4. PAUSE.

Okay. And the start-up costs, which I know you've incurred in the past, so that's nothing new. But are you able to quantify how big of a headwind that was? I don't know if it was related to CBL specifically or something different? And just from a time line or what we should expect in the near term? When does all that stuff start to normalize? Or I guess when does the new business wins fall off and those just become normalized going forward?

Yes. I mean we're not talking huge dollars. I would just say you could do some simple math and look at the difference between where we were and if we were flat or slightly accretive from a margin standpoint, right? It's not huge numbers, but it's just the reality of onboarding new customers and for us, the most important thing is to make sure that as we start these new partnerships that we get off to a good start, we're doing things right. We're treating the customers writing.

We're doing everything we can to start a good relationship. And there's -- in often cases, there's a reason why these customers are moving to Transcat, right? They want things done right. They want things spend with a higher level of quality and that's our focus and making sure we get off to the right start.

And Greg, I would add to that. The way we view some of these large customers and really all of our customers, some of them have a real high lifetime value. And so making sure they get off to the right start is a priority for us. And sometimes, there's some costs associated with that, that just go away over a couple of quarters. And then you mentioned CBLs, we saw that in the past, right? So this is not dissimilar.

Okay. And then lastly, distribution was another, obviously, really strong quarter of revenue growth. Can you maybe talk to us a little bit about what you're doing there in the AI, the data center power gen markets. And then just broadly speaking, is there a longer-term opportunity on the calibration services segment, again, longer term?

Yes. I mean I think what are we doing? I mean we're -- I think we're executing very well on the distribution side, both on the traditional equipment sales side as well as rentals. And as we've talked about also, we made a conscious effort 18 or 24 months ago to really invest fairly heavily in rentals for products used in, I'll just say the power generation, power conditioning, power management space, which aligns very well, not only with data centers, but EV charging needs and that sort of thing and it's really serving us well.

I think from a product sales standpoint, we're positioned well to support those cement markets. And there absolutely are recurring calibration opportunities that are and will continue to come along with those end markets. So I think it's an area we're excited for. I mean it's -- I mean you read about it every day in the news, right? So I think the fact that we've got alignment and we're kind of going aggressively after the business is an opportunity for us.

We go next now to Max Michaelis at Lake Street Capital Markets.

I want to go back to the service growth. Congratulations on returning to high single-digit growth at 7%. We look at Q4 2026. Do you expect to see an acceleration things to get better from the 7%? Or should we expect to kind of be in the same sort of range.

And then when we think about beyond next quarter, how has been -- how are the conversations been with customers around new business, I guess, going out into fiscal year '27.

Yes. Max, it's Tom. So I would just say that we're committed to the high single-digit guidance that we've provided for, I think when you look at Q4 and you look at last year was a really strong Q4 for us as well, right? So we're kind of building off a big number, right? And we're comfortable in that high single-digit range. When we look beyond Q4, we're not giving any specific guidance at this point, but we'll just say that our pipeline -- our new business pipeline continues to be strong, and we like we're positioned and we think we've got the pipeline to support continued growth going forward.

Okay. That makes sense. And then I guess, maybe around M&A, what are you seeing in the space? And maybe could we expect to see sort of I guess, remind us where sort of the geographic locations you guys are looking to get into and kind of maybe where you're at and sort of the progress there.

Yes. So the gaps that we always talk about, right, at this point, there's 4. This time last year, 18 months ago, they would have been 6%, right? But -- and we filled some of those holes. But Northern California is an area we want to be, Dallas, We'd love to be in the Atlantic area and then the Mid-Atlantic that kind of Baltimore areas voiding for us. We're able to service it from other locations, but there's enough business there that we'd like to physically be there. And then there's -- when we talk about other -- there's other opportunities to follow our customers, right? And we're always looking at that.

And whether it's potentially -- we've recently expanded our presence in Ireland, right, and that's going very well for us. There could be other potential opportunities in Europe, there could be other potential opportunities as an example in North America or Central America to just make sure that we're properly servicing and we have the locations to service our existing customer base properly so.

Okay. And then just the last 1 for me is around gross margin. I know you mentioned in the last question about sort of cost isn't something you've dealt with in the past. But if we look at next quarter, and I know you're taking on a lot of new business, is some of the costs you incurred this quarter in sort of preparation for the new business in the next quarter? Are we going to see similar gross margins probably from the service segment next quarter?

Yes. I mean I'll just say that our gross margins in Q4 are always the highest margins in the year, right? So as an example, last year, in Q4, we were at 36.2% margins. But I would say that we incurred start-up costs this quarter related to the revenue increase. I think there'll be new customers that onboard next quarter. But as we kind of said in our prepared remarks, right, I mean that will normalize. It's not -- we're not talking years out, right? We're talking normalizing over the next few quarters and seeing margin expansion.

[Operator Instructions] We go next now to Ted Jackson of Northland.

To reiterate, congratulations on the quarter. I got 2 or 3 questions for you. Let's -- I want to talk a little bit first about kind of the longer term. And if you think about going out a couple of years, a lot of shifts with regards to administration driven spending. So if you think about Life Sciences, which is your kind of your bread and butter, your core vertical, your favorite place to play. You look at a lot of efforts to drive pharmaceutical manufacturing in the United States. You've seen no Lilly is going to spend $30 billion to put manufacturing in Alabama, Pennsylvania, Texas, Virginia, AstraZeneca, pledged $50 billion, Amgen's talking about opening up new facilities in the Midwest and the Atlantic Seaboard. When I think -- when I hear all this kind of stuff, it seems to me that this is a really substantial amount of wind in your sales as you look out, say, 5 years and beyond.

And so I mean how would an investor over the long term, think about this stuff? How do you guys think about it? And kind of handicap it. And then like maybe in turn perspective, and I know every manufacturing plant is different. But when you get into like a new plant, say, like in the Wall Street Journal last week, 1 of the Lilly plans was decided in terms of where it was going to be in Pennsylvania, something like that when it's built, what's the revenue opportunity for a company like Transcat when it happens?

That's my first question. And actually, since there's a similar -- my second question really is the same, but just on defense. It's a little less specific. But I mean, if you look at the defense spending. I mean they're talking about $1.5 trillion of spending next year. And if you look at some of the major contractors like Lockheed and RTX and Northrop. I mean they're talking about like 30% increases in their CapEx. So maybe a discussion with regards to aerospace and defense. That's my first question.

Okay. Ted, this is Lee. So I'll take a shot at this and certainly Tom can fill in. But you're spot on. It's pretty simple for us. Any onshoring of manufacturing. In the regulated business space is always going to be good for Transcat. So AstraZeneca, of course, they're on our radar. You mentioned Lilly, they're on our radar. This is good for us. And degree, it comes true, comes to fruition. And then over the next couple of years, we'll be ready and we'll be working to gain that business, right? No question. When you look at the life cycle of a project, a capital project, it kind of starts from the building of the actual physical plant all the way through to buying equipment, commissioning equipment, validating equipment, ultimately calibrating equipment for an upstart and then calibrating equipment as time goes by on a regular basis.

There's half a dozen phases. Transcat is capable of participating in most of those. Obviously, calibration is our bread and butter. We do commissioning and validation as well. And it's always on our radar to look for those opportunities. So we'll call them capital projects. So yes, we can participate. I think over time, as we expand our addressable markets, we'll be able to participate even more. But it's right down our wheelhouse for most of that work.

