Transcat Q1 2024 Earnings Call Transcript

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Provided by Quartr
August 1, 2023

There are 5 speakers on the call.

Operator

Greetings, and welcome to the Transcat First Quarter Fiscal Year 20 24 Financial Results. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tom Barbato, CFO.

Operator

Please sir, you may begin.

Speaker 1

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, Mark Doughini. We will begin the call with some prepared remarks and then we'll open up the call for questions. Our earnings release crossed the wire after markets closed yesterday.

Speaker 1

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 and 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.

Speaker 1

You can find those on our website where we regularly post information about the company as well as on the SEC's website atsec.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 information 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.

Speaker 1

With that, I'll turn the call over to Lee.

Speaker 2

Thank you, Tom. Good morning, everyone. Thank you for joining us on the call today. I'd like to start with Transcat's overall performance in the Q1 of fiscal 2024. We delivered better than expected revenue, margins and earnings across our entire business portfolio.

Speaker 2

Consolidated revenue was up 11% to $61,000,000 driven by strong demand from our unique suite of diverse complementary services, including calibration, pipettes, instrument rentals And next is cost control and compliance services. Consolidated gross margin expanded 160 basis points The 30.9% was driven by margin expansion in both our Service and Distribution segments. Adjusted EBITDA, a key metric for us given our successful acquisition strategy, grew 16% to $8,500,000 and expanded 60 basis points over prior year. Turning to our service segment. 1st quarter service revenue totaled $40,000,000 up 18% from prior year.

Speaker 2

Organic growth was up 11% as we continue to benefit from recurring revenue streams in highly regulated markets, our unique and differentiated value proposition and growth synergies between our combined business channels. The service growth in the Q1 represents our 57th consecutive quarter of year over year growth, that's every quarter year over year for a little over 14 years. We also reported service gross margin of 32.5%, which represents a 50 basis point increase over prior year. The margin expansion, which exceeded our expectations, was a result of double digit organic growth combined with increased productivity in our lab operations. Lab operations continue to drive automation and continuous process improvement throughout our traditional and client based lab network.

Speaker 2

Moving to distribution. 1st quarter gross margins expanded 270 basis points from prior year, driven in part by 15% growth in the high margin rental business. We continue to see strong demand for our rental offering, which is an important differentiator as it enhances Transcat's ability to offer solutions to challenges our customers face. Our distribution segment, including our rental channel, continues to foster organic service growth by generating a significant number of leads and strengthening our overall value proposition. Looking at the entire business portfolio over the Q1 of fiscal 2024, We benefited from our differentiated value proposition that is resonating throughout our expanded addressable markets.

Speaker 2

We also demonstrated the inherent operating leverage in our service business as we generated strong incremental gross margins from our double digit organic service growth. The Nexa business continues to see good growth, benefiting from synergies with Transcat's core calibration business. And the pipeline of synergistic opportunities is compounding at an impressive rate. While the traditional calibration service market continues to be fragmented, we're seeing similar market attributes in the spaces where Nexa competes. Early in July, we were able to capitalize on the opportunity to acquire Cerequal, who specializes in instrument commissioning, qualifications and validation services to pharmaceutical, medical device and diagnostic manufacturers.

Speaker 2

Cerequal also provides process engineering, quality assurance and project management to recent clients like Thermo Fisher, Pfizer, Monza, Charles River Labs and others. We view the acquisition of Cerequal as another important differentiator as Nexa delivers their single source solution platform, which complements Transcat's calibration services. At the start of the Q1, we also acquired the bolt on acquisition of St. Louis based TIC Metrology Services. The newly acquired calibration operation will be integrated with our current lab in St.

Speaker 2

Louis within the next year, and we anticipate The operation will support solid revenue growth and the realization of various cost synergies as we consolidate the labs into 1. Overall, our balance sheet remains strong and our current leverage ratio is 1.5 times. We've done an excellent job managing our working capital. In the Q1, we generated $7,500,000 of free cash flow. Over the course of fiscal 2024, we expect to continue to deploy capital to margin and revenue enhancing initiatives, along with the execution of our ongoing acquisition and integration strategy.

