Transcat, Inc.

Greetings. Welcome to Transcat Inc. fourth quarter and full fiscal year 2025 financial results call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Borbedo, Chief Financial Officer. Thank you, Tom, and you may begin.

Thank you, Sheri, and good morning, everyone. We appreciate your time and your interest in Transcat. With me here on the call today is our President and CEO, Lee Rudeau, and our Chief Operating Officer, Mike West. We'll begin the call with some prepared remarks and then we'll open the call for questions. Our earnings release crossed the wire after market closed yesterday. Both the earnings release and the slides that we will reference during our prepared remarks can be found on our website, Transcat.com, in the investor relations section. If you would please refer to slide two, as you are 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 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-GAP measures, which we believe will be useful in evaluating our performance. We should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAP. We've provided reconciliations of non-GAP to compare GAP measures in the tables accompanying the earnings release. With that, I'll turn the call over to Lee.

Thank you, Tom. Good morning, everyone. Thank you for joining us on the call today. The fiscal 2025 consolidated revenue was up 7% to $278.4 million on continued, consistent demand for both our services and products. Service revenue grew 7% to $181.4 million, driven by strength in our core calibration business. Distribution revenue grew 8% to $97 million on continued growth in our rental platform. Operating cash flow for the full fiscal 2025 year was a record $38.6 million, a -over-year increase of 18%. Additionally, on December 9th, we acquired the coveted Martin Calibration, the largest acquisition in Transcat's history. Martin is a very profitable, well-run company with over $25 million of mostly calibration service revenue. The Martin deal is highly synergistic and fulfills all three of our strategic acquisition drivers, including geographic expansion into the Minneapolis and Chicago regions of the Midwest, expanded capabilities and expertise, particularly on the dimensional and mechanical measuring side of the business, and finally, two bolt-on opportunities where we can leverage our current infrastructure in Southern California and Phoenix, Arizona. Turning to the fourth quarter results for our service segment, Transcat's calibration services business continues to perform well and benefit from high levels of regulation and recurring revenue streams. In the fourth quarter, calibration services achieved double-digit revenue growth of 11%, of which organic growth was in the high single-digit range when normalized for the 53rd week and excluding solutions. We reported a service gross margin of .2% in the fourth quarter, which expanded 50 basis points versus the prior year. Margin expansion was driven by organic revenue growth and the associated inherent leverage in our calibration lab operating model, along with increased productivity from continued automation and process improvement. Turning to the fourth quarter results for our distribution segment, distribution revenue grew 4% driven by growth in the rental channel. It's important to note our associated e-commerce platform continues to be an important component to lead generation for the service segment. Transcat's distribution platform, including rentals, uniquely positions the company to achieve its consistent organic service growth. Barriers to entry in this respect have defended and we expect will continue to defend both our unique value proposition and strong brand across both operating segments. With that, I'll turn things over to Tom for more detailed look at our Q4 in full year financial performance.