And it is on our radar and onshoring is good. As far as defense goes, same basic story there, right? A lot of the defense contractors, like Lockheed, have their own in-house calibration labs. And so in that case, we'll do the overflow work. We could do their standards. And occasionally, we actually do the work in any particular plant. But the more defense contracting work there is, the bigger the government gets from that perspective. That's a highly regulated space, which means it's a good space for Transcat.

Yes. And I think you specifically referenced their CapEx budgets and the increases in CapEx budgets. The more equipment that's out there, that's good for Transcat, right? And the ultimate kind of brass ring for us is that recurring revenue, right? So we've got a broad offering the broadest in the industry, right, that allows us to participate in all of those aspects of a new plant being built, but the brass ring for us is clearly the recurring revenue streams, and that's the calibration work that takes place there.

But like the red and butter business that you guys operate in, I mean, you talk about it every quarter, 60-plus quarters of growth. I mean, you have been able to grow your business organically for conversation's sake, we're just call it 7%. For years, which just as your business grows 7%. When you see this kind of stuff happening, does it make you recalibrate what you think you could grow organically if it comes to pass? I mean, is there a case to be made that we get towards the end of the decade, and the organic growth rate for Transcat might tick up because you're seeing all this investment and all this has -- like there's, I don't know, like update in the Higton as these things are coming online?

Well, I mean there's 2 ways I look at that. One is to say even over the past 10 years and maybe we've averaged 8% growth over the last 5, there are quarters and there have been quarters when we have double-digit growth. So it's not impossible for us to do that. And I would expect that you're going to see that at different points. We're comfortable in the high single-digit range because it just makes sense for us, and that's where we are more consistently in that range than above that. We have cores when we're not -- when we don't meet our goals. And remember also, I mean we're a bigger company today.

When we started in 2011, I think we had $30 million of calibration that stays $230 million in that range. And so the number gets bigger and obviously, to grow on a larger base or larger number is a challenge too. But I think Tom and I and the entire management team when we look at our strategic planning, organic and inorganic, we're thinking to ourselves we don't see a reason why we can't get in the high single-digit range on a pretty darn consistent basis. So I think it includes all the variables that you're mentioning.

Okay. And then just my final question for you is just jumping over to the CEO search. You put a charge in it. You -- could you just kind of -- is it fair to expect to see the conclusion of your efforts during this quarter? Would we -- would we have some clarity by the time you report your fourth quarter?

I think that's a reasonable expectation.

Okay. And then would there be -- given the charge, which was a new line item within the pro forma earnings, will we see additional onetime expenses associated with that search in the fourth quarter?

There will be some additional expenses in the fourth quarter, yes.

And gentlemen, it appears we have no further questions this afternoon. I'd like to turn the conference back to you, Mr. Howe for any concluding remarks..

Thank you all for joining us for today's call. We look forward to sharing more on our story at upcoming investor events, including facility tours, institutional investor conferences and nondeal roadshows across key cities throughout the United States in the spring of 2026. If we were unable to answer any of your questions, please reach out to our IR firm, MZ Group, who would be more than happy to assist. Thanks again for your interest.

Thank you, gentlemen. Again, that will conclude today's Transcat Third Quarter Fiscal Year 2026 Financial Results call. Again, thank you so much for joining us, everyone. We wish you all a great day. Goodbye.

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" Craig-Hallum Capital Group LLC

" Lake Street Capital Markets

" Northland Capital Markets

" Oppenheimer & Co.

Greetings, and welcome to the Transcat, Inc. Second Quarter Fiscal Year 2026 Financial Results Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Howe, Senior Director of Financial Planning and Analysis. Thank you, John. You may begin.

Thank you, operator, and good afternoon, everyone. We appreciate your time and your interest in Transcat. With me here on the call today is our President and CEO, Lee Rudow; and our Chief Financial Officer, Tom Barbato. We will begin the call with some prepared remarks, and then we will open the call for questions.

Our earnings release crossed the wire after markets closed this afternoon. Both the earnings release and the slides that we will reference during our prepared remarks can be found on our website, transcat.com, in the Investor Relations section. 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. 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 this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to compared GAAP measures in the tables accompanying the earnings release.

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

Okay. Thank you, John. Good afternoon, everyone. Thank you for joining us on the call today. Transcat delivered strong performance again in our second quarter of fiscal 2026. The key to Transcat's ongoing success is the consistent execution of our unique strategy, which includes the diversity of our product and service portfolio. As a reminder, there are 4 key elements to our strategy: organic service growth, inherent operating leverage in our service platform, strategic acquisitions and growth in our highly profitable rental channel. The combination of all 4 creates a unique and proven resiliency in our business model, which can be seen clearly in the first half of our fiscal 2026 year.

And in the second quarter, despite continued economic uncertainty and volatility, consolidated revenue increased 21% to $83 million. Stable calibration revenue driven by customer retention, strong performances by our 2 recent acquisitions, Martin Calibration and Essco Calibration and significant growth in our rental channel drove double-digit revenue growth in both our service and distribution segments. In addition, in the second quarter, consolidated gross profit grew 26% and gross margins expanded 120 basis points. Our differentiated strategy also enabled adjusted EBITDA growth of 37% with 160 basis points of margin expansion. Amidst macroeconomic uncertainty and continued headwinds, the team did an excellent job finding ways to win, grow and position the company for sustainable long-term growth throughout both segments.

Turning to the service results in the second quarter. Service revenue increased 20% and recorded its 66th straight quarter of year-over-year growth. Early results of our most recent acquisition, Essco Calibration have been very strong. As expected, Essco is a perfect fit, and as we like to say, right down the fairway for Transcat. Essco, like the Martin Calibration acquisition earlier in the fiscal year, demonstrates our ability to attract and acquire highly sought-after calibration companies that expand our capabilities, geographic footprint, leadership and most importantly, our ability to deliver long-term organic service growth. Transcat's reputation as a strategic acquirer of choice in the calibration industry continues to be an important differentiator. We firmly believe our methodology and culture around integration and synergy capture is second to none. The acquisitions of both Essco and Martin have made Transcat a very difficult company to compete with.

Turning to distribution. In the second quarter, distribution revenue grew 24% from high demand, especially in our rental channel. Gross margin expanded 530 basis points versus prior year, driven primarily by an increase in the mix of higher-margin rental revenue within the Distribution segment. The strength of our balance sheet continues to support Transcat's proven growth strategy. Our new syndicated credit facility nearly doubles Transcat's resources to execute on proven acquisition and growth strategies, automation and many new AI programs in the works. We expect AI to generate new data streams and associated insights that will benefit both sales and operations from productivity to capacity planning, from marketing to customer retention. We are engaged in a new level of data management and delivery.

Overall, we're pleased with our second quarter performance, which like the first quarter, remains strong despite continued economic headwinds. With that, I'll turn things over to Tom for a more detailed look at the second quarter financial results.

Thanks, Lee. I'll start on Slide 5 of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for the second quarter of fiscal 2026. Second quarter consolidated revenue of $82.3 million was up 21% versus prior year as both segments grew double digits. Looking at it by segment, service revenue grew 20% despite continued economic volatility. Distribution revenue of $29.4 million grew 24%, primarily due to strong performance from the higher-margin rental business.