Speaker 2

With that, I'll turn things over to Tom for a more detailed look at the financials for the Q1.

Speaker 1

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 Q1 of fiscal 2024. 1st quarter consolidated revenue of $60,600,000 was up 11% versus the prior year on service segment Strength and solid revenue performance in our distribution business. Looking at it by segment, service revenue growth remained very strong at 18% with 11% of the growth coming organically and the other 7% from acquisition. As Lee mentioned, demand in our service business remained strong in the quarter.

Speaker 1

Turning to distribution. Revenue of $20,700,000 was consistent with prior year. Within the distribution segment, we continue to see excellent performance the high margin rental business. Turning to Slide 5, our consolidated gross profit for the Q1 of 18,700,000 was up 17% from the prior year and our gross margin expanded 160 basis points to 30.9% in the 1st quarter. Service gross margin expanded 50 basis points.

Speaker 1

The service margin increase further demonstrated our ability to leverage Tire levels of technician productivity and our differentiated value proposition, which continues to drive high levels of demand. Distribution segment gross margin of 27.7 percent was up 270 basis points driven by strong performance in the previously mentioned rental business. Turning to slide 6. Q1 net income of $2,900,000 decreased 4% from prior year and our diluted earnings per share came in at $0.38 Net income was negatively impacted by a shift in stock based tax benefits from Q1 of last year to Q2 of this year as well as higher interest expense. The combined year over year impact of these two items was $0.11 per share.

Speaker 1

We report adjusted diluted earnings per share as well to normalize for the impacts of upfront and ongoing acquisition related costs. Q1 adjusted diluted earnings per share was $0.52 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 it is 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 deal related transaction costs as well as the increased levels of non cash expenses that will hit our income statement from acquisition purchase accounting. With that in mind, 1st quarter consolidated adjusted EBITDA of $8,500,000 was up 16% from the same quarter in the prior year and adjusted EBITDA margin expanded 60 basis points.

Speaker 1

Both segments had adjusted EBITDA growth compared to last year. 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 was $7,500,000 in the Q1, which was up significantly year over year. Q1 capital expenditures were $400,000 higher than prior year and continue to be centered around service segment capabilities, Technology, including automation and future growth projects. At quarter end, we had a total net debt of $46,200,000 with a leverage ratio of 1.5x.

Speaker 1

We had $37,500,000 available from our credit facility. As previously announced, we acquired Steraqual for $4,250,000 just after the end of the Q1, paid 100% of the company's stock. Lastly, we expect to file our Form 10 Q on August 2 after the market closes. With that, I'll turn it back to you Lee. Okay.

Speaker 1

Thanks, Tom.

Speaker 2

I'll wrap things up by pointing out that Transcat has continued our track record of consistent performance Over many, many years and over various economic cycles, we generated profitable growth and what has proven to be a very resilient business model. And perhaps most important, we've assembled a very skilled leadership team, which we believe is the ultimate competitive advantage. As we look forward, we expect to deliver strong performance throughout the balance of fiscal 2024. We expect organic service growth in the high single digit to low double digit range and the gross margins will continue to increase over time. We'll continue to Our acquisition strategy to add capabilities and expertise, expand our geographic footprint into important regional markets and to bolt on opportunities that leverage our current lab infrastructure.

Speaker 2

From both an organic and acquisitive perspective, our focus will remain on our diverse strategic channels, including calibration, by bets, instrument rentals and NexSys suite of cost control and appliance services. As in the past, We will leverage the highly regulated markets where the cost of failure is high and our unique value proposition resonates the most. Our go to market strategy remains the same that is to demonstrate to our demanding regulated customer base that Transcat can be trusted As their risk mitigating service partner, we do this by leveraging our core competencies, which allows them to focus on theirs. In other words, We win together. As we work our way through the Q2 of fiscal 2024, Our acquisition pipeline remains strong and our initiatives designed to drive organic service growth and margin improvement continue to gain traction.

Speaker 2

Effective allocation of capital has always been a hallmark of Transcat and is the heart of our growth strategy. We expect our balance sheet to remain strong and supportive as we drive sustainable long term shareholder value. We like the trajectory of our business and the leadership team calling shots In many ways, as we discussed internally amongst our leadership team, we feel like we're just getting started. And with that, operator, please open the line for questions.

