Transcat Inc 2027 Q1 Earnings Call

Thank you, operator. 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 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 two. 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. 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 GAAP to non-GAAP measures in the tables accompanying the earnings release.

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

Thanks, John. Good afternoon, everyone, 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 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, I've held in-depth discussions with our board of directors, both individually and collectively. These first-hand 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.

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 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. 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-digit revenue growth in both segments. Demand in our highly regulated end markets, including life sciences, aerospace and defense, and energy, remained strong, 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 a 31% service gross profit growth. Adjusted EBITDA grew 19% in the quarter, driven by revenue momentum and productivity gains. Let's take a closer look at our service results.

In the fiscal first quarter, service revenue increased 27%, 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, 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.

Our pipeline positions us to pursue strategic, accretive deals that deliver meaningful synergies. M&A will remain central to our growth strategy. Turning to 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, Jaime. 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 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. On slide five, 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. On slide six, first quarter diluted earnings per share of $0.14. The year-over-year change reflects increase in tangible 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 $0.51. Flipping to slide seven, 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, 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. 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. Capital expenditures of $4 million in the quarter continue to be centered around Service segment capabilities, rental pool assets, technology, and future growth projects.