Turning to Slide 6. Our consolidated gross profit for the second quarter of $26.8 million was up 26% from the prior year. Service gross profit increased 17% versus prior year. We continue to leverage higher levels of technician productivity and our differentiated value proposition. That said, service margins continue to be pressured by lower than historic levels of organic growth as well as lower year-over-year Transcat Solutions revenue. Distribution segment gross profit of $9.8 million was up 48% with 530 basis points of gross margin expansion, driven primarily from the performance in our rental channel.

Turning to Slide 7. Q2 net income of $1.3 million decreased $2 million versus the prior year, driven by higher interest expense and increased tax rate within the quarter. Q2 net income was negatively impacted by both onetime expenses related to the company's CEO succession plan and a higher effective income tax rate. The income tax rate was impacted by higher-than-anticipated excluded compensation expenses also tied to the CEO succession plan. Diluted earnings per share came in at $0.14. We expect additional onetime CEO succession costs and a similar resulting impact on the company's effective tax rate in the second half of fiscal 2026. We report adjusted diluted earnings per share as well to normalize for the impact of upfront and ongoing acquisition-related costs. Q2 adjusted diluted earnings per share was $0.44. A reconciliation of diluted earnings per share to adjusted diluted earnings per share can be found in the supplemental schedules attached to this presentation.

Flipping to Slide 8, where we show our consolidated adjusted EBITDA and adjusted EBITDA margin. We use adjusted EBITDA, which is non-GAAP, to gauge the performance of our business because we believe it is the best measure of our operating performance and ability to generate cash. As we continue to execute on our acquisition strategy, this metric becomes even more important to highlight as it does adjust for onetime deal-related transaction costs as well as increased levels of noncash expenses that will hit our income statement from acquisition purchase accounting. Second quarter consolidated adjusted EBITDA of $12.1 million increased 37% from the same quarter in the prior year with 160 basis points of margin expansion. Please note that segment non-GAAP results are now labeled adjusted operating income, but the calculation did not change. 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 9. Operating cash flow was up 5% versus the prior year, and CapEx is in line with expectations and continues to be centered around service segment capabilities, rental pool assets, technology and future growth projects.

Slide 10 highlights our strong balance sheet. At quarter end, we had total debt of $111.9 million, $38.1 million available for borrowings under our secured revolving credit facility and a leverage ratio of 2.25x. We were pleased to close the Essco Calibration deal in the second quarter. Essco was a coveted calibration company that is highly synergistic and fulfills all of our strategic acquisition drivers. Our expanding adjusted EBITDA margin will drive a lower leverage ratio in subsequent quarters.

Lastly, our Form 10-Q will be filed November 5, after the market closes. With that, I'll turn it back to you, Lee.

All right. Thank you, Tom. As I mentioned earlier, our diversified portfolio of products and services, along with a strong financial profile has generated consistent results over an extended period of time and through various economic cycles. This should not be understated as our business model continues to demonstrate its resiliency. In addition, we will continue to leverage technology as a competitive advantage by investing in state-of-the-art capabilities, systems, processes and AI, all of which drive sustainable growth and efficiencies into our business model. This is the Transcat way.

As previously discussed, we expect to return to high single-digit organic service growth in the second half of fiscal 2026. In addition, we would expect margin expansion as we return to historical rates of organic growth. We have a strong acquisition pipeline to support an increase in our geographic footprint, capabilities and overall market share. And where it makes sense, we will continue to expand our addressable markets through acquisition. Our leadership team across multiple levels of the organization continues to get stronger and is a major contributor to our ability to continue to deliver sustainable long-term value for our shareholders.

And with that, operator, we can open the call up for questions.

[Operator Instructions] We'll take our first question from Greg Palm with Craig-Hallum.

I wanted to start with just in terms of the quarter, distribution was, I think, the highlight again. So maybe a 2-parter. But number one, what's driving the rentals acceleration? I don't know if it's -- how much is market-related versus company-specific that you're doing to drive incremental sales? And are you able to give us kind of the mix of what was rentals in the quarter as a percent of distribution?

Yes, Greg, it's Tom. So, I think when we talk about rentals, I think there's 2 things driving the growth there. I think one is -- and we've talked about this before, right? I mean, we acquired Axiom Test Equipment about 2 years ago, and we made a conscious effort to focus last year on really accelerating the integration of that business. And I think part of what we're seeing is that, that integrated team is performing at a very high level. I'll just say, winning more opportunities that are presented to them and really helping to drive some of the growth we're seeing. I think there is some rent versus buy impact to the results as well, given some of the macroeconomic challenges that exist. But I think this one is heavily weighted towards execution on our part and the benefits of the integration work we did last year. And I think year-over-year, the Becnel rental business is also performing very well on a year-over-year basis, and we're seeing consistent demand there as well.

What kind of visibility levels do you have for the second half in that business? Because obviously, the revenue growth in the first half is -- from a number standpoint, is pretty incredible.

Yes. I think we started seeing in the second half of last year, we started seeing some of the benefits of better performance, better execution post integration. So, I think it's not a reasonable expectation to think that we're going to continue to see the growth rates we saw in the first half of the year. But I'm still expecting reasonable margin expansion, not to the tune -- on a year-to-date basis, we're seeing north of 500 basis points of margin expansion year-over-year. I think we'll continue to see margin expansion, probably something more in the 250 to 300 basis points. But you should expect to continue to see good performance.

And then on the service side, I think by my math, still kind of low single-digit organic decline. What gives you the confidence to sit here today and still say, yes, we're going to return to high single-digit organic in the back half of the year because it strikes me going from a low single-digit decline to a high single-digit, that's a pretty big move, pretty big uptick.

So, I'll take this one. Greg, this is Lee. So, if you factor out solutions, we like to look at it both ways. The growth was probably in the 1%, 2% range. And we're going to call that pretty stable given this environment. We have no real issues on the retention. The customers that we have today continue to do business with us as they have in the past. Where we've struggled a little bit in this fiscal year has been on closing new business and starting new business. I think the economy is such that the longer time to close has become more normal. The incremental cost for our customers to change vendors at this particular time with some of the uncertainty has been a challenge. But the reason why we're still quoting in the high single-digit range is because a number of accounts have been won recently and will come to fruition, and we expect revenue as we drive through the third quarter into the fourth. And so, I think there's enough there that we have a fairly good sight line into more growth than we've experienced in the first half, which, by the way, is what we've been guiding to softly for the last several quarters is what we thought would happen, and it's not too far off from original expectations.

Our next question comes from Max Michaelis with Lake Street Capital Markets.

Congrats on the quarter. Maybe just a question towards Essco, maybe looking back 90 days since you guys acquired them on the 5th of August. Maybe are there some things with that acquisition that have become more of a positive than you originally thought? And then maybe on the other hand, some negatives that you -- or maybe some obstacles you've run in with the Essco acquisition as well?

