Transcat, Inc. Stock

If you need assistance at any time, please press star zero and a member of our team will Thank you. Please stand by. Your meeting is about to begin. Greetings and welcome to the TransCat, Inc. First Quarter Fiscal Year 2027 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 Investment Services at TransCat.

Thank you, John. You may begin. Thank you, operator, and good afternoon, everyone. We appreciate your time and your interest in TransCAD. With me here on the call today is our President and CEO, Jamie Eyrich, and our CFO, Tom Barbato. We will begin with some prepared remarks and then open the call for questions. Our earnings release cross-reference to wire this afternoon after the market close. 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. 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 press 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 the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of comparable gap to non-gap measures in the tables accompanying the earnings release. With that, I'll turn the call over to TransCat President and CEO, Jamie Eyrick.

Thanks, John. Good afternoon, everyone, and thank you for joining us on today's call. Prior to discussing our strong financial performance, I want to share my observations and takeaways after my first full quarter as CEO of Transcat. Over the last 100 days, as you'd expect, I've had the opportunity to engage with and learn from our customers, our strategic partners, and the Transcat team members across the board. technology labs, field operations, and the sales organization. I've also reviewed TransCat's end-to-end operations across North America, Central America, and Ireland. I've met with analysts and investors, many of you on the phone, and I've held in-depth discussions with our board of directors, both individually and collectively. These firsthand experiences have deepened my appreciation for TransCAT's leadership our employees' dedication and enduring customer and strategic partnerships we have built over more than 60 years of industry leadership. Our first quarter results, combined with the insights from my first 100 days, reinforce my confidence that we have clear, measurable opportunities to build on our industry-leading organic and inorganic growth.

They also highlight an important opportunity to become as well known for operational excellence as as we have historically been for growth. This will require time, discipline, and consistent execution. by continuously improving our customer-facing business processes, applying proven lean operating principles, optimizing business mix and pricing, and using technology and AI to improve productivity and customer solutions, can create repeatable levers to expand margins and to support sustained growth. As we move forward, we will build an even stronger Transcat by growing the business improving how we operate, and energizing our teammates. With that, I'll briefly turn to our financial results. The fiscal first quarter of 2027 highlighted another sequential quarter of strong financial performance as strength in the calibration business drove double-digit service organic revenue growth and service gross margin expansion. Consolidated revenue was up 22% to $92.9 million in the fiscal first quarter, driven by double double-digit revenue growth in both segments. Demand in our highly regulated end markets, including life sciences, aerospace and defense, and energy, remains strong, and our differentiated value proposition continues to resonate throughout TransCas addressable end markets.

Given our strong organic growth, operational excellence, and strategic acquisitions, we firmly believe Transcat continues to gain market share in the calibration services market. Consolidated gross profit grew 19% for the fiscal first quarter, led by 31% service gross profit growth. Adjusted EBITDA grew 19% in the quarter, driven by revenue momentum and productivity gains. And let's take a closer look at our service results. In the fiscal first quarter, service revenue increased 27% and service organic revenue grew 13%. The first quarter marked our 69th straight quarter of year over year growth. Service revenue growth was driven by our differentiated value proposition along with the continued successful integration and performance of our acquired companies.

The recent acquisition of SEM is progressing very well, and we are excited about the opportunity that exists in Central America. You can expect us to continue to complement our services organic growth with Strategic M&A. Service growth profit increased 31% in the quarter, with service growth margins expanding 90 basis points versus prior year, driven by the inherent operating leverage in our service model, along with focus on operational excellence and maturing of new customer relationships. The service segment has significant room for growth, both organically and through acquisitions. Our pipeline positions us to pursue strategic, accretive deals that deliver meaningful synergies, and M&A will remain central to our growth strategy. Turning to distribution, distribution revenue grew 11% in the fiscal first quarter on strong demand from rentals and product sales. As expected, distribution gross margins of 31.4% were lower than prior year, given that fiscal 2026 first quarter margins were unusually high.

Moving forward in fiscal 2027, we will have a more typical prior year comparisons and expect to benefit from a greater mix of higher margin rentals. Overall, we are pleased with our performance and optimistic about the future, given the momentum building in our service segment.

