TRNS Earnings Call

OperatorGreetings 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 Analysis. Thank you, John. You may begin.

John HoweThank 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, 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 press release as well as the documents filed by the company with the SEC.

John HoweYou 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 GAAP to non-GAAP measures in the tables accompanying the earnings release.

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

Jaime IrickThanks, 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 learned from our customers, our strategic partners, and the Transcat team members across 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 the enduring customer and strategic partnerships we have built over more than 60 years of industry leadership.

Jaime IrickOur 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 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, we 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.

Jaime IrickThe 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-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 Transcat's 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.

Jaime IrickAnd 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 SCM 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 gross profit increased 31% in the quarter, with service gross 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.

Jaime IrickOur 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 more detailed look at our first quarter financial results. Tom.

Jaime IrickThanks, Jaime. Slide 4 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, as both segments grew double digits. Looking at it by segment, service revenue in the quarter grew 27%, with organic revenue growth of 13% 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 and strong product sales.

Jaime IrickOn slide 5, consolidated gross profit for the first quarter of $30.7 million increased 19%, driven by strength in the Services segment. If we look at it by segment, Service gross profit increased 31% 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 in 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.

Jaime IrickOn slide 6, first quarter diluted earnings per share of $0.14. The year-over-year change reflects increase— increased intangible asset amortization related to acquisitions, stock-based compensation, interest expense, and executive transition costs.

Jaime IrickWe 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.

Jaime IrickFirst quarter consolidated adjusted EBITDA of $14 million increased 19% from the same quarter in the prior year, driven by strength in 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%. A reconciliation of adjusted operating income and adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation.

Jaime IrickOperating 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. Capital expenditures of $4 million —dollars in the quarter continued to be centered around service segment capabilities, rental pool assets, technology, and future growth projects. At quarter end, we had total debt of $110.4 million, $39.6 million available for borrowing under the secured 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, Jaime.

Jaime IrickThanks, Tom.

Jaime IrickIn 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 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 segment's 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.

Jaime Irick69 Consecutive quarters of service revenue growth reflect the disciplined execution of a focused strategy and an exceptional team. My first 100 days as a CEO of Transcat and 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 4 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. 3, Continuing to pursue strategic M&A, including our recent acquisition of SCM Metrology and Laboratories as the acquirer of choice in our market. And 4, 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.

Jaime IrickThe 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.

OperatorThank 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.

OperatorOur first question comes from Max Michaelis, Lake Street Capital. Please go ahead. Your line is open.

Max MichaelisHey guys, great job. I'm Max.

Max MichaelisJaime, it's good to talk to you. First question for me, I mean, service or organic 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?

Max MichaelisYeah, Max, I think, you know, 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, you know, they're going to kind of remain consistent or they did remain consistent in Q1. And I would expect that to continue, you know, balance of the year. I think we're performing well. I think the opportunities are coming you know, kind of across the spectrum of end markets. And, um, and, uh, you know, that's, uh, that's what the expectation should be.

Jaime IrickYeah, Max, I, I agree what Tom said. And look, the nice thing is, uh, we've got a double threat, uh, 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.

Max MichaelisPerfect. 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 Should we expect it to kind of slow down from how it performed in fiscal year '26?

Tom BarbatoYeah, I mean, 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 business performed in the quarter.

Max MichaelisOkay. 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?

Jaime IrickYeah, Max, the way we think about that, I mean, just take all the levers that I shared in my prepared remarks. Operational excellence to us means starting with our customer-facing business processes so that we make those faster, better, fewer defects for our customers, which 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, 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, when we talk about being as strong on our operational excellence muscles as our growth muscles, we feel confident that we can do that and continue going forward.

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

Max MichaelisAwesome. Thanks, guys.

Tom BarbatoThanks, Max.

Jaime IrickThanks, Max.

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

Greg PalmYeah, 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? And I guess 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 an under-the-radar tone shift as well.

Tom BarbatoWell, 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 particular lab or one particular part of the business that stands out. I think, you know, we're pleased with what we saw. I do want to take a minute to remind everyone though, right, that when you look at the first half of last year and the second half of last year, they were very different, right? We were relatively flat the first half of last year. You know, we grew 7% in the second half of last year, right? So the compares are a little easier first half versus second half. But, you know, I think, you know, with Jaime's comments, But 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. So.

Greg PalmYep. Okay. And Jaime, 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 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 way through over time?

Jaime IrickYeah, look, the way I think about it, Greg, first, you know, 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 rattle off the levers. I won't repeat them. And frankly, we felt the lift as we shared in Q1 and Q1, you know, based on what we were planning earlier, you know, 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.

Greg PalmOkay. Congrats again. Best of luck.

Jaime IrickThanks, Greg.

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

Martin YangHi, good evening. Thank you for taking my question.

Jaime IrickHi, Martin.

Martin YangI want to— hi, Jaime. I want to better understand your current outlook for OpEx investments. Are you still in an investment phase? If so, what particularly are you investing in?

Tom BarbatoYeah, so maybe I could start with on that, Martin, and then Jaime can comment as well, right? So I think You know, 5 or 6 weeks ago, you saw the announcement of Roy Simmons joining the team. 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's 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 execute on. You know, I think there are some additional investments we'll make in 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 the team that you need to get to, I'll just say $300 million is different than the team you need to get to $500 or $600 million, right?