Yes. This is Lee, Max. Very, very few obstacles. I mean we -- in addition to acquiring the company, we acquired a really good management team. They understand their business. And that business has done really well. We don't really count in our organic growth numbers when our acquisitions grow in the first year, but we've had really impressive growth from Essco. Actually, we have from Martin as well. So, both those companies are in the double-digit range for growth since we acquired them, and I expect that to continue. And as far as negatives, I really can't think of any. I mean, there's always some challenges just trying to get to know people. But most of the planning sessions have gone well. Our sales are integrated almost day 1 without any real issues whatsoever that have been -- at least come to my attention. I think it's been as smooth as we've experienced. And I think you're going to get that with the better-quality companies, and we saw it with Martin, and we're seeing it again. That's almost commonplace. It's part of you get what you pay for, and we've been pleased, really pleased.

Yes. And I guess kind of go back to sort of the question Greg had just with the back half of the second -- second half of the year with service returning to organic growth. And you talked about some economic uncertainty, barring any economic uncertainty further obstacles. I mean, like what is that. Like how would you define that like this economic uncertainty stalling you guys from growing in the second half of the year? I mean, just kind of getting a gauge on like what is kind of what we should be looking for, I guess, to kind of model out the second half of the year for service growth.

Well, I think what we're alluding to, Max, is maybe kind of more of what we've seen in the first half of the year. A lot of uncertainty around tariff levels and where things are going from an interest rate environment standpoint. I think it's got some of our customers reacting a little slower than what we normally see. And I think with recent news, I think we're expecting that to improve some, but it just seems like in this environment we're operating in, things are subject to change at any point in time.

I mean have you seen customer sales cycles shrink since maybe 3, 4 months ago up until now?

I don't think the sales cycle has shrunk. I think we've -- for the last half a year to 3 quarters of a year, we've had consistent delays for customers who originally expressed, yes, we're going to go with Transcat. We like the value proposition. Here's when we're going to make the change, and then it seems to get delayed and delayed again. And so, I've seen this before. It's not uncommon. It's why we try not to focus quarter-to-quarter, try to look at the bigger picture of who we are, where we're headed, where we've been in terms of a service company. We love the position we're in. But you're going to have economic cycles like this that are just going to be a little bit softer than you like. But our revenue and retention -- our revenue relative to retention has been solid. We've made 2 terrific acquisitions in the space, 20% growth in services. This is what you want. And to do it in an economic environment like this, I think, says a lot about our company, which I tried to allude to in the script. So, we're right on target. And I consider it's really good performance given some of the headwinds we have. So, we'll see how it all plays out. We are seeing sight lines. We are seeing signs of customers actually giving us the go on new orders, and that's where the confidence is coming from in the back half.

Our next question comes from Ted Jackson with Northland Securities.

I want to -- just -- it's not really a question, but it is a question. But just with regards to rental, the rental business has been going really well. You keep it buried in distribution. What's going to get you to break that out? And why I ask is, I mean, it's becoming a pretty important piece of business, and it's an important piece of your CapEx. I don't -- I mean if I'm not mistaken, I don't think you even -- you break your rental CapEx out, but the CapEx is substantially larger than it was before. You're clearly investing in your rental assets. I mean, at what point do we get to where you're going to start showing a little more about that so you can get a better handle on the return you're getting on that investment rather than deciding it just be a growth driver on the top line? So that's my first question.

Yes. Ted, it's Tom. So, one of the beauties of the rental business, right, and part of the way that we got this business started, right, is that to a large extent, we're renting equipment that we would otherwise sell through the distribution channel, right? So, there was a low cost of entry, right? We could take something off the distribution shelf and put it on the rental shelf. And if there was a customer that was willing to pay to rent it, we would be able to do that in a kind of seamless way. And what that -- the kind of the beauty in having that flexibility and be able to execute that and grow that business from nothing to something is also -- internally, there's a lot of, I'll just say, blurred lines in terms of we have the same people supporting like in our warehouse, right? It's the same people supporting distribution and supporting rental. We're working with the same vendors. There's a lot of overlap between those businesses. And so, it's not easy to necessarily kind of break it apart. And I think at some point in time, we may be there. But currently, it's kind of operated as one business internally from a resource standpoint, so on and so forth.

I think when we talk about CapEx, I would just think in the context of about 1/3 of our CapEx budget is allocated towards rentals. And when we talk about rentals, you got to think about CapEx from a net standpoint, right? Because any time you have an effective rental business, you also have to have a way to identify slow-moving equipment and have a used program to churn that equipment out, generate cash and reinvest it in assets that do have demand, right? So, I would just say on a net basis, it's about 1/3 of our CapEx.

And what is it in terms of a piece of your PP&E? I mean it would not be in your inventory; it would be in your --

I don't have that number off the top of my head, but I could follow up with you.

I mean you get where I'm going with it. I mean it's turning into like it's important -- turning into an important business driver, and I just think there needs to be some more metrics around it. That's all. The next question is on the solutions business, I mean, it's been -- I mean, now we have all these new headwinds, but prior to the election and everything that's taken place, it's been a drag for the business for quite a bit of time. And you've signaled in the past that it's come to a point where it's stabilized. I mean can you give a little more color? I mean when you look at that solutions business for the third quarter, what was it relative to the second quarter? How did it come in? What was it relative to the prior year period? And kind of how is it performing vis-a-vis your expectations when you went into the quarter?

Yes. This is Lee, Ted. I think it's in line. I'll say it's within a pretty close range of our expectations. We wanted the business to be stable, meaning it had gotten to a certain point. There was a significant drop-off. And now we're not seeing drop-offs anywhere near what we saw back a year ago. That's what we're shooting for. From a sequential standpoint, if you look from Q1 to Q2, you did see stability, which is what we expected, what we guided towards. If you look year-over-year, you still see declines, but I'm going to say, and characterize them within the range of what we thought were the possible expectations. So that business, it's an important business because in time and over time, it will help us drive organic service growth, and we like it for that reason. But we would expect, once we get to the place where we think the business can go, its growth rate should be similar than our normal -- than what our typical overall growth rates are for calibration services. We'll see. But right now, it's close, and I would say it's in range of the expectations that we set a year ago.

So, if we -- let's just say it was flat sequentially and it just trends flat. I mean I'm not saying that that's your expectation or anything. But if it did that, at what point would it stop being a drag with regards to growth metrics on the top line?

Yes. I mean if it was a flat business, then it's a business that if we're going to maintain a flat business, it's going to be for one reason only, and that is that it's a means to an end and it drives calibration business for us. And therefore, it's a channel that we see value in. We don't see it today as a flat business in the long-term. I think once we get it stabilized and get everything lined up the way we think we're capable of doing, that should be a growth business.

No, no. I preface my questions with that. I'm just kind of where I'm driving to is do the analysis at what point does it stop being a drag with regards to top line growth. That's really stabilize.

Yes, very soon. I mean as we get through this fiscal year and the back half of the year, that's exactly what we would expect. So, we shouldn't be talking about the solutions business like we've talked about it for last year as we get through third and fourth quarter. This is the time when we saw the declines. This is when we thought we get stabilized, we're close. So, I think, yes, that conversation is going to be over the next quarter or 2.

And then the last thing, with regards to your transitions and stuff, and the kind of added expenses and tax and tax stuff, that's not in your pro forma calc for earnings at all still going through the bottom line in your pro forma calc? Or is that being removed?

It's adjusted out of the -- it's adjusted out for the adjusted EBITDA number, and it's adjusted out for the adjusted EPS number for the reconciliation.

