Strata Critical Medical, Inc. (SRTA) Q3 2026 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Strata Critical Medical Fiscal Third Quarter 2026 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference call over to Matt Schneider, CFO of Clinical Services and Vice President of Finance and Investor Relations. Matt, you may begin.

Thank you for standing by, and welcome to Strata's conference call and webcast for the quarter ended September 30, 2026. We appreciate everyone joining us today. Before we get started, I would like to remind you of the company's forward-looking statement and safe harbor language. Statements made in this conference call that are not historical facts, including statements about future time periods may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties, and actual future results may differ materially from those expressed or implied by the forward-looking statements. We refer you to our SEC filings, including our annual report on Form 10-K and our quarterly report on Form 10-Q, each as filed with the SEC for a more detailed discussion of the risk factors that could cause these differences. Any forward-looking statements provided during this conference call are made only as of the date of this call. As stated in our SEC filings, Strata disclaims any intent or obligation to update or revise these forward-looking statements, except as required by law. During today's call, we will also discuss certain non-GAAP financial measures, which we believe may be useful in evaluating our financial performance. A reconciliation of the most directly historical comparable consolidated GAAP financial measures to those historical non-GAAP financial measures is provided in our earnings press release and investor presentation. Our press release, investor presentation and our Form 10-Q and 10-K filings are available on the Investor Relations section of our website at ir.stratacritical.com. These non-GAAP measures should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. Hosting today's call are our co-CEOs, Will Heyburn and Melissa Tomkiel. I'll now turn the call over to Will.

Thank you, Matt, and good morning, everyone. Our strong third quarter results speak for themselves. Q3 was not only ahead of our guidance, but also showed off Strata's capability to generate significant cash flow with much higher conversion. As more customers turn to our integrated transplant offering for more of their cases, we are demonstrating continued market share gains and clinical services. This helped to drive clinical segment revenue growth of more than 20% sequentially versus Q2 2026. As Melissa will discuss in more detail, our go-to-market is all about creating alignment with our customers' objectives, becoming that trusted long-term partner in a space that's becoming far too complex to go it alone. We saw yet another quarter of sequential margin improvement driven in large part by achieving our 2027 logistics gross margin target well ahead of plan. Logistics revenue came in towards the high end of our guidance framework despite both a larger-than-expected seasonal industry decline during Q3 and a reduction in industry trip distances. We're pleased that following our significant growth and the completion of 3 acquisitions during Q2, we still saw a reduction in our adjusted SG&A base quarter-over-quarter. Most importantly, this quarter put a spotlight on the scalability and cash generation potential of our business model with a record $8.6 million of free cash flow in Q3. We're also pleased to report that we're pacing ahead of the medium-term goals we set out at our Investor Day last November. Looking ahead to 2027, we believe we're on track to achieve our target high-teens organic adjusted EBITDA growth and 30% plus total adjusted EBITDA growth, including acquisitions as well. On the M&A front, we're well ahead of plan for 2026, closing on over $6 million of expected annualized adjusted EBITDA at our targeted mid-single-digit valuation multiples. We have a strong pipeline to deploy additional capital at our target valuations with a focus on opportunities that will further strengthen our strategic position while enhancing our margin and free cash flow conversion profile. Given Strata's improved cash generation, coupled with the receipt of our first passenger sale earn-out, we ended the quarter with roughly $42 million of cash and short-term investments, and that's before our anticipated receipt of an additional $27 million of passenger sale consideration early next year. As such, we are now in a position both to accelerate beyond our target pace of acquisitions as well as opportunistically return cash to shareholders. To that end, today, we announced a $20 million share repurchase authorization, allowing us to take advantage of what we see as an attractive valuation for our own stock. In closing, let's bring things back to basics. The underlying driver of our financial performance is simple: better service, architected for efficiency and delivered in partnership with our customers to prioritize their individual preferences and our shared goal to save more lives. With that, I'll turn the call over to Melissa.