Tom BarbatoAnd we're just, we're gonna continue to invest in that growth, right? And ensure that we're positioned not only at the executive team, but, you know, 2 and 3 levels down in the organization to, you know, build for success.

Jaime IrickI agree, agree with what Tom shared. And what I'd add to that, Martin, is, Given the recurring revenue nature, highly regulated end markets we serve, and just the total lifetime value of our customers, 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, you know, 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.

Martin YangThank you. Uh, it's really a comprehensive answer. Next follow-up is on the share gain comment. Um, can you maybe double-click on where are you taking share? Is it from the more OEMs switching to third party? Are you taking share from regionals or smaller?

Jaime IrickYeah, Martin, it's broad-based. I've been very impressed, you know, having worked in, uh, various end markets and industries, uh, I knew the strength of Transcat and the brand and the growth history that we've been on, which as you know, is exemplary. Uh, 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.

Martin YangGot it. Thank you. That's it for me.

Tom BarbatoYeah.

Jaime IrickThanks, Martin.

Tom BarbatoThanks, Martin.

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

Ted JacksonThanks very much. Good evening, guys.

Tom BarbatoHey, Ted.

Jaime IrickHey, Ted.

Ted JacksonMy 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 in, you know, was there, you know, the strength in the margins you saw, was 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 question.

Tom BarbatoThanks. Yeah, 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 the low double digits, the leverage that we get in our operating model, right? That's first and foremost. I think, you know, the other thing is, is that, and Jaime 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, you know, kind of nice to see as well. And there was some benefit we got from mix, but we see that some pluses or minuses from that quarter to quarter. But the biggest contributor is really the operational leverage that we got. Jaime also did mention that the past couple quarters we've talked about some of the upfront costs associated with some of the new customers that we've been onboarding and we've seen some of those relationships mature to the point where we've got kind of, we've reached some normalized, more normalized margins with some of those larger customers that are coming on board.

Jaime IrickSo, and yeah, 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. You know, our COO Mike West is really leading the charge with a lot of support here on areas like mix optimization. And, you know, we don't have time on this call to dial it in, but as we've shared, you know, we have the ability to now do a much better job of segmenting and targeting customers. Where we feel there's better mix opportunity and margin opportunity, and do the same thing with our different business segments. So really like what, you know, Mike and the team are driving there. And, you know, every time we see him, he's got, you know, several more ideas and opportunities that he and the team are managing. So couldn't be more— it's early, it's going to take time, but we're very excited about what we can accomplish together.

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

Tom BarbatoYeah, so the tax rate in Q1 was higher than you would expect or more than, you know, what you would've 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.

Tom BarbatoThere were some, you know, stock-based compensation impacts in Q1 that drove the rate a little bit higher, but, you know, But that'll normalize. '31 To '32 is where, you know, you should expect us to be, you know, kind of on a go-forward basis, you know, on an annualized go-forward basis.

Ted JacksonAnd then just one more model question, then I've got something a little more fun. But G&A also is a little bit more than I might have expected. You know, I mean, it's kind of hard to say what— maybe I was just low relative to, you know, my peers or such, but You know, were there any expenses in G&A that were, you know, unforeseen? How would we think about that for the remainder of the year?

Tom BarbatoYeah. So there continue to be some, some, what, 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. 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, we could talk about the kind of the right go-forward run rate as well.

Tom BarbatoSo.

Ted JacksonOkay. And then one just kind of marketing question, market question is, you know, we, in the past there, I was, I had a client ask me a bunch of questions about TransCat actually last week, and it made me kind of dig into some old, presentations, you know, from, from years gone by. And I haven't seen the data for a while, but I guess where I wanted to get at is, you know, where do you think you sit in— it's for a 2 or 3-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, you know, your key verticals, which would be, you know, I mean, to me it'd be life sciences and aerospace defense.

Tom BarbatoYeah. So, so, Ted, if you think of, if you think of the North American market in like the $3 to $3.5 billion range in terms of calibration, right? You could take that market and split it roughly a third, a third, a third between outsourced service providers like Transcat, the OEMs, and then companies that run, you in-house laboratories, right? So you could kind of look at our services revenue as a percentage of that third, right? And that'll kind of show you where we're at, you know, relative to, you know, 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, We're roughly 60% life sciences. We've been at 60% for a while and it's 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 serve, right?

Tom BarbatoSo that they're staying there as a percentage of the total, they're remaining relatively the same.

Jaime IrickYeah, 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 you should think about it. We think we've got runway on both as we've demonstrated and we expect to continue.

Ted JacksonWell, I mean, in the markets you're at, I mean, there's clearly a lot of reshoring going on in life sciences and— Yeah. I mean, you know, in some ways, you know, with aerospace and defense, war is good.

Jaime IrickSo— Yeah, that's right. Yeah. That's right. That's right.

Ted JacksonOkay. Well, that's it for me. And congrats on the quarter. It was very impressive.

Tom BarbatoThank you, Ted. Thank you.

Jaime IrickThanks, Ted.

OperatorThank 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 Howe.

John HoweThank 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.

John HoweWe will also be attending the Jefferies Industrials Conference, Lake Street Best Ideas Growth 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.

Tom BarbatoThank you.

OperatorThis brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.