Transcat, Inc. (TRNS) Q3 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to Transcat Incorporated Third Quarter Fiscal Year 2025 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Tom Barbato. Thank you. You may begin.

Thank you, operator 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 Rudow; and our Chief Operating Officer, Mike West. We will begin the call with some prepared remarks, and then we'll open it up the call for questions. Our earnings release crossed the wire after markets closed yesterday. Both the earnings release and the slides that we'll 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, including 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 in 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 non-GAAP to compared GAAP 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. Fiscal 2025 third quarter consolidated revenue was up 2% to $66.8 million. However, organic service revenue declined 4% from prior year third quarter. Last quarter we talked about the NEXA Solutions channel, and that our expectations were that softness in that channel, would continue through the current fiscal year. This continues to be our view, and the team is focused on pipeline development, and getting new solutions deals across the finish line. What we did not anticipate in the third quarter, was the December decline in core calibration service demand. Following an October and November, which was largely in line with expectations. We discovered that the midweek Christmas holiday, drove extended manufacturing closures in the back half of the month. Essentially, this affected the incoming calibration service work in two ways. In the front end of December, many of our customers ramped up manufacturing to meet demand, up to and through the holiday shutdowns. The intensified production makes it difficult, to send in equipment for calibration. The back end of December, extended holiday facility closures and - reduced staffing levels, contributed to a reduced volume of incoming equipment, through the end of the calendar year. So timing contributed to the December service shortfall and as one would expect, service revenue picked up significantly in January, as a result of pent up demand from December. Stepping away for a moment from the quarterly performance on December 10, we acquired Martin Calibration. We're very excited to get this deal done, as Martin satisfies all of our strategic acquisition requirements. With annual revenues more than $25 million, Martin gives Transcat a strong presence in the Midwest including Minneapolis, Chicago and Milwaukee as well as Tempe, Arizona and Los Angeles, California. Martin's flagship lab is in Minneapolis, an area rich in medical device and life science. This is a region that relies heavily on quality calibrations, and related services and solutions. From a bolt-on perspective, we anticipate the ability to leverage our current operational infrastructure, by combining our Arizona and LA labs with the Martin facilities that, are in very close proximity. From a capabilities perspective, the two companies are very complementary. Martin brings a higher level of expertise on the mechanical and dimensional side, and represents an ideal match with Transcat's advanced capabilities on the temperature, pressure and electrical side of the business. So in addition to the cost synergies, you would expect over time with bolt-on acquisitions, we expect to drive service growth by leveraging the expanded, combined capabilities of both Martin and Transcat. The integration process is off to a great start, and as we work - and we work to maximize the early returns on this exciting coveted opportunity. Turning to distribution, revenue grew 7% in the quarter the third quarter. In December however, due to the extended closure of many of our customers, our rental channel experienced a similar decline in demand, as our core calibration services channel. The rental revenue decline in December, resulted in a distribution segment mix change that, negatively impacted distribution service margins. And before I turn things over to Tom, I want to point out that the Transcat team has consistently delivered excellent results, over an extended period. We have a demonstrated track record of driving growth and productivity. Our team is working to overcome the near term challenges, we've encountered in the last couple of quarters, and this primarily pertains to the year-over-year softness of the solutions channel. From a traditional calibration services channel perspective, we currently have a very strong pipeline of new high probability opportunities, as we close out fiscal 2025. We are prepared for a strong fiscal 2026. So with that I'll turn things over to Tom, for a more detailed look at the third quarter financial results.