I just want to make sure that -- yes, so that -- what is it, $0.44 of adjusted earnings that has that removed. That's what I was asking.

That's correct.

Our next question comes from Martin Yang with Oppenheimer.

So, I want to make sure I understand the different growth dynamics between newly acquired Essco and Martin and then your other service business. Other services overall have organic growth rate at low single-digits. But you also mentioned Essco and Martin still on double-digit growth. So, what's created such different growth profiles? Anything you can do to bridge the 2?

Okay. So, I guess the question is why are those businesses doing well?

Yes, so much better than the rest of your service.

Right. So, there's probably a couple of reasons that I would point towards, Martin. First and foremost, it really depends, like, for example, Essco is in the New England area, which is their strength. And there are certain life science customers that are doing very, very well. And we do a lot of research. We do we churn a lot of data to figure out which customers are growing, which ones are descending, which ones have troubles, which ones are building plants, which ones are not. And we knew in due diligence that their portfolio of customers was a really strong portfolio. We expected them to grow. Some of the ones that we have are just a little bit different. We have some of the same customers, but in some cases, they're different. And part of what made Essco Essco is that the strength of their customer base and their trajectory of growth. So that has not come to us -- that's not surprising to us. Really the same thing with Martin, too. In the particular region that they're in, which is Minneapolis, the life science companies that are there and the med device primarily that are there are companies that are performing really well.

So, as you go around the country, I mean, we have 34 commercial labs. I would say 80% of our -- don't hold me to this number, but a large percentage of our commercial labs are growing. It's just we have different pockets in different regions for different reasons where we've got some headwinds, and that's normal. So, we bought those companies for a reason, and we expected them to grow even with these headwinds, and they're doing that. So, they're meeting our expectation.

Another question on the next quarter. So, part of the Martin's performance will be characterized as organic growth come next quarter, correct?

That's correct.

At the end of the quarter, yes.

Are you able to quantify how much that can contribute to your organic growth target?

I would just say, Martin, it's $25 million on a base of -- on a full year on a base of $225 million or $230 million of service revenue, right? So, it kind of gets diluted because it's 10% of the total. But yes. I don't know how else to characterize it.

Would you expect Martin and Essco to sustain their double-digit growth?

I think we expect them to continue to perform well. But I'm not sure how comfortable I am saying that they're continuing to perform double-digit growth, right? I mean, because every year you do that, the base gets larger and at some point, what Lee just said about their customer base, we could see some slowdowns there. But we expect them to continue to perform well. I'm just not sure we could say that they're going to continue to perform in the double-digit range.

And we do have a follow-up from Greg Palm with Craig-Hallum.

Just a couple of follow-ups. On distribution, I feel like every year, it almost sort of builds throughout the year. And so, I guess my question is, I mean, from a seasonality standpoint, do you expect anything different this year? Or is there anything -- any reason why you would have maybe higher than normal first half revenues? I don't know if that's just timing or what you sort of see right now based on visibility levels, but just kind of curious how you think distribution plays out more specifically in the second half.

You're right. I think we're going to see it continue to be strong. I mean, typically, third quarter is a strong quarter historically for distribution. But when we look at Pulse, so Pulse for us would be things like daily quotes and activity levels and so on and so forth. And the Pulse for distribution continues to be strong into the third quarter, which is what we expected. And I don't see anything right now on the radar, and I'll defer to Tom as well, that would lead me to believe there's a drop-off coming from the strong performance we've had.

Certainly not a drop-off. But I think, as I mentioned earlier, I think when we talk about rentals and some of the benefits that we're seeing from the execution and as a result of our integration, we started to see some meaningful acceleration in growth towards the back half of last year. So, I think as we look ahead to the second half of this year, I don't think -- we're certainly not going to see things reverse, but I think the growth will moderate a little bit. And that's why I'm also not expecting 500-plus basis points of margin expansion. I think something, as I mentioned earlier, 250 to 300 is probably more reasonable on slightly lower growth.

Fair enough. And then I was wondering if you could comment at all on the competitive landscape in the service segment with a couple of things going on. I don't know how that sort of relates to your expectations of accelerated organic service growth, but just kind of curious to get your thoughts there.

Well, when you look at the competitive landscape, there's a group of traditional customers that we've always competed against. You're talking the CIMCO, the Tektronix, the Trescal. And from the information that we gather from the marketplace in at least a couple of cases, those companies are struggling a bit with these particular headwinds that we have. And there's reasons for that. I mean, over the longer-term, Transcat has been so committed to the calibration market. We've invested year in and year out, not only in our people and our training, but the assets that we put in capabilities, the types of acquisitions we make. The competitors that I just referred to have not done that. They haven't acquired companies and increased capabilities. They have not put a lot of capital into their businesses. So, when you hit -- look, this is my opinion from the information that I have. And so, when you come up against headwinds, we're much better suited to withstand them than that group of competitors. And I think we've done an excellent job doing that. I'm very proud actually of the organization. And yes, maybe our organic growth is in a flat or low single-digit range. But I think relative to others that are traditional. Better positioned, better diversified. I used the word diversified a couple of times in my script for that very, very reason, Greg.

Now we also compete these days with -- there's a new group of competitors. There's some private equity in our business space who have sort of consolidated several, in some cases, smaller companies. But again, longer-term, if you don't integrate those companies and you can't take advantage of the synergies, particularly the growth synergies, I think we're going to end up with the same scenario. So, if you invest the way we invest, you integrate the way we integrate, acquire the types of companies we acquire, I think we're going to continue to fare well with the old competition, which I described and the new competition, which is more PE-backed. I like the position we're in. It doesn't mean we're not going to face headwinds like everybody else. I just think we're going to fare better. And in the longer-term, we're going to be better positioned. And we've proven that over time, and I think we're proving it right now.

And this will conclude our Q&A session. I will now turn the call back to John Howe.

Thank you all for joining us on the call today. We have a number of upcoming conferences in the month of November. On November 11, we will be attending the Baird 2025 Global Industrial Conference in Chicago. On November 17, we will be attending the Raymond James Sonoma Small Cap Summit in Sonoma, California. And finally, on November 19, we will be attending the Stephens Annual Investor Conference in Nashville, Tennessee. For those attending the conferences, we look forward to seeing you there. Otherwise, feel free to reach out to us at any time. Thanks again for your interest in Transcat.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.

Greetings, and welcome to the Transcat, Inc. First Quarter Fiscal Year 2026 Financial Results Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, John Hao, Senior Director of Financial Planning and Analysis. Thank you. John, you may begin.

Thank you, operator, and good morning, everyone. We appreciate your time and your interest in Transcat. With me here on the call today is our President and CEO, Lee Rudow; and our Chief Financial Officer, Tom Barbato. We will begin the call with some prepared remarks, and then we will open the call for questions. Our earnings release crossed the wire after markets closed yesterday. Both the earnings release and the slides that we will reference during our prepared remarks can be found on our website, transcat.com in the Investor Relations section. If you would, please refer to Slide 2.

As you are aware, we may make forward-looking states 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 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 presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to compared GAAP measures in the tables accompanying the earnings release. With that, I'll turn the call over to Lee.