Operator

Thank you. We will now be conducting a question and And our first question comes from Greg Palm with Craig Hallum Capital Group. Please go ahead.

Speaker 3

Awesome. Thanks. Congrats on the great results everyone.

Speaker 2

Thanks, Craig.

Speaker 3

I want to just maybe start with the quarter. It wasn't that long ago, what, a couple of months ago since you gave an update, You nicely exceeded expectations, but more surprisingly, you raised the outlook for the full year, So at least on the service side for organic growth. So I'm just curious, did you see an uptick In June specifically or what are you seeing in July that makes you confident that 1 quarter out of the gates you raised the outlook for the year?

Speaker 2

Okay. Yes, Greg. Greg, I appreciate where that question is coming from. We talk a lot about it internally, as you can imagine. It's really Quite simple.

Speaker 2

We've had 3 consecutive quarters of double digit growth. We like the pulse going into 2nd quarter At least we're almost halfway through Q2. When we just look at our pipelines and look at the business activity in general, we think The pulse supports being in the range that we stated. So not a major change, more of a subtle one, but I think appropriately timed.

Speaker 3

Yes, makes sense. Any specific end markets or areas that are maybe outperforming relative to What your expectations were a couple of months ago?

Speaker 2

I wouldn't point to anything specific other than to say We like the way some of the synergies are working between Nexa and Transcat. I think These two businesses continue to complement one another. And by complement, I'm referring to the business activity levels that are on the increase As a result of working together versus working separately or in before the acquisition. So I think that's gaining some traction and momentum Probably it's much or more than anything.

Speaker 3

Okay. And then just shifting gears to distribution, What really caught us surprised in a positive way was the gross margin there. And I guess it's Somewhat a byproduct of strength in rentals. So any way you can give us a sense of what rentals growth was? And Maybe ballpark where rentals is in terms of mix as a part of distribution overall?

Speaker 1

Yeah, Greg, it's Tom. I'll take that one. I would just I would characterize the rental growth as stronger than It's at a higher level than what we're seeing on the service side for the rental standard home business. And It continues to perform well with as we've kind of said in the past, the margins are Significantly favorable to the overall distribution business. So I'll also point out that We have been able to continue to do some kind of advanced buys, which continue to benefit the margins overall in the Distribution side as well.

Speaker 1

So it's not only the rentals, but we see that kind of moderating as we get into the second half of the year as well.

Speaker 3

Okay. But just to be clear, I mean that margin in distribution specifically was, I don't know if it was a record, but certainly one of the best That we've seen since we've been tracking the company. I'm assuming that's not sort of a normalized rate going forward, But maybe you can help us figure out what the normalized run rate is just given rentals is a bigger part of the mix. We used to think of it as kind of a low to mid-20s, but obviously you had a good year in fiscal 2023 and really an outsized result here in fiscal

Speaker 2

I was going to say one thing real quick. What you're seeing on the margin side is intentional from our We've done a lot of focus on allocating dollars to where we'd like to see the mix Where we'd like to see the growth mix come from. And so as long as we continue to invest in the higher margin mix Over time and it becomes concentrated more over time, we may see this business pick up from more of the low margins, Low 20s to the high 20s over time. And I think we're seeing some of that transpire as we speak in this past quarter, but I don't think it's an anomaly. I think as the mix changes by design and we allocate capital towards higher margin channels, you're going to see that continue to increase.

Speaker 2

I mean, do you see it

Speaker 1

any differently? No. And I think the other thing I'll just add is that we're making a conscious decision to kind of shed some of the lower end Margin business, the traditional distribution business as well. And the growth in rentals is kind of giving us the opportunity to kind of step away from some of that less We're in

Speaker 2

a nice position to do that now, Greg, versus a couple of years ago.

Speaker 3

Yes, understood. All right. Well, congrats again. Best of luck. Thanks.

Speaker 4

Take care.

Operator

Our next question comes from Gary Sweeney with Brooks Capital Partners LLC. Please go ahead.

Speaker 4

Hey, good morning, Lee and Tom. Thanks for taking my call.

Speaker 2

Hey, good morning.