Thanks Lee. I'll start on Slide 4 of the Earnings' Deck posted on our website, which provides detail regarding our revenue on a consolidated basis, and by segment for the third quarter of fiscal 2025. Third quarter consolidated revenue of $66.8 million was up 2% - versus prior year driven, by growth in distribution. Looking at it by segment, Service revenue grew slightly 3.8% organic decline, was offset by growth from acquisitions. As Lee mentioned, service revenue was negatively impacted, by the unexpected extended December holiday closures at our customer sites, as well as the anticipated year-over-year decline in the Transcat, NEXA Solutions channel. Turning to distribution, revenue of $25.2 million grew 7% driven by strong product sales, and rental growth. Turning to Slide 5, our consolidated gross profit for the second quarter of $19.7 million, was down 6% from prior year. Service gross profit declined 8% versus prior year. Continued leverage from higher levels of technician productivity, could not offset the headwinds caused by lower organic revenue levels. Distribution segment gross profit of $7.3 million was down 2%, as margins were pressured in the third quarter, due to mix. Turning to Slide 6, Q3 net income of $2.4 million, was down a $1 million versus prior year. Diluted earnings per share came in at $0.25 down $0.13. We report adjusted diluted earnings per share as well, to normalize for the impacts of upfront and ongoing acquisition related cost. Q3 adjusted diluted earnings per share was $0.45. Flipping to Slide 7, where we show our adjusted EBITDA, and adjusted EBITDA margin. We use adjusted EBITDA, which is non-GAAP, to gauge the performance of our business, because we believe the best measures 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 level of non-cash expenses that, will hit our income statement from acquisition purchase accounting. The third quarter consolidated adjusted EBITDA of $7.9 million, was down 13% from the same quarter in the prior year, as extended December holiday closures and the expected solutions revenue softness, negatively impacted third quarter EBITDA. As always, a reconciliation of adjusted EBITDA to operating income and net income, can be found in the supplemental section of this presentation. Moving to Slide 8, operating cash flow and operating free cash flow, were both higher year-over-year. Q3 capital expenditures were $1.4 million higher than prior year and continue to center around Service segment capabilities, rental pool assets, technology and future growth projects. The spend was in line with expectations. Slide 9, highlights our strong balance sheet, at quarter end we had total net debt of $40.8 million, with a leverage ratio of 0.97x. We had $39.5 million available from our credit facility - and as a previously announced, we acquired Martin Calibration for $79 million in fiscal Q3, paid in combination of $69 million in cash and $10 million in company stock. Lastly, we expect to file our Form 10-Q on February 5. With that, I'll turn it back to you Lee.

Okay, thanks Tom. As we wind down the fourth quarter, we expect fiscal 2025 organic service revenue, to be in the low to mid-single-digits once adjusted for the 53-week - 53rd week in fiscal 2024. Of course that is below our expectations, and as I earlier it's driven by the softness, primarily driven by the softness in our solutions channel that, negatively impacted our organic growth rates in fiscal 2025. We're certainly looking-forward to improved solutions performance in the year ahead, relative to our core calibration business. We have a strong pipeline and momentum for both are building, as we get ready to embark on fiscal 2026. We believe organic service growth in fiscal 2026, will be more in line with our historical performance. We will continue to focus on the full integration of Martin Calibration. Working together, we expect to capitalize on the numerous opportunities we have, for both service growth and productivity gains. I shared my vision for the company over the years, which includes strong organic service growth, an industry leading value proposition, inherent service operating leverage, lower cost of goods sold and SG&A over time, driven by process improvement, automation and other productivity improving initiatives. Strong operating cash flow, and sensible expansion of addressable markets. We still believe in our vision, our goals, and our ability to achieve them. We're excited for the fiscal year ahead. And with that, Rob, you can open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Greg Palm with Craig-Hallum. Please proceed with your question.

Yes, good morning. Thanks for taking the questions here. I wanted to start I guess with the, near term outlook so understand some of the timing around that the holidays you still, and it sounds like things picked up in January, but you still took down the full year guide. So I'm just curious if it was timing, just things slipping from December to January. You wouldn't expect that that guide to come down, but it did. So is there, sort of more of a deferral or what? I guess what, what's kind of the incremental weakness here relative to, what we were talking about three months ago?

So this is Lee, I'll start and maybe Tom can add some color as well. Yes. So we had the slowness in December. We spoke too many of our customers during and after the slowdown. So we kind of confirmed that that was taking, that took place and impacted the numbers. The business has generally gotten very busy in January. So we made some of that back just looking at the full year, looking at the solutions impact, continued impact. We're just, we're confident that we'll be in the - mid-single-digit range for organic growth, generally speaking. And there's been, there has been some relative delays in some orders, and things with high probability that we expect it to close in Q3. Some will close at the back end of Q4, maybe even early into fiscal year and April. But we just being conservative in the guidance.

Yes. Okay. And can you maybe just give us a little bit more color, on the visibility in the pipeline and really tie this back into, kind of expectations for next year? Last quarter I think you were, kind of confidently talking about returning to high single-digit organic growth. I think the commentary is a little bit more vague, understandably so. But just any comments on visibility pipeline, timing around some of the closures, that'd be pretty helpful?