Thank you, John. Good morning, everyone. Thank you for joining us on the call today. I'll begin with a few key messages that highlight our first quarter performance in fiscal 2026. Our Q1 results yielded stronger-than-expected year-over-year revenue and adjusted EBITDA growth. Consolidated revenue was up 15% to $76.4 million. The growth was primarily driven by consistent demand for our calibration and rental services. Adjusted EBITDA grew 15% as both service and distribution generated digit revenue growth. Transcat's ability to deliver strong performance amidst a fair economic uncertainty and volatility is testament to the strength of our diversified portfolio. In addition, regulation, along with the high cost of failure continues to drive demand for our calibration services, its associated recurring revenue streams.

The team is very pleased with our strong start. And as we've previously talked about, we expect performance to continue to get stronger as the fiscal 2026 year progresses. Looking a little closer at the Service segment for the first quarter, we recorded our 65th straight quarter of year-over-year service revenue growth. Martin Calibration had another strong quarter, their second quarter as part of the Transcat portfolio. Our integrated Transcat and Martin sales teams captured revenue synergies throughout the Midwest region, where we now have a strong presence with Martin's flagship lab. Overall service revenue growth -- overall service revenue grew 12% and was in line with our expectations. Total organic service growth not including Transcat solutions, was 2%. The balance of the total service revenue growth came from our combined effort with Martin to drive year-over-year growth. We believe current new service sales activity levels are supportive of organic growth in historic range of high single digits as the year progresses.

On August 5, Transcat acquired ESCO calibration., This is a deal we've worked on for over 10 years. And very similar to Martin, represents Transcat's ability to acquire the best of the best within the fragmented calibration services market. ESCO is the premier provider of specialized high-end electronic calibrations. While they primarily service New England's large concentration of highly regulated life science and aerospace and defense manufacturers, they service various other parts of throughout the country as one of the very few primary electronics calibration standards labs. ESCO is second to none in terms of quality of their operation. They have consistently invested in state-of-the-art calibration capabilities to support both the aerospace and defense and life science industries. Their technical expertise and dedication to customer service is among the best we've ever seen. And now they are a Transcat company.

Believe me when I say they are difficult to compete with, and we're excited to join our talented teams together. They are a perfect fit for Transcat. Integration will be swift and we expect to achieve both sales and cost synergies as we integrate and leverage our combined forces. Turning to distribution. The heart of our distribution strategy is to be a strong differentiator by generating leads to foster consistent organic service growth. The unique combination of products, rentals and services continues to amplify the overall Transcat brand. Our first quarter distribution results, driven by our unique suite of rental services were outstanding. Distribution revenue grew 19% in the quarter and totaled $27.3 million. Distribution gross profits grew 24% as gross margins expanded 130 basis points to 35.2%. The margin growth reflected the continued positive change in mix towards the high-margin rentals within the Distribution segment. Our balance sheet remains strong. We recently closed a 5-year credit facility that nearly doubles Transcat's capital resources and provides ample capacity to execute our proven acquisition and growth strategies. Overall, Transcat's first quarter results were strong despite the economic volatility. We are pleased to be off to a fast start in fiscal 2026.

And with that, I'll turn things over to Tom for a more detailed look at the first quarter financial performance.

Thanks, Lee. I'll start on Slide 5 of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for the first quarter of fiscal 2026. The First quarter consolidated revenue of $76.4 million was up 15% versus prior year as both segments grew double digits. Looking at it by segment, service revenue grew 12%. Despite economic volatility, it was in line with expectations. Turning to distribution. Revenue of $27.3 million grew 19% primarily due to the strong performance from the higher-margin rental business. Turning to Slide 6. Our consolidated gross profit for the first quarter of $25.8 million was up 14% from the prior year. Service gross profit increased 9% versus the prior year. We continue to leverage higher levels of technician productivity and our differentiated value proposition.

Distribution segment gross profit of $9.6 million was up 24% and with 130 basis points of gross margin expansion to a record 35.2%, driven by the higher-margin rental mix. Turning to Slide 7. Q1 net income of $3.3 million decreased $1.1 million versus prior year, driven by higher interest expense and taxes. Diluted earnings per share came in at $0.35. We report adjusted diluted earnings per share as well to normalize for the impact of upfront and ongoing acquisition-related costs. Q1 adjusted diluted earnings per share was $0.59. Flipping to Slide 8, where we show our adjusted EBITDA and adjusted EBITDA margin. We use adjusted EBITDA, which is non-GAAP to gauge the performance of our business because we believe it's the best measure of our operating performance and ability to generate cash. As we continue to execute on our acquisition strategy, this metric becomes even more important to highlight as it does adjust for onetime deal-related transaction cost as well as the increased level of noncash expenses that will hit our income statement from acquisition purchase accounting. First quarter consolidated adjusted EBITDA of $11.8 million increased 15% from the same quarter in the prior year, with 10 basis points of margin expansion.

Distribution EBITDA increased 49% driven by growth in rentals. 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 9. Operating cash flow was lower versus prior year related to timing of certain working capital items. Q1 capital expenditures were $900,000 higher than prior year and continue to be centered around Service segment capabilities, rental pool assets, technology and future growth projects. The spend was in line with expectations. Slide 10 highlights our strong balance sheet. At the end of the quarter, we had total net debt of $32.5 million, with a leverage ratio of 0.82x. Just after quarter end, we closed a new 5-year syndicated secured credit facility led by M&T Bank and includes additional lenders, Wells Fargo and Bank of America. This facility with America's top lenders nearly doubles our access to available capital and provides significant financial flexibility. Our existing revolver and term debt was paid off as part of this transaction.

Lastly, we filed our 10-Q yesterday after the market closed. With that, I'll turn it back to you, Lee.

Thanks, Tom. The macro environment continues to be a challenge, but our diversified portfolio of products and services, along with our ability to top tier calibration providers that expand both our geographic footprint and capabilities have solidified our strong financial profile and differentiated Transcat from the competition. We expect to progressively improve our service organic revenue growth during the fiscal year. And as I stated earlier, barring any further economic deterioration, we anticipate a return to high single-digit organic service revenue growth in the second half of fiscal 2026. Acquisitions will continue to be important to fortify our core calibration business as well as expand our addressable markets where it makes sense. We continue to leverage continuous process improvement and automation as key drivers of future service margin expansion wise, we expect distribution margins to benefit over time as our rental channel continues to be a higher percentage of the distribution revenue mix. And as always, we focus on generating sustainable, long-term value for our shareholders. .

Our leadership team has never been more talented and capable and we are well positioned to deliver strong results as our strategy continues to be differentiated and defendable. With that, operator, we can open the line for questions.

[Operator Instructions]

Our first question comes from Greg Palm with Craig-Hallum.

Congrats on the quarter and the recent acquisition.

Thanks, Greg.

Starting with the results. What really stood out was distribution. So maybe a 2-parter, but how much of that -- or I guess, was any of that related to sort of pull in revenue getting ahead of any kind of tariff-related impacts and just kind of visibility levels going forward, kind of what you're seeing so far in fiscal Q2? And a little bit more color would be great.

Greg, it's Tom. I'll take that. Distribution, we continue to see consistent demand both on the kind of core distribution side as well as rentals. So I think it -- I think it's indicative of something more than just kind of a pull-in due to tariffs. So I'll just kind of leave it at that, but demand continues to be consistent for us.