Thanks, Lee. I'll start on slide four of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for the fourth quarter in full year. Fourth quarter consolidated revenue, 77.1 million, was up 9% versus the prior year on service segment strength and growth in our distribution segment. Looking at it by segment, service revenue grew 11% to 52 million, which included 6.8 million from acquisitions in the quarter. As Lee mentioned, growth was driven by strong performance in our calibration business and service organic revenue growth was in the high signal digit range when normalized for the 53rd week in excluding Transcat solutions. Turning to distribution, revenue of 25.1 million was up 4% versus the prior year. We continue to see growth in the rental channel. Finally, on a full year basis, the total consolidated revenue was 278.4 million, an increase of 7% compared to the prior fiscal year. Our service segment saw continued demand in our calibration business, resulting in year over year growth of 7%. On a full year basis, service revenue benefited by 10.4 million resulting from acquisition. Distribution segment revenue grew 8% driven by rentals. Turning to slide five, our consolidated gross profit for the fourth quarter of 25.9 million was up 8% from the prior year and our gross margin declined 30 basis points. Service gross margin expanded 50 basis points to 36.2%. The service margin increase further demonstrated the inherent leverage in our higher levels of automation and technical productivity. The distribution segment gross margin of .2% was down 210 basis points. For the full year, our consolidated gross profit increased 7% to 89.5 million and our gross margin declined 20 basis points to 32.1%. Our service gross margin was .4% which represented a decrease of 30 basis points compared to the prior year. Distribution segment gross margin of .7% was up 20 basis points as a segment benefited from the growth in the higher margin rental channel. Turning to slide six, Q4 net income of 4.5 million decreased from 6.9 million in the prior year and our diluted earnings per share decreased to 48 cents from 77 cents. The prior year net income included a non-cash profit increase of 2.4 million for the amended NEXA earn out agreement. We reported diluted earnings per share as well to normalize for the impact of upfront and ongoing acquisition related costs. Q4 diluted earnings per share was 64 cents. Lastly, full year net income increased 6% to 14.5 million. Flipping to slide seven, where we show our adjusted EBITDA and 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 one-time deal related transaction costs as well as the increased levels of non-cash expense that will hit our income statement from acquisition purchase accounting. With that in mind, fourth quarter consolidated adjusted EBITDA of 12.7 million was up 9% from the same quarter in the prior year driven by growth of 16% in the service segment. Q4 EBITDA margin of .5% was consistent with last year. Full year EBITDA of 39.7 million which was up 3% compared to the prior year driven by strength in the calibration business is always a reconciliation adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation. Moving to slide eight, operating free cash flow of 25.4 million improved 31% versus the prior year. Full year capital expenditures were consistent with the prior year and continued to be centered around service segment capabilities, rental pool assets, technology and future growth projects. The spend was in line with expectations for fiscal year 2026. We expect our net cap x to be in the range of 14 to 16 million dollars. Slide nine highlights our strong balance sheet. At year end we had a total net debt of 31 million dollars with a leverage ratio of 0.7x. We had 49 million dollars available from credit facility at quarter end. Lastly we expect to file our 10k on May 27th. With that I'll turn it back to you Lee.

Thanks Tom. Those of you who follow Transcat know we have consistently delivered strong results through various economic cycles over the past decade and a half. We have a proven track record of delivering profitable growth and being disciplined capital allocators. Our strategy is differentiated and our leadership team is poised to execute our plan and to drive excellent performance. While the macro economic backdrop including tariffs have become more uncertain since the beginning of the year, over time Transcat's business, particularly our calibration services channel, has been resilient as it continues to benefit from recurring revenue streams and highly regulated markets. Put simply in the past the business holds up well. Holds up well because our organic growth typically returns to growth levels more in line with the historical high single digit growth range as macro trends normalize. As we look at the landscape for strategic accretive acquisitions we are excited by our current pipeline and our opportunity to drive both synergistic growth opportunities and strengthen our foundation for future growth. And as I mentioned we're particularly excited with the recent Martin acquisition which is both sizable and right down the fairway for Transcat. The early Martin integration activities are going very well and ahead of schedule. We continue to believe the service segment has a substantial runway for growth both organically and through acquisition. Our solutions business is making slow and steady progress towards the short-term goals we communicated over the last couple of quarters. We are now actively operating the proven Transcat sales playbook in the solutions channel and as we integrate the solutions channel into our overall service platform expectations are for improved results stabilization and ultimately growth which will contribute to our overall organic service goals. I'll close by saying that our leadership team has never been stronger. Across the organization we've invested in recruiting and developing a higher level of leadership and sales technology and operations all commensurate with our ambitious long-term expectation for Transcat. It all starts with strong leadership and culture and in our business space we believe our leadership team is second to none. We intend to leverage these strengths as we create communicate and execute our strategy and vision for the future. A future we feel is incredibly exciting and with that operator you can open the call for questions.

Thank you. If you would like to ask a question please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue and for participants using speaker equipment it may be necessary to pick up your headset before pressing the star keys. One moment while we poll for questions. Our first question is from Greg Palm with Craig Hallam Capital Group. Please proceed.

