Greetings and welcome to the Transcat, Inc. First Quarter Fiscal Year 2026 Financial Results Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, John Howe, Senior Director of Financial Planning and Analysis. Thank you. John, 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 Financial Officer, Tom Barbato. We will begin the call with some prepared remarks and then we will open the call for questions. Our earnings release crossed the wire after markets 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 2. As you are aware, we may make forward-looking states 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-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider 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, John. Good morning, everyone. Thank you for joining us on the call today. I'll begin with a few key messages that highlight our first quarter performance in fiscal 2026. Our Q1 results yielded stronger-than-expected year-over-year revenue and adjusted EBITDA growth. Consolidated revenue was up 15% to $76.4 million. The growth was primarily driven by consistent demand for our calibration and rental services. Adjusted EBITDA grew 15% as both service and distribution generated digit revenue growth. Transcat's ability to deliver strong performance amidst a fair amount economic uncertainty and volatility is a testament to the strength of our diversified portfolio. In addition, regulation, along with the high cost of failure continues to drive demand for our calibration services with its associated recurring revenue streams. The team is very pleased with our strong start. And as we previously talked about, we expect performance to continue to get stronger as the fiscal 2026 year progresses. Looking a little closer at the Service segment for the first quarter, we recorded our 65th straight quarter of year-over-year service revenue growth. Martin Calibration had another strong quarter, their second quarter as part of the Transcat portfolio. Our integrated Transcat and Martin sales teams captured revenue synergies throughout the Midwest region, where we now have a strong presence with Martin's flagship calibration lab. Overall service revenue growth -- overall service revenue grew 12% and was in line with our expectations. Total organic service growth, not including Transcat Solutions, was 2%. The balance of the total service revenue growth came from our combined effort with Martin to drive year-over-year growth. We believe current new service sales activity levels are supportive of organic growth in historic range of high single digits as the year progresses. On August 5, Transcat acquired Essco Calibration. This is a deal we've…

Thanks, Lee. I'll start on Slide 5 of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for the first quarter of fiscal 2026. The First quarter consolidated revenue of $76.4 million was up 15% versus prior year as both segments grew double digits. Looking at it by segment, service revenue grew 12%. Despite economic volatility, it was in line with expectations. Turning to distribution. Revenue of $27.3 million grew 19% primarily due to the strong performance from the higher-margin rental business. Turning to Slide 6. Our consolidated gross profit for the first quarter of $25.8 million was up 14% from the prior year. Service gross profit increased 9% versus the prior year. We continue to leverage higher levels of technician productivity and our differentiated value proposition. Distribution segment gross profit of $9.6 million was up 24% and with 130 basis points of gross margin expansion to a record 35.2%, driven by the higher-margin rental mix. Turning to Slide 7. Q1 net income of $3.3 million decreased $1.1 million versus prior year, driven by higher interest expense and taxes. Diluted earnings per share came in at $0.35. We report adjusted diluted earnings per share as well to normalize for the impact of upfront and ongoing acquisition-related costs. Q1 adjusted diluted earnings per share was $0.59. Flipping to Slide 8, 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 it's 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 onetime deal-related transaction cost as well as the increased level of…

Thanks, Tom. The macro environment continues to be a challenge but our diversified portfolio of products and services, along with our ability to top-tier calibration providers that expand both our geographic footprint and capabilities have solidified our strong financial profile and differentiated Transcat from the competition. We expect to progressively improve our service organic revenue digit organic service revenue growth in the second half of fiscal 2026. Acquisitions will continue to be important to fortify our core calibration business as well as expand our addressable markets where it makes sense. . We continue to leverage continuous process improvement and automation as key drivers of future service margin expansion. Likewise, we expect distribution margins to benefit over time as our rental channel continues to be a higher percentage of the distribution revenue mix. And as always, we focus on generating sustainable, long-term value for our shareholders. Our leadership team has never been more talented and capable and we are well positioned to deliver strong results as our strategy continues to be differentiated and defendable. With that, operator, we can open the line for questions.

[Operator Instructions] Our first question comes from Greg Palm with Craig-Hallum.

Congrats on the quarter and the recent acquisition.

Thanks, Greg.

Thanks, Greg.

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 little bit more color would be great.