Yes. Right now our core calibration pipeline is very strong. So it's about as strong as I probably have ever seen it, which is good. There's a couple of big opportunities, for example where, we've gotten verbal confirmation. Yes, we're going to go with Transcat. We're going to proceed according to these terms and this timing, and some of those have been delayed. Which has affected, some kind of our softer guidance trying to get our arms around exactly, when some of these jobs are going to start. And there's a variety of reasons, why you have delays like this. We can get into some of them if you'd like. But generally speaking, the pipeline is very strong. I think that's the most important point. And for us it's a matter, and they have to come to fruition, of course, and that doesn't always happen. But we feel pretty good about where we stand going into the year, into the timing. And I think when we talk about, we're a little vague for Q4, but when we talk about next year, particularly in the back half, Greg, as some of these things come to fruition. We're feeling pretty good about, the level of activity that we're seeing. So not a lot has changed. And I think, when we look at the solutions business improving throughout next year and we combine that with the pipeline activities, the macros appear to be pretty strong. There's no reason to believe that, we shouldn't be back to more historic levels in terms of sales.

Got it. Okay. And that was going to be kind of my next question, or sort of final on this level of thinking, just making sure that nothing structural has changed, whether it's law, large numbers or something else. But historically we've, you've demonstrated and you've talked about this high single-digit, low double-digit organic growth profile for the service business, and understand a couple of, hiccups recently, but anything as you look ahead over the next handful of years, there's nothing that gives you hesitancy, and your ability to sort of match those targets?

Absolutely not. I mean, we have to keep things in perspective. We've had a lot of growth over a very, very long time. Quarter-after-quarter-after-quarter, nothing has changed. Still we have recurring revenue streams, still the business is driven by regulation. There hasn't been any competition that we've noticed that's been able, that is taking market share or doing anything differently. We're still in a really good position. And when you just take a little bit of a broader perspective on the sales engine, which from our perspective continues to get better, there's always tweaks that you can make. There's always technology that you can implement, to make the sales process and other processes better. We're working on all those things, and to have a couple of quarters that you're in the mid-single-digit growth, as opposed to high or even low double-digits, that's to be expected. You can't win every game, the same way. But we have a really good team, a really good plan. The fundamentals are the same and we expect that over the long-term, and even the midterm we expect strong performance from this company. I can't point to anything today that would stop me from believing that. So, we expect a good year, and the pipeline going into the year supports it. So we'll see. You never know 100%, but I like the fundamentals. Nothing's changed, and we just got to get over a couple quarters of softness, and for the most part that we have identified the areas that need to be addressed. So we feel pretty good about the upcoming year yes.

All right. Thanks, Lee.

Yes, no problem, Greg. Thanks.

Thanks, Greg.

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

Thanks very much. Good morning. I got a list of questions. Let's start with kind of the NEXA Transcat Services, and maybe get an update with regards to kind of the actions that you've taken so far, and kind of the actions that are left to kind of put that business back, where you want it to be?

Yes. So from a solutions perspective, it's something, we're talking a lot about. There's two ways to look at the solutions business. One is as a standalone business that, offers five or six service tracks in the ecosystem for calibration. And that business has to be profitable, and that business has to grow. Those are our expectations. There's also, Ted, the benefit that you get from the solutions business in terms of organic growth for our calibration services business. Because they also sit at the table with us, literally and figuratively when we're trying to win new business. They're a differentiator. Their suite of services make our calibration business in some cases more affordable, and helps our customers accomplish and complete their goals. So we like the business. We just needed to have better pipeline development. It needed a different way to sell. It needed our marketing team involved. We're doing all these things. Unfortunately, the nature of that business, is you're just not going to turn it around in a quarter or two. It takes a few quarters. So we think, we're doing all the right things. The pipeline is better today, that's a fact than it was when we kind of discovered that, we needed to work on it. And I think we'll get it to be an improved business, stable and growth in time. I'm not overly concerned with it. It's still a relatively small business, but we expect that it will be, I'm going to say, back on track next fiscal year, and earlier the better.

Okay. Thanks. Then just kind of shifting over to more to some model questions, like service gross margins. The lowest was since, like third quarter of '23. And I know volume was a big impact there, but we're expecting to see a rebound in the fourth quarter, and carry forward into '26. Can you give us some kind of view, on what you would expect your service margins to be next quarter, and how we would think about that for next fiscal year?

Yes I think, Ted, as we've talked and kind of gone through models. I would expect Q4 to be kind of more in line, to be kind of flat year-over-year and then continue to grow, as we look into fiscal '26 and beyond.

And then shifting over to distribution. You did see, I know you said it was a lot, but it was a little bit of recovery from last quarter. How do we think about that '25 in - fourth quarter '25, '26. And then can you provide some kind of, I mean like, did we get the recovery out of Becnel that we expected with regards to some of the rental stuff? Maybe an update on that front?