With that, I will turn the call over to Tom for a more detailed look at our first quarter financial results. Tom. Thanks, Jamie. Slide four of the earnings deck provides detail regarding our revenue on a consolidated basis and by segment for the first quarter. First quarter consolidated revenue of 92.9 million, increased 22% versus the prior year, both segments grew double digits. Looking at it by segment, service revenue in the quarter grew 27 percent, with organic revenue growth of 13 percent, and the balance of the growth attributable to acquisitions. Relative to distribution, first quarter revenue grew 11%, driven by strong performance in our rental channel. strong product sales. On slide five, consolidated gross profit for the first quarter of 30.7 million increased 19 percent, driven by strength in the services segment. If we look at it by segment, service gross profit increased 31 percent in the first quarter and service gross margin expanded 90 basis points versus the prior year. driven by the inherent operating leverage in our service model, along with our focus on operational excellence and the maturing of new customer relationships.

As expected, distribution segment gross margin of 31.4% decreased in the quarter by 380 basis points compared to the prior year. Prior year Q1 distribution gross margins were unusually high, driven primarily by increased levels of vendor rebates. On slide six, first quarter diluted earnings per share of 14 cents. Year-over-year change reflects increased intangible asset amortization related to acquisitions, stock-based compensation, interest expense, and executive transition costs. We report adjusted diluted earnings per share to normalize for the impacts of upfront and ongoing acquisition related costs, executive transition costs, as well as costs that are not directly tied to ongoing operations. First quarter adjusted diluted earnings per share was 51 cents. Flipping to slide 7, where we show our adjusted operating income, adjusted EBITDA, and adjusted EBITDA margin.

We use adjusted operating income, which is 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. First quarter consolidated adjusted EBITDA of $14 million increased 19% from the same quarter in the prior year. by strength and services segment. Service adjusted operating income was $9.6 million, up 35% in the quarter, and margin of 15.4% increased 80 basis points compared to the prior year. Distribution adjusted operating income was $4.3 million, a decline of 12%. reconciliation of adjusted operating income and adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation. Operating free cash flow of $4.8 million in the first quarter grew $5.8 million compared to the prior year period. driven by an increase of cash from operations and slightly lower capital expenditures.

Fulfill expenditures of $4 million in the quarter continue to be centered around service segment capabilities, rental pool assets, technology, and future growth projects. Order end, we had total debt of 110.4 million, 39.6 million available for borrowing, under the secure revolving credit facility and a leverage ratio of 2.19x. 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, Jamie. Thanks, Tom. In our fiscal first quarter, the TransCat team delivered strong results, which demonstrated our ability to grow, to operate with excellence, and to energize our teammates. With Q1 performance and momentum as the backdrop, we remain relentlessly focused on bringing differentiated value to our customers. customers every day. When you combine our Transcat customer focus and differentiation with our attractive, highly regulated end markets and recurring revenue business model, we have a winning equation that makes us extremely optimistic about our service segments future momentum and our overall company's potential. for profitable growth. Our strong first quarter performance positions us well to execute high single-digit service organic growth and service gross margin expansion for the full fiscal year. Before we open the line for questions, I'll close with a few thoughts. Sixty-nine consecutive quarters of service revenue growth reflect the disciplined execution of a focused strategy and an exceptional team.

Thank you. My first 100 days as the CEO of Transcat directly observing our team in action give me confidence that our best days are ahead of us. Looking ahead, we remain laser focused on executing our four strategic pillars. One, driving strong service organic revenue growth through high customer retention, realization of new business wins, and market share gains. Two, expanding service gross margins through operational excellence, in our recurring revenue business model. Three, continuing to pursue strategic M&A, including our recent acquisition of SCM, metrology, and laboratories as the acquirer of choice in our market. And four, growing our higher margin rental business. Finally, I want to thank our customers for their trust. our employees for their dedication, and our shareholders for their confidence in TransCat and our path forward.

The team and I are energized by what we can accomplish together, and I look forward to sharing our continued progress. With that, Leslie, please open the line for questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad now. To leave the queue at any time, press star 2. Again, that is star 1 to ask a question. And we will pause for just a moment to allow everyone a chance to join the queue. Our first question comes from Max Michaelis, Lake Street Capital. Please go ahead. Your line is open.