Yeah good morning thanks for taking the questions and congrats on the results. Thanks Greg. Thanks Greg. Can we maybe just start with you know in terms of like you know the cadence thinking about you know thinking back to December and some of the timing issues you had and you know back in late January you talked about a big bounce back in January. How did the rest of the quarter flow and then I guess more importantly you know over the last you know call it four five six weeks any any change versus what you saw you know back in February and March?

You know I would characterize the fourth quarter February March I would just include in my characterization as good solid kind of what we expected. You know we we probably saw some of the pent-up demand from the December time frame that I think you're referring to make its way into the fourth quarter and that helped contribute to the high single digit organic growth. I don't think we saw it all and I think that will you know play out over time. That's a kind of interesting thing I mean given the backdrop we have and some of the volatility and this work has to be done and we're going to do it but there is some flexibility in the short term for customers to you know kind of wiggle around certain dates and extend intervals when necessary. So I think it all plays out as we'll get the work but from a quarter to quarter month to month basis it's hard to predict particularly the volatility. So we're pleased with the high single digit growth we think there's you know probably more over time but it's gonna take a couple quarters to get past the current volatility before we probably see it all.

Yeah that's fair and I remember last quarter you in the service business specifically you had talked about that there were kind of several big opportunities looming out there. Did any of those close or is that kind of what you're referring to in terms of you know still opportunities and things are shifting around timing wise etc.

Yeah I mean we have a healthy pipeline currently of new opportunities we're working on. We've had a lot of opportunities to get to what we think will be momentum primarily or particularly in the back half of the year as we kind of look out at some of the you know potentiality of it. But yeah I mean I think again you know I've said this for many many years and you know it's difficult to look at any business it's difficult to look at our business you know every 90 days and get a full picture you know. It's a regulated market the recurring revenue streams if you do the work well and your customers are satisfied you'll get the work back most of the time. And so I think you know if you look beyond quarter to quarter look at the whole year we would expect to you know hit our targets of high single digit growth you know as we exit this year and go into next and how soon we get there and the volatility in the first quarter. These are things are very difficult to determine you know given the current economic backdrop but I'm not we don't have any concerns when we look you know beyond that.

Fair enough okay and then just on distribution I'm just curious just given you know some of the tariff announcements you know from a you know a procurement standpoint just remind us kind of where that that sits and maybe more importantly are you seeing any kind of changes in behavior from customers all odd you know are you seeing more demand for or more interest in rentals versus buying outright I'm just kind of curious to see what you're seeing in that segment as well.

Right now you know if I if I look at the current environment we're working in distribution has held up really well and what I mean by that is you know we're getting a fair amount of orders and volume in but it's hard to determine even even a little bit of an uptick so it's hard to determine whether people are getting ahead of some tariffs so some momentum is the that's the impetus for some of the momentum that you know we always used to say that the distribution business was kind of a leading indicator you know when the when the business was slow you know that that that might tell you something about the economy when you're doing well it tells you something else you know in this environment where you've got you know the tariff discussion going on I think you know sort of all bets are off I think the uptick and the solid you know results that we're seeing kind of currently you know may be a leading indicator but may also just be a reaction to tariffs so I think we're going to need more time before we determine you know how that business is going to play out this year and and what the current you know kind of steadiness means I don't know but you know we're not overly thinking it because there's just too much volatility but right now we're doing okay.

But to be clear when you're talking about uptick are you talking like current quarter like quarter to date or you you know putting in March? I'm just saying currently yes

current the current read is distributions holding up well.

Yeah okay all right I will I'll leave it there thanks

you got it

thanks Greg.

Our next question is from Ted Jackson with Northland Securities please proceed.

Well great thanks for taking the questions. Thanks Ted. So my first question you did a really nice job with regards to expense control on the outback side and I was kind of curious you know what were the levers you pulled in there and how would we think about those line items as we put together our estimates for 26?