Greg, it's Tom. I'll just say take that distribution, we continue to see consistent demand, both on the kind of core distribution side as well as rentals. So I think it's indicative of something more than just kind of a pull-in due to tariffs. So I'll just kind of leave it at that but demand continues to be consistent for us.

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?

Yes. I mean, rentals had a really nice quarter. And that anytime we see rental growth like we saw in Q1, we're going to see margins expand. Now that being said, we shouldn't expect 35-plus percent going forward. But we should expect meaningful year-over-year growth in distribution margins as we progress through the year.

But I do think, over time, Greg and not next quarter, which is I think what Tom is alluding to. But over time, if you look forward a year or 2 or even beyond, again, as rentals continues to grow, we anticipate it will because it's strategic for us and that's where we allocate capital. As it grows, the margins are going to continue to grow. So that mix is sort of a short-term, midterm and long-term play and will continue through time. And that's why it's strategic for us.

Yes. Okay. And then I just wanted to spend a minute on Essco. I don't know if this is a fair question but maybe kind of hoping to kind of compare and contrast to Martin, just knowing it's a similar revenue, EBITDA margin profile, that's obviously -- Martin's obviously been a great acquisition, highly accretive. But what's similar? What's different? Can it be a home run like Martin has been so far?

Right. It can be and we anticipate and expect it will be. The companies are similar in terms of size, earnings, sort of dominance, if you will. I'm a little reluctant to use that word but their strength within a region. One of the differences is that -- when you look at Essco, you're looking at a high-end electronics lab. And these are very, very rare. There's only a few standard level electronic labs in the country. We happen to be one of them. They're a second one but you can count them on 1 hand. And so they've invested a lot of money in the high-end electronics, which lends itself to the highly regulated markets which we serve. . When you look at Martin, their strength is in dimensional and mechanical measurements, which is very different. And they have a strength there that definitely resonates well within medical device, for example. When you think of Minneapolis, you think of Medtronic and Boston Science, St. Jude and so they have different suites of services. Now they overlap. If there was a Venn diagram, I would say 30%, 40% overlap but their specialties are different. And so we're going to leverage that difference within the regions with which -- where they operate. And so I think they're similar but different and the difference is important to us.

We'll take our next question from Max Michaelis with Lake Street Markets.

Congrats on the quarter. I just want to start off with the Essco acquisition. How would you characterize their growth rate? I mean, would you put it into the service segment of Transcat of the high single-digit growth? Or how would you characterize that, I guess?

I think I would characterize it similar to ours. They're a very high-quality company. I've watched them grow for, I mean, many, many years fairly consistently. And you -- what ultimately drives the growth is investment in your company sales, marketing capabilities, they've done that consistently. They've done a really nice job.

And investment in people.

Investment in people. It's all part of it. And even during our discussions and negotiations, I mean, the people part was really important to them and that fit like a glove with our value proposition, the way we approach business. So yes, that all -- you need all those things together, Max, to get the growth over time and they've done a lot of really good things and they've been -- they've definitely generated consistent growth over time.

Awesome. Perfect. Again, we shift to the 2026 expectations. 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? I mean, is the other side of the -- or is the other parts of the service business going to be growing high single digits, maybe low double digits and then Trans Solutions is going to be still declining? Or how do you expect that to kind of shake out throughout the rest of the year?

Yes. It implies stabilization in part in the solutions business, which was our goal. I mean the solutions business, it's an important differentiator for us. When we go to an organic service business and we include the attributes of that channel for us, those suite of services, it makes us a better company. It makes our value proposition better. It resonates with our customers. So we're going to continue to drive that. Our goal this year was stabilization and we're making good progress towards that goal. And that's all -- that's part of the story when we think about high single digits in the back half of the year. That's a contributing factor. In addition to the activity levels we see now and the quoting levels, the win rates, it all works together. But yes, solutions is a part of it and we expect it to be stable in the back half of the year.

We'll take our next question from Martin Yang with Oppenheimer.

First, a few questions on Essco sales. Can you maybe give us more context on the timing of what helped to push the deal forward? Is it -- do they have a incentivized seller on the Board or in management? What helped you finalize the deal?