Hey, guys. Great job on the quarter. Jamie, it's good to talk to you. First question for me, I mean, granted growth in the service segment, 13%, obviously that was higher than what we expected. You're looking for high single-digit growth throughout the rest of the year. I mean, can you kind of point to some end markets that really outperformed your guys' expectations and maybe some other end markets that you expect to kind of.

push growth throughout the year? Yes, Max, I think we saw good performance across all end markets. You know, I think, you know, we talk about our, you know, splits. I would expect that they're going to kind of remain consistent, or they did remain consistent in Q1, and I would expect that to continue balance of the year. I think we're performing well. I think the opportunities are coming kind of across the spectrum of end markets, and, you know,.

And that's what the expectation should be. Yes, Max, I agree with what Tom said. And look, the nice thing is we've got a double threat in our favor. One, the end markets are growing and up from what we saw last year and two, we're taking share. So those give us the ability and the confidence to call what we're calling because of those two forces that, you know, the team, as you can tell, has just done a great job of optimizing.

Perfect. A couple more from me and then I'll hang it up. Rental business, So distribution grew 11%. I mean, can you give us sort of an indication on how rental business performed on let's say Q4, last year was it low double digits or is it should we expect it to kind of slow down from what it how it performed in this year 26 yes I mean we've kind of we've kind of guided that we expect.

you know, the rental business to perform organically, high single digits, low double digits, and it was in that range. And, you know, we're really happy with the way that that business performed in the quarter.

Okay. Last one for me. You guys mentioned AI optimizing sort of productivity in the company business lines right now. I mean, when should we expect to see that sort of show up in the numbers? I mean, what sort of outcome do you expect from sort of this operational excellence initiative?.

Yes, Max, the way we think about that, I mean, just take all the levers that I shared in my prepared remarks. You know, operational excellence to us means means starting with our customer-facing business processes so that we make those faster, better, fewer defects for our customers. Quite frankly, drives growth and margin expansion. AI, mix optimization, pricing analytics, and improving our processes there, and all the things we do, we feel we're getting an uplift now, quite frankly. And our team has really rallied around the renewed focus. And each of those is contributing, you know, some a little more than others, but we're seeing that lift start to take effect. And that's going to continue to help prop up the business and help us on the growth side and the margin side, which is why, you know, we talk about being as strong on our operational excellence muscles as we are. our growth muscles, we feel confident that we can do that and continue going forward.

And we'll share more. You can expect in the future, you know, we'll start to break out some things as we talk more, but just know they're all giving us great tailwinds.

Awesome. Thanks, guys. Thanks, Max. Thanks, Max.

Thank you for your question. Our next question is from Greg Palm with Craig Hallam. Your line is open.

Yes, thanks. I wanted to go back to the organic service growth number. It was very impressive. And so, I mean, as you look back on the quarter relative to what we were all talking about a couple months ago, what outperformed relative to your expectations? the one word that maybe changed as it relates to the full year is you now confidently expect high single-digit organic growth and just want to sort of get your feedback on whether that's a little bit of a under-the-radar tone shift as well.

Well, Greg, I think, you know, again, similar to Max's question on end markets, right, I would say it was just strength across the board. There isn't one, you know, particular, you know, lab or one particular, you know, part of the business that stands out. I think we're pleased with what we saw. I do want to take a minute to remind everyone though, that when you look at the first half of last year and the second half of last year, they were very different. We were relatively flat. The first half of last year, we grew 7% in the second half of last year, right? So the comparison is a little easier, first half versus second half. But I think with Jamie's comments, with the use of the word confidence, I think that is in fact an indication of where we think we expect to be within that range.

Yep, okay. And you know Jamie as you think about some of these margin enhancement opportunities, you called out a few of those. I mean how does that shape your view of the earnings power, you know, of the company and just trying to get a sense of like how much of this is near-term where we're actually going to see like near-term improvements in margins in the P&L versus stuff that's going to sort of work its well through overtime yes the look.