Yeah I think you know obviously it's something that we focus on you know regularly Ted and always trying to make sure that our costs are aligned with you know the levels of revenue we're seeing and and also aligned with you know some of what we're seeing from a you know the economic backdrop here right. So you know some of it is you know delayed hires some of it is just good you know cost management and you know we'll continue to do that I mean on the you know on the hiring front you can only you can only do that for so long right because we want to make sure that you know we have the right teams in place to to deliver you know our long-term you know plans so but we'll continue to focus on costs we'll continue to make good decisions and you know as we go into you know this year I would expect you know some you know nominal increases and and you know there will be some items that kind of return I'll just say to more normal levels right so you know as an example based on our performance last year you know we didn't pay incentives at the level that we normally would but we would expect this year with with you know our expectations that you know we would see an uptick in some of those lines but where we can you know be focused on on cost savings and and being very cost conscious we absolutely will.

Well it was impressive. Next question I'm going to kind of go back to what Greg was dancing around with you know when I listened to you know the prepared remarks and the commentary that's on your slide deck you know the discussion with regards to expect expectation of icing the legit growth for services with the caveat that once it's once the macro environment excuse me pumped I today the macro environment normalizes you know me is there is that just you know boilerplate I'm just we're just being conservative because you know it could be yours you know as you're kind of been ruling through you know this spring is have you seen you know some disruption maybe turmoil within the business that gives you pause you know where you you've actually seen you know we've kind of rolled into April and now we're in May you know the last two months we've seen you know things kind of just be a little more turbulent and when you're thinking about how you're going to lay out that growth that you're expecting that the things will calm down and you're going to see you maybe a stronger back part of the fiscal year than the front

part of the fiscal year you know all things.

Yeah I mean I I this is Lee of course and and I think a lot of you said you know I would agree with and the way you said it I think that the the bigger overall but yes there's short-term volatility short-term disruption you know there are some customers that are going to you know delay some work and we will call them push outs you know into the second quarter from the first or those even into the third or the fourth that's going to happen this is a pretty unusual environment but you know what we're focused on and we've always been focused on is our value proposition the way we approach the market and the quality of our services that we offer and it's very very strong in fact I would say that entering this year and through the year our ability to sell calibration services to satisfy our customers the type of data we're getting from our technology the type of structuring we're doing on how we approach the customer these are all getting better I mean there's process improvement opportunities we've been talking about we don't just say that because it's sort of boilerplate we say it because we're focused on it and I expect this company to get better and to be better and to have stronger sales in the future than even in the past now all bets are off over the next quarter too and I'm not going to you know you know pretend that I know every possible outcome but I will tell you with high level confidence that the things we're doing are the right things for the business our value proposition is second to none I like what we're doing on the leadership front I like what we're doing on the sales front the pipelines look good and I expect this business to perform well once we get over some of the volatility and so yeah nothing has changed and if anything has changed I see a bright future that could get better I'll just leave it at that you know we you know I'm not going to put numbers around it I just like the direction we're going and I like and I like who we are and what we're doing and so um I look out much further than the next quarter too I like what I see

I'd be concerned if you didn't look longer than a quarter or two I'm going to ask one more question I do have I do have more but I'm going to let other people ask and then if they don't get asked I'll circle back and so the the next question is just kind of on you know um you know Transat Solutions or NIC the NICSA business you know it's been an area that you know you've been you know uh you know repairing um you know rebuilding if you would um could you talk a little bit about where things stand with you know that portion of your world and kind of how to think about it or you know kind of next year yeah