Speaker 4

I wanted to spend just a little bit of time on Nexa. And strategy isn't the right word, but maybe I want to see if you could talk a little bit more about the opportunity behind Nexa and sort of that entire market. I'm not sure Market size, opportunity, acquisitions,

Speaker 3

it's been

Speaker 4

a great purchase for you. Obviously, you're following it up with It's a terrible call, but just wanted to get a better feel for what really lies out there on that side of the business.

Speaker 2

Right. Well, first, I mean, just to take one small step back to describe the different models. On the traditional Transcat side, we do calibration services. On the NexSys side, they don't perform calibration services at all. But they do everything around that, around the calibration process.

Speaker 2

They're in the calibration ecosystem. And we use the words cost control and compliance because Most of their work is done in large life science companies where they're doing CMMS work, where the data is being consolidated from one to a next where they're looking at ways to be more efficient to lower their costs over time through anything from Efficiencies of usage of the instruments, uptime, reliability, could be interval adjustments involved. So they essentially Improved calibration programs, we do the calibration work. And so you can see the natural complementary nature between the 2. We can bring them into Our clients, which we have over 30,000, when we see an opportunity to where cost is a factor, efficiency is a factor, They can bring us into opportunities when they see a problem at one of their clients because the calibration vendor isn't performing Effectively.

Speaker 2

So that's just a natural good fit. And when we go together and sit at the same table and this is probably the biggest point, Jerry, And we're sort of pitching our value prop to a customer together. It is really effective. It's difficult to compete against us when all the stars align in that way. And that's where we're seeing the growth both from an organic Transcat perspective and also from a Nexa perspective, it's just kind of working well.

Speaker 2

We think it's going to continue.

Speaker 4

And certainly get that. And I apologize, maybe it wasn't a But curious to how big of a market maybe that cost control and outsourcing efficiency market that is Nexa, How big is that opportunity?

Speaker 2

That's something we're working on to try to come up with a range that would Be meaningful to our shareholders. I'm not going to give you that size of the market other than today, other than say it's significantly larger than just Calibration, the calibration world is a $1,500,000,000 to $2,000,000,000 market in North America. It's going to be significantly larger than that because their business is driven well, in a sense, now that SteriQual, Insikyo is part of The next value prop, you get commissioning, you get start ups in plants and so on and so forth and so as capital A capital spend to build facilities around the country and there are certain estimates about life science capital spend that we take a close look at. But while that market is getting bigger and bigger for us as we expand the services within that ecosystem. So we'll try to work on a figure, but I will say It's significantly it could be 10x larger in that range from the traditional calibration business.

Speaker 2

So they'll help us gain share and then we'll gain share inherently by the nature of their business and the channels that they serve.

Speaker 4

So suffice to say, it dramatically And your addressable market and while you're pretty small Mason in that market, a lot of runway, lots of synergies and Strengthens both sides of the house.

Speaker 2

Yes, we think so. And then we're doing business in Ireland as well. But the nature of their business is, It's not that difficult on their side of the equation to scale their business even beyond Ireland. We've done some work, I think we said last quarter Belgium and Germany, because You have the same customer as another facility in Europe in a different country. It's not a big leap to service them to do an on-site visit, go back to Ireland, do 80% of the work Behind the computer, so to speak, and periodic visits.

Speaker 2

So it's unlike calibration, which we will scale and have scaled, it's a little bit easier as you cross border. So that's another Attribute to the business that we like.

Speaker 4

Got it. And how is the market fragmented or Similar to what the calibration market is, I mean calibration there's a couple of larger players than a bunch of small players, but how does the market look from that perspective?

Speaker 2

Well, we're learning more and more about the market as each quarter goes by. But my the answer to that question is we think so. And Part of the script in this particular release was to say that we're discovering as we do our development work on the acquisition side that it is fragmented. It may be equal to or even more fragmented than the calibration business. So it lends itself to those acquisition and integration opportunities that We see the traditional Transcat.

Speaker 2

We like that and that's why we mentioned it in the earnings script.

Speaker 4

Got it. One last question. And I think this is all positive. This is why I'm What and maybe I should know this, but what does the margin profile look like? I suppose you actually talked about It's easier to leverage.