Thanks, Will. It's now been 1 year since our strategic transformation and the beginning of Strata. As Will just reviewed, the impact of our new strategy to our financial results is self-evident, but I'd like to take a few minutes to focus on our evolving and strengthening customer value proposition. This is what we believe is driving our share gains today and what will continue to fuel our strong growth in the years to come. The fundamental challenge we face with our partners is to increase the supply of donor organs. Demand has only grown. The transplant community has responded to this challenge with innovation in the form of perfusion and other preservation technologies that has led to a significant expansion in the pool of donation after circulatory death or DCD donors, which now make up over half of all transplants. With this shift to DCD come significantly more complexity versus traditional donation after brain death or DBD donors. Perfusion technology is generally required along with clinicians experience in its use, cases take longer and organs are unusable, which we call a dry run, roughly 30% of the time. As a result, the historical system of relying upon a transplant centers captive clinicians and technology is breaking. America's 250 transplant centers and 50 OPOs simply do not have the national scale required to manage this complexity alone nor did a patchwork of excellence for regional providers that has historically served the industry. [ Enter Strata ]. We have created an integrated platform offering organ recovery, perfusion, logistics and placement with the scale to deliver services locally. By utilizing surgeons that can drive or fly commercially to donors, we reduce the time and cost to get to the OR. We have become more efficient across the board, repositioning empty airplanes less, using 2 airplanes less and successfully leveraging local surgeons and aircraft to reduce dry run costs. Customers are seeing the benefits of our more efficient end-to-end platform. They're not just saving money, they're also completing more transplants. What's more, our expanding list of preservation device partnerships enables our transplant center customers to execute cases the best way they see fit. We currently stock devices from OrganOx, Bridge to Life, Paragonix and Traferox at our clinical hubs across the country, enabling seamless utilization by our customers according to their preferences. Our integrated go-to-market strategy is leading to continued share gains in clinical. In addition, Strata has a much larger financial opportunity in these integrated cases as much as 3x versus the transport only case, weighted more heavily towards clinical revenue. This is a win-win in several ways. One, our clinicians and perfusion equipment deployed on short trips locally, see higher utilization versus transplant center-based resources. In other words, in our system, the same number of surgeons can recover more organs; two, Strata builds deeper clinical relationships with our customers while shifting mix to our higher margin, higher free cash flow conversion business line; and three, of course, one of our objectives is to save our customers' money. We do this by reducing logistics expenses for dry runs and handling transportation of our staff via ground or commercial air, which we do successfully roughly 2/3 of the time. Though this is a contributor to reduced flight hours per case, it is a worthwhile investment in doing right by our customers that creates a significant long-term competitive advantage for Strata. Most importantly, by reducing the cost of dry run we make it financially possible for our customers to attempt more organ recovery. A case with only a 50% probability of a successful recovery transforms from a past to a 50% chance of saving multiple lives. We're really just getting started demonstrating this value proposition to the transplant community, and we're excited about the growth potential in the business over the coming years. We continue to pursue creative opportunities to further improve the efficiency of our model and increase our total addressable market. To that end, in October, we launched with our first customer in our new cardiothoracic surgical locum tenens business line, loaning our surgeons and clinicians to hospitals for non-transplant use cases. This is a huge new addressable market for us that also serves to further increase the utilization of our surgeons and makes us a more attractive employer. More work means more pay for our team and ultimately better staff retention. Moving to industry trends. The transplant system exhibited above average seasonality in Q3 with deceased donors and heart, liver and lung transplants falling approximately 7% quarter-over-quarter. While transplant volume continued to grow in the mid-single-digit range year-over-year, trip distances fell approximately 10% year-over-year, driven primarily by lungs. As a reminder, lungs moved to continuous distribution in 2023, driving an increase of over 100% in lung distances between 2022 and 2025. Earlier this year, OPTN modified the lung continuous distribution composite allocation score, resulting in a roughly 20% year-over-year decline in lung trip distances in Q3. Changes in organ allocation policy have been and will continue to be a clear long-term positive for the transplant community, enabling sicker patients to obtain life-saving organs. Heart and liver, which represent more than half of our transportation volumes have yet to move to the more efficient continuous distribution framework, which, similar to our experience with lungs, we expect to result in increased transplant volumes as well as another leg up in distances. In closing, we've already skated to where the puck is going in transplant and most importantly, Strata has created a business model with alignment between our customers, their patients and our shareholders. With that, I'll turn it back to Will to discuss the third quarter financial results.