sure

I will and there were two goals with NICSA coming off of some of the the the problems you know we call it solutions now and the change from NICSA solutions is important because it's a change in how we view the business and so there's there's two pieces to it one is sales so we have integrated we are integrating we put a lot of work into making sure that every salesperson in this company understands the value proposition around solutions and that every salesperson is capitalizing on the opportunities they encounter relative to the solutions channel and that was not in place before it doesn't happen overnight but I think we get better every day so I'm fairly pleased with the process the progress we've made in terms of the recognition of how to sell when to sell and why to sell solutions that I would not have said that a year ago I don't think I would have said it six months ago but I like the progress we've made on the operations front we see total integration where solutions is not only stands on its own two feet as a channel you know small channel but that it's a means to an end and it's a means to an end and we say a lot here at Transcat internally all roads lead to calibration when we're in front of a customer and we're trying to solve problems for them on their database on their reliability if you will looking at their intervals it all leads to a calibration discussion and so we see it as a means to an end solution and in and of itself and that's an important distinction sales understands this operations understands this is an important part of of you know making Transcat a better company so I'm pleased with the progress we'll continue to stabilize it and eventually the growth that we see in that area will contribute to our overall organic growth and service

okay I'm going to step aside and I might jump back in later thanks thanks Tim

our next question is from Scott Buck with HC Wainwright please proceed

hi good morning guys thanks for taking my my questions Lee I'm curious you've been integrating automation now for a few quarters how much juice is there left to squeeze out of that

it's a great question I mean we started you know probably what three four years ago we said we were in the first inning I appreciate the question I think it's an important one we are proud we've made so much progress that I'm really proud of the team and it's contributed to you know some of the margin improvement without question and I would characterize where we are Scott today is around the fourth or fifth inning I mean I feel like we're in the midpoint maybe not quite maybe just under the midpoint so maybe fourth inning is probably better than fifth we got a lot of work to do it's arduous it's slow it's hard but when you do it and you get it done it's like it's coding you've got it it theoretically lasts forever and you move on to the next one so we've invested a lot of time and effort and money I think it's a differentiator for us and when we talk about getting consistently into mid-high single digits and beyond that it's a big important component you know that progress

and

so yeah let's call it the fourth inning with one out how about that

that's helpful and great to hear there's some more room there second can you remind us in a more challenging macro environment the mechanics of distribution I mean do you see customers put off sales and go the the rental route instead to save some of their capex or what are the mechanics on that side of the business in a more challenging macro environment

I think the short answer is yes you do see that we're not seeing it right now and I think the reason may be and this is not a definitive answer but our gut tells us we're not seeing it right now because we all know this is a challenging environment so why is in distribution you know feeling more pressure we think it might be people trying to get ahead of tariffs you know so people are ordering equipment now at price levels that they anticipate are lower than they're going to be in the near future so even though the long or the mid-term outlook or distribution may not be as favorable just in theory we're not seeing that because I think this tariff the macros driven by tariffs are different than macros driven by more of a long-term recession oriented environment so I think that's the reason why we're not seeing it because normally you would expect distribution sales to be at the front the tip of the spear and to be declining and to feel some headwinds that we're not feeling today but that we might feel as soon as we kind of get over the tariff hump where the orders have been placed higher costs are hitting the market and then you will see distribution maybe later in the year but this is speculation this is what we're

thinking Great that I mean that makes a ton of sense and then last one Lee the business clearly looks so you know fairly different than it did three or four years ago has the M&A criteria changed at all just given the you know scale and scope of the business today versus you know maybe 2020 or 2021?

I think we have

we

spent a lot

of time on our M&A plan and there are you know there's hundreds of small companies you know it's very it's still a fragmented industry so in general much of the narrative is the same there's more PE involvement in our space you know the the the trans we're a public company Transcat has had outstanding performance for a really long time really consistent we got great model and of course PE is attracted to that so we've seen more private equity scoop up some small companies but in almost every case and there's a few exceptions but not many it's companies that we took a pass on you know for good reason you know from our perspective so so you know there are companies being acquired and you know the field the pond is getting a little bit smaller but I still think there's a lot of work to be done on the more desirable regionals like Martin for example and there's still enough fragmentation that we have a plan and we should be able to execute so I think it's yes it's changed a little bit everything changes but but not to some extent where I would say our acquisition plan has changed or our outlook or expectations to get important synergistic deals done I still see a pretty good opportunity for

that

Great well I appreciate the added color guys and congrats on the quarter All right Scott thank you for

the

questions

Our next question is a follow-up from Ted Jackson with Northland Securities please proceed