So the deal was finalized because I think the owner of the company just reached a point in his career where he had accomplished his goals and he there -- it was originally a family business and they've been running it for between 40 and 50 years. And I think we've always stayed in close contact with them, Martin. We have dinners together and we talk often and it was just a matter of time. And I think he reached a point in his career where he saw that the best benefit for his people. And again, we talked about the importance of training and development. He's very passionate about that. And he had -- he just reached a time when he just felt like going forward, he wanted to focus on other things in the back half of his life and Transcat was the one partner. He's told me this time and time again that was going to perpetuate what he created and that was going to take care of his people and develop them and make the company better. So it all worked together and it was a matter of time. So we're really pleased.

Got it. And then within Essco's business, is there any rental or distribution components? Or is it all services, calibration services?

Very, very little. It's primarily all core calibration services.

Got it. And then can you comment on maybe core distribution versus rental? 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?

We saw growth in both core distribution and rentals in the quarter. Both parts of that segment performed well. And as I mentioned earlier, in response to Greg's questions, we continue to see consistent demand on both sides of that segment as well into Q2.

But if we take a longer-term view, do you think -- is there any updated thought on core distribution? Is it a moderately declining, business is stable? Or do you see potential for that to start growing again?

No. Our view, Martin, is consistent with our past view and that is our strategy is to grow services because of recurring revenue streams driven by regulation. Rentals is also part of our core strategy to continue to grow that, allocate capital. When it comes to core distribution, what we want to do is, we want to maintain it. It's going to get less capital investment because over the long term, the returns aren't as high as we'd like them to be and the opportunity isn't as great as the other areas. But we do think it's important. It is a differentiator and we want to maintain it at its current levels. If it were over the long term to decrease a few points here and there, that's fine because that would reflect our capital allocation. That's what we would expect. It's doing really well right now but it's not going to change our view on its strategic value. It's strategic value is to support our service growth over time because that differentiates us and we're going to keep doing that. And that's where we see that business going.

Got it. Last question for me, 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?

Well, I mean, when you look at long-term organic growth rates, you're looking, #1, at capabilities, what work can we do and where can we do it? And when you think about Martin and Essco just as an example, since they're recent acquisitions, every time we make an acquisition like that, you're creating a foundation that's going to foster higher organic growth in the future because you've got more capabilities in the region and you're going to be more competitive. So that's a factor. Our ongoing investment in process improvement, the capabilities, improving turnaround time, so that they're the industry best, that's also going to improve organic growth rates and it's going to improve customer satisfaction and retention, which is also a major component of organic growth rates. Solutions is just one of those elements that on certain accounts and certain opportunities that's going to give us a competitive advantage. On other accounts, it's not going to be a factor. So it's just one of the many things we do over time to make us just a little better, marginally in some places, significantly in others and it's all part of it. So at the end of the day, it's going to be capabilities, geography, service levels, retention and the uniqueness of our value proposition. I think they all work together. And our goal is to continue to get better in as many or each of those elements as we can over time.

And I think our confidence kind of somewhat dependent on kind of the macro kind of uncertainty and the trend that we're seeing on the front continuing and further erosion of it, right?

I mean difficult macro environments, you may see organic growth in the mid-single digits or the low single digits. But over time, if you go back over like the last 5 years, I think we're close to 8%. That's what we would expect as things normalize. But you're always going to have the ebbs and flows of the economy but it's still a really nice business model almost regardless.

Our next question comes from Ted Jackson with Northland Securities.

Congratulations on the fabulous results.

Thanks, Ted.

Thank you.

So my first question to you guys. So the outperformance on rental distribution, I think I know the answer to this from the previous questions in your -- and how you responded to them. But 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.

Growth in rentals should not be viewed as an anomaly. I mean it's part of our strategic plan to grow our rental business. Core distribution had a great quarter. And of course, we like that. But if core distribution kind of over time becomes sort of moderated by the fact that it's not strategic for us in the same way the rentals and services, you would expect that to be -- it may continue to have a terrific year, it may continue just to moderate and have an average year. But again, we allocate capital towards where we get the highest returns and that's going to be rentals and service. And so we would expect both those to grow. That's not an anomaly [indiscernible] rental that growth we have.

We have to say, you grew at almost 20%, which is way above kind of the norm. So it sounds like just making sure that I'm listening to you and understanding your answer. Secondly, 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. Is that a good way to think about it? Point B [indiscernible]

That is right. You know what I'm saying like...

Yes. That is correct.

And would there be a case then given the acquisitions that as we get to the back half of this year, your reported growth rate should be well into double digits with 2 really large acquisitions. I mean, I'm talking the services here really like, you [indiscernible]

That's correct.