Thanks, Melissa. I'll now walk through the financial results in more detail. Total revenue increased 50.3% to $74.1 million in Q3 2026 versus $49.3 million in the prior year period, driven by clinical acquisitions and growth, partially offset by logistics. On a pro forma basis, including the results of acquired businesses in both periods, revenue increased 8.5% year-over-year in Q3 2026. Total gross profit increased 57.9% to $16.8 million in Q3 2026 versus $10.7 million in the prior year period, driven by clinical acquisitions and growth, partially offset by logistics. Total gross margin increased 110 basis points to 22.7% in Q3 2026 versus 21.6% in the prior year period, driven primarily by the positive mix impact of our larger clinical segment, which also saw margin expansion versus the year ago period, partially offset by a slight decline in logistics gross margin. Clinical year-over-year comparisons are not yet meaningful, so we'll discuss it on a sequential basis. Clinical revenue increased 20.3% sequentially in Q3 2026, driven primarily by the full quarter impact of recent acquisitions as well as modest organic sequential growth. As discussed earlier, the clinical business saw organic growth in a seasonally weak quarter for the industry, which was down approximately 7% sequentially in terms of total transplants because we are gaining market share. Clinical gross profit increased 18.3% sequentially driven primarily by the full quarter impact of acquisitions completed in Q2. Clinical gross margin declined 50 basis points to 25.6% versus 26.1% in Q2 2026, primarily due to investments in staff and training to support our growth and elevated use of part-time providers which we expect to backfill with additional dedicated resources in the coming quarters. Turning to the Logistics segment. On a sequential basis, Logistics revenue decreased 6.9% towards the high end of our guidance framework and consistent with seasonal industry transplant volume declines. This equates to a 3.5% revenue decrease versus Q3 2025. The year-over-year comparison was impacted by an industry-wide decrease in average distances between donors and recipients of approximately 10%, which was driven in part by modifications to the lung allocation methodology that Melissa discussed earlier as well as the reduced flying by a nonexclusive customer discussed last quarter. Logistics gross margin rebounded 240 basis points sequentially to 20.8% in Q3 from 18.4% in Q2 2026, well ahead of our goal to reach 20% in 2027, driven by improvements across the logistics business, including air, ground and TOPS. On a year-over-year basis, Logistics gross profit decreased 6.6% to $9.3 million in Q3 2026 versus $10 million in the prior year period. Logistics gross margin of 20.8% in Q3 2026 declined versus 21.5% in the prior year period driven primarily by an increase in fuel surcharge pass-through revenue and a reduction in average distances between donor and recipient, industry-wide and of Strata, which results in lower margins on our owned aircraft. On a sequential basis, adjusted SG&A decreased $0.2 million, and it's been about flat over the last 4 quarters. We're especially proud of this given our significant organic growth over the same period as well as our completion of 3 bolt-on acquisitions. On a year-over-year basis, adjusted SG&A increased $1.5 million to $8.9 million in Q3 2026 driven primarily by clinical acquisitions. It's important to note that stock-based compensation expense has been elevated in 2026 broadly and in Q3 2026 in particular, at $5 million. This was driven in large part by performance stock units linked to the receipt of the first passenger sale earn-out, which was delivered this quarter. We expect a sequential decline in stock-based compensation expense of approximately 20% to 30% moving into Q4, and we expect this lower run rate to persist since 2027 alongside a continued reduction in SG&A as a percentage of revenue. Adjusted EBITDA increased both year-over-year and sequentially to $9.6 million in Q3 2026 versus $4.2 million in Q3 2025 