Great thanks again I got two follow-ups the first going into kind of the distribution of rental and maybe if you get a more color of what you're seeing within the rental market I know you don't break it out in terms of the size but then we'll kind of continue to take a bigger chunk of the the line item as we go forward and then now that it's become such a more important part of your business how do you see rental performing in a more challenge of macroeconomic environment I would think that it's kind of a it could be a something that could do well and you would see the equipment distribution side maybe be weaker but perhaps the rental market stronger that's my first question

Yeah and I think Ted that you know it kind of gets back to Lee's comment earlier right is that you know in this in a time of uncertainty like this we would have expected you know kind of a pullback in core distribution you know and and you know maybe rentals to to you know pick up the pace because of you know restrictions on cap acts but you know we haven't seen that pullback in distribution yet I think we are seeing a little bit of an uptick in rentals and you know we would expect that you know the longer you know things remain kind of in this uncertain environment that you know that would be a benefit but you know we have we've had and we continue to have you know you know expectations for the rental business to grow you know kind of in line with our historical trends on the services business you know high single digits and you know we're making the investments that we need to to to kind of ensure that growth will continue not only in you know making investments in our asset pool but also you know making investments in in people to help enable

that but in some ways I mean given that it's you know generally a better margin revenue stream than actual distribution you know I mean it could be a case to where you know even though you might see softness in distribution you might pick it up you know at the gross profit level is with a big shift towards rentals and a fair way to kind of think about it

for sure for sure and I think you know as we as we look forward I mean assuming that you know it plays out the way you describe Ted then you know I think we we will definitely be in a position where we can or we should be in a position I should say where you know we can just consistently see distribution margins north of 30

and then my last question is actually one that's hopefully a little bit more fun but I like the commentary with regards to you know the impact of automation improving some of your margin structure and you know that you know you made that acquisition in Ireland and you know it's it was something that we used to talk about quite a bit too much so maybe a little discussion about you know what are some of the things you've done on the automation front that have allowed you to better return on your on your business and kind of where you see that going variable punitive things

I think I think there's

two parts to automation

one

is the technical side and that is just coding right taking a known standard with electronic outputs and writing code so it can talk to the unit under test is how we would describe it internally and that's just blocking and tackling on the coding front I don't think there's any magic to it it's identifying where the opportunities are and then it's getting you know how much what are the resources how much capital are you going to allocate towards this initiative you know we're a public company so everything's balanced right you want to go up and to the right you can't you know you just have to balance you know expectations and funding for you know even important initiatives like automation so we're doing that and then the back half of it is okay now you've got this code written Ted what are you going to do with it and how are you going to execute you know part of the execution so you have automation but probably equal to or more important is getting it into your 33 operations throughout primarily North America of course we have an opportunity a lab in Ireland as well but getting that code disseminated and every technician in every place to be using it because once they recognize the value of this right in theory you could be doing two calibrations at once you need to get some multiplier so I think you write the code you determine where that opportunity exists and then you've got to get that code disseminated and into your operation on a consistent basis the incentives have to be in place to do that the leadership has to be in place to do that the -to-day management has to be in place and when you do it and to the degree that you do it well you will see margin gain and so you know it's kind of a you

know two different stories going on at the same time

okay thanks very much guys thank

you I appreciate the question

there are no further questions at this time I would like to turn the call back over to Cleve to leave for closing comments

okay

well thank you all for joining us on the call today we appreciate it we will be attending the upcoming 22nd annual Craig Hallam institutional investor conference which is in Minneapolis on the 28th so we hope to see you there we appreciate everyone's continued interest in Transcat and feel free to check check in with us really anytime we look forward to talking to you guys again after the first quarter so thanks again for participating

thank you this will conclude today's conference you may disconnect your lines at this time and thank you for your participation