You really got for some very, very good top line growth.

Correct. Correct.

Okay. And then my last question is, as we look at this fabulous new acquisition that you've done, 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...

That's correct. I mean, all 3 assumptions are -- yes, well all 3 assumptions are correct and on point. It will follow the same cycles as our business. And yes, I agree with what you said across the board.

So. And actually, just again, I have one more question. One more -- it's a little more fun. And so 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? That's my last question.

Look, I'll be very clear. Any and all onshoring of manufacturing in the United States is good for Transcat. Period. And the second part of your question is, are we hearing -- are we seeing signs or hearing any dialogue around that happening currently? And the answer is also yes. And we've got several companies that were -- we do a lot of business with the United States and we are definitely hearing we're going to be opening x amount of facilities over the next 5 years. And I mean, I can count several just off the top of my head. Now between that and them actually being up and running and creating opportunities for us on -- for our business, that's going to take time, that, as you know. But we are thinking about it. It is a good thing for us. It's going to help our business long term and we're excited about it. But I don't want to get too excited because we're not talking about tailwinds in this year. I mean it could start next year and the year after. But it's something that we absolutely are keeping an eye on and it's absolutely an opportunity for Transcat.

Our next question comes from Scott Buck with H.C. Wainwright.

Lee, I'm curious, 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?.

Okay. As far as overlap, they are about 5x larger-ish than our facility and our revenue streams in that area. So we do run a Boston facility. And as far as capabilities go, we overlap in capabilities a lot. But we're doing about 1/5 the business that they're doing. I think we bring those operations together sooner rather than later. We leverage our strengths with their strengths and we'll be better together. So that -- that's what I would say. As far as the region itself, together, we're going to be very competitive. It's hard for me to even visualize why we wouldn't continue to grow and win where and when we want to. So I don't want to be overconfident but we're in that position. And so -- and then you want to expand. I mean, when I look at Essco, they are very strong. But what they don't have that we have is capital. And so we're a public company and we know how to allocate capital. So if we can leverage their strengths, their expertise, their standards lab and feed them with capital so that we can capitalize on the opportunities we have together, that's what's going to be unique. And as good and as strong as they are, they're still a small privately held company and now they join forces with us. And together, I think I like the prospects. So that's what we're excited about.

Great. That's helpful. And then I'm curious, 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?

Well, it's difficult to come up with market share because there's just not a lot of good public information, Scott, around that. But -- so I guess it's -- to a certain degree we don't know. Now there's a lot of in-house [indiscernible]. As far as opportunities for growth, about 1/3 of the market roughly are in-house calibration labs. And for those kind of labs, we do their overflow work. We do their standards work and we supplement their labor during certain times. But there's always an opportunity with every one of those labs to outsource them. We call them CBLs, client-based labs. So we're going to continue to go after that market. Our value proposition around that market is very strong. I don't -- I can't think of a single competitor that has a strength around outsourcing in-house labs, like we do. So we're going to continue. There's big opportunity there over time. You've got the OEM business, right? You've got original equipment manufacturers, the Keysights, the Agilents, the Tektronix, you've got these companies, Rohde & Schwartz and they can do their own [indiscernible] of their products. But if you go into an average plant and there's 1,000 or 10,000 instruments and you're -- and they're managing 100 vendors, Transcat can come in and do it all. So our value proposition is very strong in terms of competing against individual OEMs within a plant. And then you got the third-party market, which is where we are, where Essco was, where Martin is. And that's still a very big market. Obviously, our market share is increasing as we make these big acquisitions. But we've got a pretty good runway ahead of us and we're going to make sure we do the best we can.

That concludes our question-and-answer session. I would now like to turn it back over to Lee Rudow for closing remarks.

Okay. Well, thank you all for joining us on the call today. Relative to IR, we're going to be busy. On August 12, we'll be attending the Oppenheimer Technology Conference and participating in a fireside chat format Q&A. On September 18, we'll be attending the D.A. Davidson Conference in Nashville. That's new for us. On November 17, we'll be attending the Raymond James conference in Sonoma, California, it's also new for us. And for any of you who are attending any of these conferences, feel free to check in on us or really reach out to us any time. Tom and I make ourselves available. We appreciate everybody's interest in Transcat and joining us on the call today. Take care.

Thank you. And this does conclude today's program. We thank you for your participation and you may disconnect at any time.