and $7.9 million in Q2 2026. Adjusted EBITDA margin rose to 13% in Q3 2026 versus 8.5% in Q3 2025 and 10.9% in Q2 2026. GAAP loss from continuing operations of $7.6 million in Q3 2026 was driven entirely by noncash transaction-related items, including $5.5 million of intangible asset amortization of which $3.1 million was related to the retirement of legacy trademarks following our brand integration, $1.3 million of losses from the sale of the Joby earnout shares and $2.6 million of change in fair value of assets and liabilities related to the revaluation of acquisition earnouts. Excluding these items, net income would have been positive over the last 2 quarters. Many of these noncash items will sunset in the near term as we completed the trademark amortization in Q3 and will pass our remaining passenger sale earnout opportunity in early 2027. Cash flow from operating activities was $9.5 million in Q3 2026. Free cash flow was strong at $8.6 million and benefited from a low level of aircraft capitalized maintenance resulting in only $0.8 million of capital expenditures in the quarter. We ended Q3 2026 with $41.6 million in cash and short-term investments. During the quarter, we achieved our first earnout from the sale of our passenger business last year. We realized net proceeds of $15.3 million after the sale of all Joby earnout shares. There is an additional $27.5 million of potential earnout consideration and holdbacks release in Q1 2027. Moving to the outlook. We are reiterating all aspects of our 2026 guidance including revenue of $285 million to $295 million, adjusted EBITDA of $33 million to $35 million and free cash flow before aircraft and engine acquisitions of $15 million to $22 million. At the midpoint, this implies a low single-digit sequential increase in revenue in the fourth quarter. While transplant volumes are often volatile month-to-month, we have not yet seen the typical seasonal sequential improvement in industry volumes or in our own logistics volume so far in Q4. As such, we expect sequential growth in Q4 to be driven primarily by clinical while logistics is expected to be about flat quarter-over-quarter. Gross margin is expected to remain about flat sequentially in the fourth quarter, and we anticipate an increase in clinical gross margins moving into 2027 as we leverage investments in clinicians and training and backfill part-time providers with dedicated resources. We will provide 2027 financial guidance when we report Q4 2026 results early next year, but we remain confident in our medium-term financial targets for high teens organic adjusted EBITDA growth and 30% plus adjusted EBITDA growth, including acquisitions. We expect our growth in 2027 to be led by the Clinical division, driven by a strong new customer pipeline for our integrated transplant offering. Clinical also benefit from exposure to rising penetration rates, both NRP and third-party surgical recovery. Together, we expect these tailwinds to more than offset slower top line growth in logistics, a function of both shorter industry trip distances and the efficiency improvements discussed earlier. We expect the resulting mix shift to drive continued improvement in our free cash flow conversion in 2027 relative to 2026. We do not expect a material allocation of capital towards the aircraft purchases in the near term, and any such purchases we would expect to be largely funded by the sales of other aircraft or the release of deposits with third-party operators. In summary, we're excited about the growth potential of our integrated organ recovery platform and transplant with strong operating leverage and cash generation potential of the business and our ability to create value through capital deployment towards M&A and share repurchases. We're participating in several investor conferences over the next few weeks, including UBS's Healthcare Conference and the Sidoti Conference in December. Please don't hesitate to reach out with any questions, and we hope to see many of you there. With that, I'll turn it back to the operator for Q&A.