And any specific part of that segment end markets that drove the strength, just in light of the significant outperformance relative to sort of prior quarters. And maybe also if you could hit on the gross margin, was it skewed more towards rentals? Is that why we saw such a big jump in margins relative to the last few quarters as well?

Yes. I mean, rentals had a really nice quarter. And that anytime we see rental growth like we saw in Q1, we're going to see margins expand. Now that being said, we shouldn't expect 35-plus percent going forward. But we should expect meaningful year-over-year growth in distribution margins as we progress through the year.

But I do think, over time, Greg, not next quarter, which is, I think, what Tom is alluding to. But over time, if you look forward a year or 2 or even beyond, again, as rentals continues to grow, we anticipate it will because it's strategic for us and that's where we allocate capital as it grows, the margins are going to continue to grow. So that mix is sort of a short-term, midterm and long-term play and will continue through time. And that's why it's strategic for us.

Yes. Okay. And then I just wanted to spend a minute on ESCO. I don't know if this is a fair question, but maybe kind of hoping to kind of compare and contrast to Martin, just knowing it's a similar revenue EBITDA margin profile, that Martin has obviously been a great acquisition, highly accretive, but what's similar, what's different? Can it be a home run like Martin has been so far?

Right? It can be, and we anticipate and expect it will be. The companies are similar in terms of size, earnings, sort of dominance, if you will. I'm a little reluctant to use that word, but their strength within a region. One of the differences is that -- when you look at ESCO, you're looking at a high-end electronics lab. And these are very, very rare. There's only a few standard level electronic labs in the country. We happen to be one of them. they're a second one, but you can count them on 1 hand. And so they've invested a lot of money in the high-end electronics, which lends itself to the highly regulated markets, which we serve. When you look at Martin, their strength is in dimensional and mechanical measurements, which is very different. And they have a strength there that definitely resonates well within medical device, for example. When you think of Minneapolis, you think of Medtronic and Boston Science, St. Jude. So they have different suites of services. Now they overlap. If there was a venn diagram, I would say 30%, 40% overlap of their specialties are different. And so we're going to leverage that difference within the regions which -- where they operate. And so I think they're similar but different, and the difference is important to us.

We'll take our next question from Max Michaelis with Lake Street Markets.

Congrats on the quarter. I just want to start off with the ESCO acquisition. How would you characterize their growth rate? I mean, would you put it into the service segment of Transcat at the high single-digit growth? Or how would you characterize that, I guess?

I think I would characterize it similar to ours. They're a very high-quality company. I've watched them grow for, I mean, many, many years fairly consistently. And you -- what ultimately drives the growth is investment in your company sales, marketing capabilities, they've done that consistently. They've done a really nice job.

And investment in people.

Investment in people. It's all part of it. And even during our discussions and negotiations, I mean, the people part was really important to them, and that fit like a glove with our value proposition, the way we approach business. So yes, that all -- you need all those things together, Max, to get the growth over time, and they've done a lot of really good things and they've been -- they've definitely generated consistent growth over time. .

Awesome. Perfect. Agin shifting to the 2026 expectations. When we talked about high single-digit organic revenue growth in the second half I mean, what does that imply for the Transcat solutions business? I mean, is the other side of -- or the other parts the service business is going to be growing high single digits, maybe low double digits and then Trans solutions is going to be still declining? Or how do you expect that to kind of shape throughout the rest of the year?

Yes. It implies stabilization in part in the solutions business, which was our goal. I mean the solutions business -- it's an important differentiator for us. When we go to in organic service business and we include the attributes of that channel for us, those suite of services, it makes us a better company. It makes our value proposition better. It resonates with our customers. So we're going to continue to drive that. Our goal is stabilization, and we're making good progress towards that goal. And that's all -- that's part of the story when we think about high single digits in the back half of the year. That's a contributing factor. In addition to the activity levels we see now, the quoting levels, the win rates, it all works together. But yes, solutions is a part of it and we expect it to be stable in the back half of the year. .

We'll take our next question from Martin Yang with Oppenheimer.

First, a few questions on ESCO sales. Can you maybe give us more context on the timing of what helped to deal forward -- is it -- do they have an incentivized seller on the board or in management? What helped you finalize the deal.

So the deal is finalized because I think the owner of the company just reached a point in his career where he had accomplished his goals and he -- was originally a family business, and they've been running it for between 40 and 50 years. And I think we've always stayed in close contact with them, Martin. We have dinners together, and we talk often, and it was just a matter of time. And I think he reached a point in his career where he saw that the best benefit for his people, again, we talked about the importance of training and development. He's very passionate about that. And he had it just reached a time when he just felt like going forward, he wanted to focus on other things in the back half of his life and Transcat was the 1 partner. He's told me this time and time again that was going to perpetuate what he created and it was going to take care of its people and develop them and make the company better. So it all worked together and it was a matter of time. So we're really pleased. .

Got it. And then within ESCO's business, is there any rental or distribution components? Or is it all services, calibration services.

Very little. It's primarily all core calibration services.

Okay. And then can you comment on maybe core distribution versus rental is core distribution still declined on a year-over-year basis. Is there any divergence of the growth rate between rental and corporate distribution?

We saw growth in both core distribution and rentals in the quarter, both parts of that segment performed well. And as I mentioned earlier, in response to Greg's question, we continue to see consistent demand on both sides of that segment as well into Q2.

But if we take a longer-term view, do you think -- is there any updated thought on core distribution is moderately declining, business stable? Or do you see potential for that to start growing again?

No. Our view, Martin, is consistent with our past view, and that is our strategy is to grow services because the recurring revenue streams driven by regulation. Rentals is also part of our core strategy to continue to grow that, allocate capital. When it comes to core distribution, what we want to do is we want to maintain it. It's going to get less capital investment because over the long term, the returns aren't as high as we'd like them to be and the opportunity isn't as great as the other areas. But we do think it's important. It is a differentiator, and we want to maintain it at its current levels. If it were over the long term to decrease a few points here and there, that's fine because that would reflect our capital allocation. That's what we would expect. It's doing really well right now. But it's not going to change our view on its strategic value. It's strategic value is to support our service growth over time because that differentiates us, and we're going to keep doing that. And that's where we see that business going. .

Got it. Last question for me on your confidence level or the return to high single-digit organic growth. Maybe if I ask you to rank the relative factors that build that confidence, how important how important is the stabilization of Transat solutions in that equation? And what are the other factors that gave you the confidence?

Well, I mean, when you look at long term, organic growth rates, you're looking, number one, at capabilities, what work can we do and where can we do it? And when you think about Martin and ESCO just as an example, since the recent acquisitions, every time we make an acquisition like that you're creating a foundation that's going to foster higher organic growth in the future because you've got more capabilities in the region, and you're going to be more competitive. So that's a factor. Our ongoing investment in process improvement, the capabilities, improving turnaround time, so that they're the industry best, that's also going to improve organic growth rates and it's going to improve customer satisfaction and retention, which is also a major component of organic growth rates.

Solutions, it's just one of those elements that on certain accounts and certain opportunities that's going to give us a competitive advantage on other accounts, it's not going to be a factor. So it's one of the many things we do over time to make us just a little better, marginally in some places, significantly in others and it's all part of it. So at the end of the day, it's going to be capabilities, geography, service levels, retention and the of our value proposition. I think they all work together. And our goal is to continue to get better in as many or each of those elements as we can over time.

