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, 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 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 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 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 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 significant revenue growth. Transcat's ability to deliver strong performance amidst a fair amount of 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 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 the historic range of high single digits as the year progresses. On August 5, Transcat acquired Essco Calibration. This is a deal we've worked on for over 10 years and, very similar to Martin, represents Transcat's ability to acquire the best of the best within the fragmented calibration services market. Essco is the premier provider of specialized high-end electronic calibrations. While they primarily service New England's large concentration of highly regulated life science and aerospace and defense manufacturers, they service various other pockets of work throughout the country as one of the very few primary electronics calibration standards labs. Essco is second to none in terms of the quality of their operation. They have consistently invested in state-of-the-art calibration capabilities to support both the aerospace and defense and life science industries. Their technical expertise and dedication to customer service is among the best we've ever seen. And now they are a Transcat company. Believe me when I say, they are difficult to compete with, and we're excited to join our talented teams together. They are a perfect fit for Transcat. Integration will be swift, and we expect to achieve both sales and cost synergies as we integrate and leverage our combined forces. Turning to distribution. The heart of our distribution strategy is to be a strong differentiator by generating leads to foster consistent organic service growth. The unique combination of products, rentals, and services continues to amplify the overall Transcat brand. Our first quarter distribution results, driven by our unique suite of rental services, were outstanding. Distribution revenue grew 19% in the quarter and totaled $27.3 million. Distribution gross profits grew 24% as gross margins expanded 130 basis points to 35.2%. The margin growth reflected the continued positive change in mix towards the high-margin rentals within the Distribution segment. Our balance sheet remains strong. We recently closed a 5-year credit facility that nearly doubles Transcat's capital resources and provides ample capacity to execute our proven acquisition and growth strategies. Overall, Transcat's first quarter results were strong despite the economic volatility. We are pleased to be off to a fast start in fiscal 2026. And with that, I'll turn things over to Tom for a more detailed look at the first quarter financial performance.

Thanks, Lee. I'll start on Slide 5 of the earnings deck, which provides detail about 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% 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 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. First quarter consolidated adjusted EBITDA of $11.8 million increased 15% from the same quarter in the prior year, with 10 basis points of margin expansion. Distribution EBITDA increased 49% driven by growth in rentals. 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 9. Operating cash flow was lower versus prior year related to the timing of certain working capital items. Q1 capital expenditures were $900,000 higher than prior year and continue to be centered around Service segment capabilities, rental pool assets, technology, and future growth projects. The spend was in line with expectations. Slide 10 highlights our strong balance sheet. At the end of the quarter, we had total net debt of $32.5 million, with a leverage ratio of 0.82x. Just after quarter end, we closed a new 5-year syndicated secured credit facility led by M&T Bank and includes additional lenders, Wells Fargo and Bank of America. This facility with America's top lenders nearly doubles our access to available capital and provides significant financial flexibility. Our existing revolver and term debt were paid off as part of this transaction. Lastly, we filed our 10-Q yesterday after the market closed. With that, I'll turn it back to you, Lee.

Thanks, Tom. The macro environment continues to be a challenge, but our diversified portfolio of products and services, along with our ability to partner with 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 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.

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 two-part question. How much of that was related to pull-in revenue getting ahead of any tariff-related impacts and what visibility levels are you seeing so far in fiscal Q2? A little more detail would be appreciated.

Greg, it's Tom. I'll just say 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 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. 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 two or even beyond, again, as rentals continue 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.

I wanted to discuss Essco for a moment. I'm not sure if this is the right question, but I was hoping to compare it to Martin, considering they have similar revenue and EBITDA margin profiles. Martin has been a fantastic acquisition and very beneficial for us. I'm curious about the similarities and differences between them. Can Essco turn out to be as successful as 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 one 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 Scientific, St. Jude, and 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 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 as 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 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 make 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, could you provide more context regarding the timing that helped move the Essco deal forward? Is there an incentivized seller on the Board or in management? What facilitated the finalization of 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 just reached a time when he 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 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 declining 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, 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 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. Its 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 is the stabilization of Transcat Solutions in that equation? And what are the other factors that give you the confidence?

Well, I mean, when you look at long-term organic growth rates, you're looking, number one, 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 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 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 is somewhat dependent on the macro uncertainty and the trend that we're seeing on the front continuing and further erosion of it, right?

I mean in 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 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.

My first question is about the outperformance in rental distribution. I believe I understand your previous answers, but should we consider the first quarter as the baseline? It seems that rental distribution should continue to grow from that point rather than reverting to the trend line in the third quarter and then moving forward 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 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.

You experienced nearly 20% growth, which is significantly higher than average. To clarify, regarding growth and a potential return to single-digit rates, there will be a period of improved comparables as you move past the challenges faced with NEXA. When considering organic growth, excluding acquisitions, it seems reasonable to expect that your growth rate will improve throughout the year as the negative impact from NEXA decreases. Is that an accurate way to understand it?

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

Yes. That is correct.

Given the acquisitions, as we move into the latter half of this year, should we expect your reported growth rate to reach double digits with these two significant acquisitions? I'm specifically referring to the services aspect.

That's correct.

Okay. And then my last question is, as we consider this fantastic new acquisition, will it follow a similar seasonal pattern as your services business when we think about incorporating that revenue into our models, particularly when we discuss it being approximately $2 million and adding it in on a pro rata basis?

That's correct. I mean, all three assumptions are — yes, well all three 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.

I have one more question, which is a bit more lighthearted. With all the attention surrounding Trump, changes in government policies, and the push for bringing manufacturing back, there is significant focus on reshoring life sciences, particularly pharmaceuticals. Are you noticing any activity that is encouraging your customers to expand operations in the U.S.? Would this trend benefit Transcat in the long term, particularly if more pharmaceuticals are produced domestically? Is that accurate, and are there any other related developments you've observed? 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 in the United States and we are definitely hearing we're going to be opening x amount of facilities over the next five 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. 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 5 times larger 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 one-fifth 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'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 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?

It's challenging to determine market share due to the lack of reliable public information. To some extent, we are unsure. A significant portion of the market consists of in-house calibration labs, which makes up about one-third. For those labs, we provide overflow work, standards work, and labor support during peak times. There’s always potential for outsourcing opportunities with these labs, which we refer to as client-based labs. We will continue to pursue this market since our value proposition is very strong. I can’t think of any competitor with our level of strength in outsourcing in-house labs. There’s considerable opportunity to be had over time. Additionally, concerning original equipment manufacturers like Keysight, Agilent, and Tektronix, they handle their own product calibration. However, in a typical plant that contains thousands of instruments and involves multiple vendors, Transcat can manage everything comprehensively. Our competitive edge is robust against individual OEMs within these plants. Lastly, there’s the third-party market where we operate, including companies like Essco and Martin, which is also substantial. Our market share is growing with recent acquisitions, and we have a solid prospect for continued growth. We will strive to maximize our potential moving forward.

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 anytime. 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.