So the way I think about it, Greg, first, our team is rallying around the vision that we should be and can be and will be as strong on operational excellence as we have been on growth. So that's a starting point. And you heard me right off the levers. I won't repeat them. And frankly, we felt the lift as we shared in Q1. And Q1, based on what we were planning earlier, we did a little better than we thought, a little faster. Too early to call anything different than we've said for the full year, but I would say we're at the beginning of our journey, Greg. on operational excellence and what we could be versus the middle, certainly then. So there's room to continue to run, and we feel very confident with our team rallied around the levers that I laid out that we can continue that performance.

Okay, congrats again, best of luck. Thanks Greg.

Thank you for your question. Our next question is from Martin Yang with Oppenheimer. Your line is open.

Hi, good evening. Thank you for taking my question. Hi, Martin. I want to – hi, Jamie. I want to better understand your current outlook for OPEX investments. Are you still in investment phase? If so,.

but particularly are you investing in? Michael Heaney- yes, so maybe I could start on that, Martin, and then Jamie can comment as well, right? So, I think, You know, five or six weeks ago you saw the announcement of Roy Simmons joining the team. and that's obviously an investment in our future, right? Not only from helping us set the strategy and enhance the strategy of the company, but also an investment in ensuring that we've got a sound M&A strategy in place. ensuring the pipeline is robust, working closely with me to make sure that we've got the capital structure in place to execute the strategy, and also being hyper-focused on integration to make sure that we maximize the value of the acquisitions that we do that we do execute on. You know, I think there are some additional investments we'll make in the future. the executive team as well that again will position us for long-term growth. You know we've said it in the past right that that the team that that you need to get to I'll just say 300 million dollars is different than the team you get to need to get to five or six hundred million dollars right and we're just we're going to continue invest in that growth right and ensure that we're positioned not only at the executive team, but two and three levels down in the organization to.

you know, bills for success. I agree. I agree with what Tom shared. And what I'd add to that, Martin, is, you know, given the recurring revenue nature, highly regulated end markets we serve, and just the total lifetime value of our customers, you know, We think there's an opportunity to kind of ride the tailwinds that exist now. So we want to be smart and surgical about investing into that. And we also think there's a continued opportunity to take share, given things we're seeing and some softness with other folks in the industry that we can take share from today. So I think you'll continue to see us. invest into that broadly, but certainly we can pick up great talent like we did with Roy Simmons. You saw the announcement to lead M&A and strategy, two areas that are so critical for our current performance and future.

We'll look to be opportunistic there, and you can expect that to continue.

Thank you. That's really a comprehensive answer. Next follow up is on the share gain comment. Can you maybe double click on where are you taking share? Is it from being more OEMs, switching to third party? Are you taking share from regionals or smaller? Yes, Martin is broad based. I've been very impressed, you know, having worked in various end markets and industries, you know,.

I knew the strength of TransCat and the brand and the growth history that we've been on, which as you know, is exemplary. I've been very impressed with our ability to win business and take share across the board. So I'd say the team is doing well and we've targeted areas which you're probably familiar with where others have dialed back on their services and investment. And if anything, we think that should accelerate and it's broad-based. Thank you.

Thanks Mark. Thanks Mark. Thank you for your question. Our next question is from Ted Jackson with Northland Securities. Please go ahead. Your line is now open.

Thanks very much. Good evening guys. My first question, we've been talking a lot about organic service revenue growth and it obviously is impressive, but the other part of it that was impressive in terms of services was the margin. And how about a little discussion and you know, was there, you know, the strength in the margins you saw Is there any kind of particular, you know, mix or, you know, discipline or something that pushed that margin to those levels? And how sustainable is something like that? That's my first.

Yes, Ted, I think first and foremost, I think it shows the, you know, our ability, you know, when you get, I'll just say, you know, above high single digits into low double digits, the leverage that we get in our operating model, right, that's first and foremost. I I think the other thing is that, and Jamie alluded to this, there are some early signs and some early results from some of the actions that we've been focused on from an operational excellence standpoint. which is kind of nice to see as well. And there was some benefit we got from MIX, but we see that, some pluses or minuses you know from that you know quarter to quarter but you know the biggest the biggest contributor is really the the operational leverage that we got you know Jamie also did mention that the past couple of quarters we've talked about some of the upfront costs associated with some of the new customers that we've been onboarding. We've seen some of those relationships mature to the point where we've reached some more normalized margins with some of those larger customers that are coming onboard.