And I think our confidence kind of somewhat dependent on kind of the macro kind of uncertainty and the trend that we're seeing on the front continuing and further erosion of it, right?

Difficult macro environment, you may see organic growth in the mid-single digits or the low single digits. But over time, if you go back over like the last 5 years, I think we're close to 8%. That's what we would expect, as things normalize. But you're always going to have the ebbs and flows of the economy, but it's still a really nice business model almost regardless.

Our next question comes from Ted Jackson with Northland Securities.

Congratulations on the fabulous results.

Thanks, Ted. Thank you. .

So my first question to you guys. So the outperformance on rental distribution, I think I know the answer to this from the previous questions and your -- and how you responded to them. But we should view the first quarter kind of the baseline and you should -- it's not an anamoly as we think about the go forward for rental distribution, it should continue to grow from that base say, fall back to, for lack of a better term trend line in third quarter and then go.

Growth in rentals should not be viewed as an anomaly. I mean it's part of our strategic plan to grow our rental business. core distribution had a great quarter. And of course, we like that. But if core distribution kind of over time, become sort of moderated by the fact that it's not strategic for us in the same way the rentals and services, you would expect that to be -- it may continue to have a terrific year, may continue just to moderate and have an average year. But again, we allocate capital towards where we get the highest returns, and that's going to be rentals and service. And so we would expect both of those to grow. That's not an anomaly. Growth that we have.

We have to say...

You include almost 20%, which is way above kind of the norm like just making sure that I'm listening and understanding your answer. Secondly, with regards to growth and a return to single-digit growth, you're going to have a period of, just bluntly speaking, better comparables as you lap through all the issues that went on with and such. When we think about organic growth, absent the acquisitions, then I assume it would be fair to assume that as you roll through this year, that your growth rate else being equal, would accelerate, as the drag from Nexa, is that the way to think about it.

That is correct. Yes.

And would there be a case then given the acquisitions that as we get to the back half of this year, your reported growth rate should be well into double digits with 2 really large acquisitions. And I'm talking the services here really, but you saw going with this. You really got for some very, very good top line. And then my last question is as we look at this fabulous new acquisition that you've done, would it follow like a similar seasonal cadence as your services business as we think about putting that revenue into our models, where we basically for conversation say $2 million and layer in on a pro rata basis.

That's correct. I mean well, all 3 assumptions are correct and on point. It will follow the same cycles as our business. And yes, I agree with what you said across the board.

And actually, just again I have one more question. One was it's a little more fun. And so for all the fun that the world is having with Trump, the government change in policies and idea of bringing manufacturing back. One area that he's putting a lot of effort into is a lot of things with it a reshoring sciences, pharmaceuticals, in particular. I mean -- and so I guess the question is, is are you seeing any activity that is driving the -- your customer base to expand operations in the U.S.? And would that be a tailwind for Transcat if we think out -- maybe not this year, but going over longer term that if they make more pharmaceuticals in the country, they start bringing them back, that should be good for you and everything. I mean is that true? And are there other areas? And are you seeing anything along.

Look, I'll be very clear. Any and all onshoring of manufacturing in the United States is good for Transcat. Period. And the second part of your question is, are we hearing -- are we seeing signs or hearing any dialogue around that happening currently. And the answer is also yes. And we've got several companies that were -- we do a lot of business with the United States, and we are definitely hearing we're going to be opening x amount of facilities over the next 5 years. And I mean, I can count several just off the top of my head now between that and then actually being up and running and creating opportunities for us on -- for our business. That's going to take time, debt, as you know. But we are thinking about it. It is a good thing for us. It's going to help our business long term.and we're excited about it. But I don't want to get too excited because we're not talking about tailwinds in this year. I mean it could start next year and the year after, but it's something that we absolutely are keeping an eye on and it's absolutely an opportunity for Transcat.

Our next question comes from Scott Buck with H.C.Wainwright.

Lee, I'm curious, first, on ESCO, what kind of customer overlap is there with your -- the Transcat business? Just trying to get my arms around what potential cross-selling opportunities could look like?

Okay. As far as overlap, they are about 5x larger than our facility and our revenue streams in that area. So we do run a Boston facility. And as far as capabilities go, we overlapping capabilities a lot, but we're doing about 1/5 the business that they're doing. I think we bring those operations together sooner rather than later. We leverage our strengths with their strengths, and we'll be better together. So that -- that's what I would say. So far as the region itself, together, we're going to be very competitive. It's hard for me to even visualize why we wouldn't continue to grow and win where and when we want to. So I don't want to be overconfident, but we're in that position. And so -- and then you want to expand. I mean when I look at ESCO, they are very strong.

But what they don't have that we have is capital. And so we're a public company, and we know how to allocate capital. So if we can leverage their strengths, their expertise, their standards lab and feed them with capital so that we can capitalize on the opportunities we have together, that's what's going to be unique. And as good and as strong as they are, they're still a small privately held company, and now they join forces with us and I think I like the prospects. So that's what we're excited about.

Great. That's helpful. And then I'm curious -- the company obviously has grown meaningfully over the last few years. Where are you in terms of kind of industry market share? And are there opportunities to shift pricing higher with your current kind of market position?

Well, it's difficult to come up with market share because there's just not a lot of good public information, Scott, around that. But so I guess it's to a certain degree we don't know. Now there's a lot of in-house. As far as opportunities for growth, about 1/3 of the market roughly are in calibration labs. And for those kind of labs, we do their overflow work. We do their standards work and we supplement their labor during certain times. But there's always an opportunity with every one of those labs to outsource them. We call them CBLs, client-based labs. So we're going to continue to go after that market. Our value proposition around that market is very strong. I don't -- I can't think of a single competitor that has a strength around outsourcing in-house labs, like we do.

So we're going to continue, there's big opportunity there over time. You've got the OEM business, right? You got original equipment manufacturers, the key sites, the Agilent, the Tektronix, you've got these companies they can do their own of their products. But if you go into an average plant and there's 1,000 or 10,000 instruments and you're managing 100 vendors, Transat can come in and do it all. So our value proposition is very strong in terms of competing against individual OEMs within a plant. And then you got the third-party market. which is where we are, where ESCO was, where Martin is. And that's still a very big market. Obviously, our market share is increasing as we make these big acquisitions. But we've got a pretty good runway ahead of us and we're going to make sure we do the best we can.

That concludes our question-and-answer session. I would now like to turn it back over to Lee Redrow for closing remarks.

Okay. Well, thank you all for joining us on the call today. Relative to IR, we're going to be busy. On August 12, we'll be attending the Oppenheimer Technology Conference and participating in a fireside chat format Q&A. On September 18, we'll be attending the D.A. Davidson Conference in Nashville. That's new for us. On November 17, we'll be attending the Raymond James conference in Sonoma, California, it's also new for us. And for any of you who are attending any of these conferences, feel free to on us or really reach out to us any time. Tom and I make ourselves available. We appreciate everybody's interest in Transcat and joining us on the call today. Take care. .

Thank you. And this does conclude today's program. We thank you for your participation and you may disconnect at any time.