TRANSCAT INC (TRNS Q1 FY2026 earnings call

• Q1 results yielded stronger-than-expected year-over-year revenue and adjusted EBITDA growth. Consolidated revenue was up 15% to $76.4 million, with growth driven by consistent demand for calibration and rental services. - The Service segment recorded its 65th straight quarter of year-over-year service revenue growth. Martin Calibration had a strong quarter with revenue synergies in the Midwest region. - On August 5, Transcat acquired Essco Calibration, which is a premier provider of specialized high-end electronic calibrations and fits well with Transcat's portfolio. - The Distribution segment's revenue grew 19% in the quarter, with distribution gross profits growing 24% and gross margins expanding due to the higher-margin rental business. - Transcat recently closed a 5-year credit facility that nearly doubles its capital resources, providing ample capacity for acquisition and growth strategies.

Consolidated revenue for the first quarter of fiscal 2026 was $76.4 million, up 15% compared to the prior year. The Service segment saw service revenue grow 12%. Despite economic volatility, it was in line with expectations. The Distribution segment had revenue of $27.3 million, which grew 19% primarily due to the strong performance of the higher-margin rental business. Service gross profit increased 9% versus the prior year, while the Distribution segment gross profit was $9.6 million, up 24% with a 130 basis points expansion in gross margin to 35.2% driven by the higher-margin rental mix.

• Expect to progressively improve service organic revenue growth in the second half of fiscal 2026. - Acquisitions will continue to be important to fortify the core calibration business and expand addressable markets. - Leverage continuous process improvement and automation as key drivers of future service margin expansion. - Expect distribution margins to benefit over time as the rental channel continues to be a higher percentage of the distribution revenue mix.

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

A: Tom Barbato said that distribution continues to see consistent demand both on the core distribution side and rentals, indicating it's more than just pull-in due to tariffs.

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

A: Tom Barbato said rentals had a nice quarter, and when rental growth occurs, margins expand. Lee Rudow added that over time, as rentals continue to grow (which is strategic), margins will continue to grow.

Q: How would you characterize Essco's growth rate?

A: Lee Rudow said Essco is a very high-quality company that has grown fairly consistently, driven by investment in sales, marketing capabilities, and people.

Q: When we talk about high single-digit organic revenue growth in the second half, I mean, what does that imply for the Transcat Solutions business?

A: Lee Rudow said it implies stabilization in the Transcat Solutions business, which is a contributing factor to the high single-digit growth in the back half of the year.

Q: Can you maybe give us more context on the timing of what helped to push the Essco deal forward?

A: Lee Rudow said the Essco deal was finalized because the owner reached a point in his career where he wanted to focus on other things and saw Transcat as the right partner to perpetuate the company and take care of his people.

Q: Within Essco's business, is there any rental or distribution components?

A: Thomas Barbato said there is very, very little; it's primarily all core calibration services.

Q: Is core distribution still decline on a year-over-year basis? Any -- is there any divergence of the growth rate between rental and core distribution?

A: Thomas Barbato said both core distribution and rentals grew in the quarter, and they continue to see consistent demand on both sides into Q2.

Q: On your confidence level for the return to high single-digit organic growth. Maybe if I ask you to rank the relative factors that build that confidence, how important how important is the stabilization of Transcat Solutions in that equation? And what are the other factors that gave you the confidence?

A: Lee Rudow said factors include capabilities, geography, service levels, retention, and the uniqueness of the value proposition, with stabilization of Transcat Solutions being one element.

Q: The outperformance on rental distribution, we should view the first quarter kind of the baseline and that you should -- it's not a anomaly that as we think about the go forward for rental distribution, it should continue to grow from that base, not like, say, fall back to, for lack of a better term trend line in third quarter and then [indiscernible] and then go from there?

A: Lee Rudow said growth in rentals should not be viewed as an anomaly, as it's part of the strategic plan to grow the rental business.

Q: With regards to growth and a return to single-digit growth, you're going to have a period of just, broadly speaking, better comparables as you lap through all the issues that went on with NEXA and such. When we think about organic growth, absent the acquisitions, then I assume it would be fair to assume that as we roll through this year that your growth rate, all else being equal, would accelerate, as the drag from NEXA abates?

A: Thomas Barbato and Lee Rudow said that is correct.

Q: As we look at the new Essco acquisition, would it follow like a similar seasonal cadence as your services business as we think about putting that revenue into our models, when we basically for conversations say that [indiscernible] $2 million and layer it in on top like a pro rata basis to...

A: Lee Rudow said it will follow the same cycles as the business.

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

A: Lee Rudow said any onshoring of manufacturing in the U.S. is good for Transcat, and they are hearing of companies planning to open facilities over the next 5 years, though it will take time.

Q: First on Essco, what kind of customer overlap is there with your -- the legacy Transcat business? Just trying to get my arms around what potential cross-selling opportunities could look like?

A: Lee Rudow said there is a lot of overlap in capabilities, and together they will be very competitive, with Transcat bringing capital to leverage Essco's strengths.

Q: The company obviously has grown meaningfully over the last few years. Where are you in terms of kind of industry market share? And are there opportunities to shift pricing higher with your current kind of market position?

A: Lee Rudow said it's difficult to determine market share, but there are opportunities in the in-house calibration lab market, OEM business, and third-party market, with a strong value proposition.