Yes, yes. So let me take that in pieces, right. So from a margin standpoint, certainly we've talked in the past about being consistently above 30% on the distribution side, and growing from there as the mix towards rentals continues, right. I think if we, we certainly would have been there if we didn't see the slowdown in rentals that Lee referenced in - the back half of December. And then, as we look ahead that certainly that 30% threshold, is one that we feel that we should be able to achieve. And then as I said, as we see a bigger mix towards rentals, we should see some growth from there. Becnel was certainly better sequentially in Q3 versus Q2, and we expect it to be better in Q4 sequentially - than Q3.

Okay. And then, I lost my train of thought. I wanted to hit something else on when your earlier answer on the margin. I'll come back. Maybe it'll come into my head. How about just on pro forma earnings, how should we think about, you've just done a pretty large size acquisition? How should we think about, the amortization of intangible assets within your pro forma earnings, and also acquisition deal costs for fourth quarter in FY '26?

Why don't I follow-up with you on that, Ted? I don't have the numbers in front of me right now, but I know when we talked about the model after the acquisition, I think we had done that update, but I could follow-up via email.

Yes, I'm just double checking. Then shifting over to working capital. Your receivables were up, inventories were down, payables were up, the turns all followed, all that kind of stuff. Can you give us kind of a view on, kind of what's going on with some of those working capital levers, and how you see them playing out for the next few quarters?

Well, I think, we should see a move kind of consistent with the growth in revenue. We've had a, we've been focused on inventory levels all year, and I think you've seen, the improvements we've made, since the beginning of the year from an inventory standpoint, accounts receivable, part of the growth right, is just bringing on a business. And as we bring on these bigger businesses, right, we're bringing on the accounts receivable that goes along with that. So you saw that addition, coming from the Martin acquisition in December. But I think we've over time, we've seen those working capital numbers, kind of flex accordingly based on the inorganic, and organic growth that we've experienced.

Okay. That's it from me. Thank you very much.

Thanks, Ted.

[Operator Instructions] Our next question comes from Martin Yang with Oppenheimer. Please proceed with your question.

All right, thank you for taking my question. First question on distribution. Would you attribute the witnessing distribution this quarter, to the same reasoning you described for services, and how uniform are those two segments performing, based on those seasonal patterns?

What we referred to, Martin, in the earnings call script was the rental business, as part of the rental channel as part of the distribution that, was impacted the same way that the calibration services. So that is to say that, we saw a decrease in demand throughout the month, particularly on the back half, that's what we're referring to. And of course, as you have that as rentals becomes. As rentals was lowered in the quarter, that changes the mix, the overall mix to heavier. It's weighted heavier towards core distribution, which has lower margin. So it has both an impact on margin, which is significant, but also in volume. So that's the effect that you saw on distribution. And yes, so it was similar to service in the month of December, rentals that is.

Got t. And then when we look at the overall distribution on a year-over-year basis, can you tell us about the respective growth rate for rental versus non-rental?

So I think, Martin, what we've said, what we've kind of said historically and it's still, kind of plays out here, is that, we expect kind of our core distribution, to decline slowly over time. And then, we expect the rental business to grow at a similar rate to service, right. And what we've seen historically with service, like high single-digits, that's kind of the goal and that's what we've. The trajectory we've been on over the past couple years.

Got it. My next question is on, regarding your comment on what happened in December. Is there any other seasonal patterns every quarter or other certain time of year that could give you surprises like the past December?

Not really. There are certain patterns in the business. Typically volume for services, is higher in our fourth quarter, which is January through March. And typically distribution, core distribution not rentals, is a little bit stronger in our third quarter. I mean, there are some patterns that seem to repeat, Martin, year-over-year. I think what happened this year again, when you have a holiday on a Wednesday. You never know exactly how people react. It's just for whatever reason, which I don't think we saw as much in the past. So maybe it's an anomaly, maybe it's a pattern. Don't know yet. But being - having a holiday lane on a Wednesday, people shut down that week. And then things extend to 10 days, and so on and so forth. So I don't know of. We've been doing this a long time and typically there aren't patterns like that. I'm not sure this is a pattern or a one-off, but either way - caught us a little bit off guard, in terms of modeling and forecasting. So I guess that's the best way to answer.

Got it. Thank you, Lee. That's it from me.

Okay. Thanks, Martin.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to management for closing comments.

Okay. This is Lee. And thank you all for joining us on the call today. We appreciate your continued interest in Transcat. We will be attending the Oppenheimer 10th Annual Emerging Growth Conference, which is February 26. So for those of you who are attending the conference, feel free to call on us, check in on us, and maybe sign-up for a meeting time. Otherwise, you're free to contact us any time after that conference, and we'll be speaking to everybody again after our Q4 results. So thank you. Thanks again for joining us. Take care.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.