Well said, Tom. And all I'd add, Ted, look, this is a process that's going to take time. But you can expect to continue just relentless focus on both growth and operational excellence. And I've been really impressed with the team. Our COO, Mike West, is really good. really leading the charge with a lot of support here on areas like mix optimization. And we don't have time on this call to dial it in, but as we've shared, we have the ability to now do a much better job of segmenting and targeting customers where we feel there's better mix opportunities opportunity and margin opportunity, and do the same thing with our different business segments. So really like what Mike and the team are driving there. And every time we see him, he's got several more ideas and opportunities that he and the team are managing.

So it's early. It's going to take time, but we're very excited about what we can accomplish together.

My next question, this is maybe the oversight on my part, but the tax rate was. Higher than I would have expected it to be last quarter too. And, you know, is there what is the tax rate we should think about for. fiscal year and is there going to shift in terms of how you think about your tax rate with regards to, you know,.

rates in pro forma. Yes, so the tax rating Q1 was higher than you would expect or more than, you know, what you would have seen historically, but we expect that to normalize, right? So we provided a range of 31 to 32% for the full year and we still expect to be, you know, at that rate. There were some, you know, stock-based compensation impacts in Q1 that drove the rate a little bit higher, but that'll normalize. 31 to 32 is where, you know, you should expect this to be, you know, kind of on a go-forward basis.

on an annualized go forward basis. And then just one more model question then I've got something a little more fun, but GNA also is a little bit more than I might have expected. It's kind of hard to say what maybe I was just low relative to my peers or such, but were there any expenses in G&A that were unforeseen? How would we think about that for the remainder of the year?.

Yes, so there continue to be some, what I would say are kind of one-time expenses, right, related to the CEO transition, right? And I think, you know, maybe when we talk offline, Ted, we should just kind of take a look at those and just make sure that, you know, you have them reflected properly, um, and are comprehending those properly. But, you know, aside from that, things kind of came in pretty much, you know, in line with where we would have expected and, you know, you know, we could talk about the kind of the right go-forward run rate as well.

Okay, and then 1, just kind of marketing question market question is, you know, we, in the past, I was, I was, I had a client asked me a bunch of questions about trends cat, actually last week and it made me kind of dig into some old. presentations from years gone by. And I haven't seen any data for a while. But I guess where I wanted to get at is, where do you think you sit in, it's sort of a two or three part question, in terms of market share in North America for calibration services, and where do you think you sit in terms of market share for kind of your key verticals, which would be, you know, I mean, to me, it's the life sciences and air.

aerospace defense. Yes. So, Ted, if you think of the North American market, in like the three to three and a half billion dollar range in terms of calibration, right? You could take that market and split it roughly a third, a third, a third between outsource service providers like Transcat, the OEMs, and then companies that run in-house laboratories. Right. So you could kind of look at our services revenue as a process. percentage of that third, right, and that'll kind of show you where we're at. relative to that percentage, right? But it's still a fairly small percentage of the North American opportunity. and obviously growing, right? Because we're confident that we're taking share. In terms of end markets, right? I mean, you know, we're roughly 60% life sciences. We've been at 60% for a while and it's, you know, not because life sciences isn't growing, it's just that we're being successful at growing across all of the end markets that we're we serve, right, so that, you know, they're staying as a percentage of the total, they're remaining relatively the same.

Yes, Ted, I mean, look, Tom's right. There's a lot of room to run organically. There's a lot of room to run inorganically. That's how I just think about it. We think we've got runway on both as we've demonstrated and we expect to continue.

Well, I mean, in the markets you're at, I mean, there's clearly a lot of reshoring going on with life sciences and I mean, you know, in some ways, you know, with aerospace and defense, war is good. Yes, that's right. Yes, that's right. That's right. Okay, well that's it for me and congrats on the quarter. It was very impressive.

Thank you, Ted. Thank you. Thanks, Ted. Thank you for your question. At this time, there are no further questions in the queue, and I will now turn our meeting back to John Howell.

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 fall and winter of 2026. We will also be attending the Jeffries Industrials Conference, Lake Streak Big Ten Conference, and D.A. Davidson Diversified Industrials and Services Conference in September. 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. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

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.