[Operator Instructions] Our first question comes from Bill Bonello with Craig-Hallum.

Just a couple questions. One, both probably related to the policy changes. But the final OPO rule came out late last week. And just curious how you think that might impact your business at all? I guess, in particular, whether you generate a material percent of revenue, let's say, 10% or greater from any one OPO. Just trying to get at what's the risk of competition or somebody being decertified?

Bill, thanks for the question. We don't have any large OPO customer like that. I would say we only have the data from last year, which is not what's going to be used to make these decisions. But if we look at that data, we have very minimal exposure to Tier 3, something like 3%, and our viewpoint is that they're making positive changes by working with a company like us and offering NRP directly that's going to result in more organs being placed successfully. So hopefully, they're going to see some improvement in their data with the new info that will be utilized to make these decisions.

Okay. That's helpful. And then just on the flight distance, just curious, as you think about the impact on Q3, do you think this is sort of the new base, or do you think there was sort of unusual, more of an impact in Q3 as people get -- were trying to adjust to the policy change or it's not fully reflected yet? Just how should we be thinking about that going forward?

Bill, it's really hard to draw a conclusion in just 1 quarter. You all do a great job of tracking that data. And as you see, it's extremely volatile for all organ types quarter-to-quarter. Lung is maybe 20% of our mix. And so if this was the new normal, you're talking about a low single-digit headwind. I think we'll have to kind of keep watching, but the important thing is that the trend of new regulation is leading both to more organs being transplanted and also to longer distances over time. So we're really focused on the long term on that, and we're happy to see that the regulators are engaging with the continuous distribution framework, because as you know, you still have the vast majority of organs that are yet to move on to that methodology, which will be a big boost to the folks that are sick and maybe a little bit outside of the range of where they could be matched today, and we think we're uniquely positioned to be able to help when those rules come into play.

Excellent. I'll hop back in the queue for additional questions.

Our next question comes from Yuan Zhi with B. Riley.

In the corporate deck, you anticipate the DCD donors undergoing NRP to reach 80% by 2028 versus 60% right now, and you used France and U.K. as examples there. Can you maybe talk about what are the key differences between U.S. and EU and what are changing right now that indicate U.S. moving towards this 80% range?

Yuan, thank you. Yes, we are looking at the trends that are happening over in Europe, which is making us feel confident that NRP is going to become more and more widely adopted in DCD donation. We think, honestly, that the changes now coming out of CMS and the regulatory environment with OPO consolidation, which is now inevitable, will only further drive the NRP adoption when it comes to DCD donations. So that's where we kind of came to that estimate.

Got it. And maybe a clarification on the organic growth in the clinical segment. How was it split between the transplant clinical and other clinical? Can you talk about the near-term and long-term growth for these 2 segments?

Thanks for the question on that. If you look at it on kind of any way you look at it, the year-over-year growth on a like-for-like basis was 30% plus. You can get to there, if you just look at owning Keystone in both periods. You get there if you also include the acquisitions. So that's kind of the year-over-year growth that we're seeing across the clinical business. The faster growth continues to be weighted towards our transplant clinical business.

Our next question comes from Jon Hickman with Ladenburg Thalmann.

I'm sorry, Melissa, could you reiterate what you said about the lung business? I am sorry, I think I missed most of that.

So what I was talking about was the adaptation of continuous distribution as an allocation framework. And from '22 to '25, that increased lung distances by 100%. There was an OPTN rule that came out in about May of this year that reconfigured the allocation system there that led to a little reduction in that distance. But there's still, overall, up about 80% in flight distances from the original adoption of continuous allocation for lungs.

Okay. So they put a limitation on the distance that you could harvest the lung...

It wasn't a limitation. There's many factors in allocation. Historically, they wanted to keep the organs within DSAs. That's why we saw over time, they eliminated the distance as a driving factor. When they came out with the new framework in May, distance, again, was factored in. So it just resulted in the slight reduction. But it's still overall positive, and that's why we're optimistic when this framework comes out for livers and hearts, that we're going to see trip distances increase.

Think of it as just a tweak to the weighting, Jon. There's a bunch of different criteria that have different weightings and they made some tweaks.

Okay. And then, Will, you made a comment about the seasonality -- you haven't seen the pickup that you normally see in kind of the fall/winter here. Is that...

Yes. If you look at the OPTN industry data in October, we haven't seen yet an uptick in the number of transplants happening in the overall industries. In fact, if you look at October, maybe it was down low single-digit percentages. I think when we look at our own business, we're happy to still see that sequential growth in our clinical business despite the industry being down. So continuing to take share and so that's why we kind of gave the guide that we expect our growth to be driven a little more by clinical because on the logistics side, we're seeing that track the industry more closely.

[Operator Instructions] Our next question comes from Ben Haynor with Lake Street Capital Markets.

First off for me, just on the locum tenens business that you're launching based on customer demand/interest. Any more color on kind of how that all came about? How does that materialize? And then does that change your M&A tactics materially going forward?

Ben. The CT locum business was really an example of our willingness and ability to always say yes to our customers. We view it as an opportunity to further entrench ourselves with our healthcare system customers, and it's large addressable market because there's many ways that we can provide these services to support them. It has the added benefit of retaining our surgeons that are doing our local recoveries by keeping them busy and happy and well compensated. But -- so it's just an example there of how we want to further partner and be able to support customers. I think as far as the M&A front, those, we've been pretty clear that -- we're very open to a lot of M&A opportunities across the board. So we continue to include all of these potential acquisitions in our pipeline.

Okay. That's helpful. And then just with the commentary you guys had on kind of the aircraft acquisitions and the network overall. I mean, is there a chance that you actually need fewer planes and would you say that your fleet is more likely to be owned in the future? Or is that too much of a step?

We don't require additional owned planes to be able to operate efficiently. I think this quarter was a great example of how we've reached a really good point to be able to be the most efficient option for our customers and deliver our local recovery. And that's because we have the planes that we do have strategically located around the country, close to donor ORs, and that's how we've been able to reduce costs for our customers. So we don't think we're going to need to buy more planes in order to continue to scale our model. Our dedicated fleet provides us the flexibility, the non-owned planes that we have the dedicated capacity which gives us the flexibility to scale in and out of the right equipment, too, for the mission as we see kind of trends develop in flight distances and such.

Okay. That's helpful. And then lastly for me on the buyback, that's great. Do you have any color you can provide on how you're going to utilize that? Is it something that you're going to be opportunistic like you start today? Or is that going to be spread over time? Any commentary on that?

This is really just a function of our improved cash position here and the expected pacing of our M&A strategy. We're able now to run significantly ahead of our target pace and then still have some excess cash to opportunistically return to shareholders. So the priority is and remains our M&A pipeline, which is really strong and as Melissa touched on earlier, as we launched some of these new business lines that expands the aperture for us of what would be an attractive acquisition. But we can only chew on so much in any given period of time. And given the receipt of our earn-outs and the expected receipt of additional earn-outs, we just think this is good corporate finance, good opportunity to return some cash to shareholders rather than just having it sit on the balance sheet.

Our next question comes from Bill Bonello with Craig-Hallum.

Thanks guys for taking a follow-up. Just 2 more things, if I can. You mentioned that with the strong balance sheet and the cash infusion and cash flow, you can accelerate the pace of acquisitions. Should we be expecting anything different in terms of either the types of deals or the size of deals that you might be targeting or pretty much the -- kinds of tuck-in acquisitions that you have been doing so far?

I think you should expect to see deals that are consistent with the framework that we've outlined and what we've accomplished already. We're really focused on that mid-single digit multiple of adjusted EBITDA, free cash flow tends to be about the same for the things that we're looking at. And we're focused on areas where we've already built successful businesses today. And so there's a lot of opportunities that fit that aperture. The sizes can vary as you've seen from what we've accomplished already. But if you look at last year, the pacing was effectively double our target. So we're really pleased that we could do that and still be in a position to continue executing on the pipeline and have some excess cash as well.

Excellent. That's what we were hoping. And then I guess, just the last thing, last quarter you called out and you mentioned it today, some lost business on the logistics side. Can you just give us an on what you're seeing on the competitive front in the logistics business?

Sure. Things are pretty steady there. There might be some leakage on a one-off basis, but we don't expect a similar situation like we talked about last quarter. We do know though that we do expect that the percentage of our flights where we're carrying the OCS device is going to decline. And that's just a symptom of us gaining share for our unified local recovery model. So our customers are now shifting more towards NRP and the usage of other preservation and perfusion devices.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Melissa Tomkiel for closing remarks.

Thank you all for your continued interest and support. These are very exciting times. And as we've said on our call, our strong results this quarter are a proof point for how we are optimizing the business. We look forward to speaking to many of you over the next few days and at our upcoming conferences. Thanks again.

This concludes today's conference call. Thank you for participating. You may now disconnect.