Speaker 4

So there it sounds like there are some either margin components or

Speaker 1

at least

Speaker 4

leverage opportunities on the Nexa side.

Speaker 1

Yes. I mean, Jerry, it's Tom. I mean, what we've said in the past, right, is that The gross margins for Nexa are generally higher than they are for the overall services business and we'll just we'll kind of leave it at that.

Speaker 4

Okay. Got it. Okay. Thanks a lot. Appreciate it.

Speaker 2

You're welcome.

Speaker 4

You're welcome, Jay.

Operator

Our next question comes from Pat Jackson with Northland Securities. Please go ahead.

Speaker 2

Good morning, guys. Congrats on the quarter.

Speaker 4

Good morning, Dan.

Speaker 2

Just I'm going to kind of keep it to 2 questions and let things go forward. One is, I want to talk a little bit about the customer base labs. In the first half of the or I mean, I guess, calendar year, we know there was some discussion about So the impact with margin with regards to some of that new stuff coming online. So I'm curious what we could expect to see with regards to kind of an operating margin in the back half of this Calendar year as we roll through and that moves behind and then tied into that is what the pipeline looks like with regards to new opportunities there? And then I've got a follow-up.

Speaker 2

Okay. Yes, I get it. So yes, CBLs, we have 1 handful of CBLs early in the year Or at the latter stages of last year. And as is typical when you land a CPL, The first couple of quarters tend to have a bit of a drag on service gross margins just for reasons that make a lot of sense. Your New staff, the lay of the land, learning the processes of the lab that you're operating.

Speaker 2

So There is definitely a couple of quarters where you're not at peak efficiency. That tends to correct itself routinely over time. And I think When you look at some of the margin expansion in the Q1 that we didn't necessarily anticipate coming out of Q4, some of it, I can't put a number on it. I don't think any of you guys here can, but some of it definitely is a byproduct of getting up and running in the CBLs over a quarter or 2 since they started. There's always going

Speaker 3

to be that

Speaker 2

factor and we know how to overcome it in a relatively short period of time, but it's the margin drag does exist At the outset. So yes, we've made some progress there. As far as the pipeline, which is the second part of your question, the pipeline is pretty solid. It's as solid as it's ever been. And I think from a CDL perspective, from a client base lab perspective, I think that continues To be a product of the difficulty the market has finding technicians.

Speaker 2

And so even our customers that would normally run an in house lab, When they struggle to find technicians, it's not like we don't struggle, but they struggle in a different way. They don't have a technician school, Transcat University that we set up. They don't have the networks that we have. And quite frankly, there's no way in the world when they hire 3 technicians a year and we hire 100 100 technicians a year that they're going to be as proficient at it. So we've got the techs, we've got the backup, we can move people around like we always have.

Speaker 2

And that adds a lot of value to these client based labs who could at any given time be struggling. And so I think that's Those types of labor tight environments is always going to be a good thing for us growing our CDL business, Client based lab business and that's playing out this year as well. Great. Let me move on to my next, which is going around Nexa So kind of the M and A pipeline. I mean, the last time we spoke, I mean, it was clear that the pipeline for Opportunities with M and A was robust and there was a fair amount of discussion around opportunities within M and A on Accentuating, adding to the Nexa portfolio and then low and behold you made your first acquisition on that front.

Speaker 2

What's the pipeline look like in general? How does it look like with regards to the consulting services? When you look into that kind of area on the consulting side, which I'm little bit more interested in. I mean, where do you see the opportunities? And then like kind of where do you feel like would be Like the areas within kind of your NEXA business that you'd want to bolster?

Speaker 2

Well, I think We look at some of our growth strategic growth opportunities across calibration. We'd say this for PipeX rentals. We'd say for NEX as well. And we're always looking for Acquisition opportunities that meet our sort of stringent criteria. We're very disciplined.

Speaker 2

So you'll have Track record like we do in terms of success versus lack of success unless you're very disciplined at the outset and upfront. We remain Disciplined in that way. We've got a great process and a great team that does this sort of work. So just having said that, sort of as a foundational comment, we are looking At the nexus space that cost control and compliance services space because we think it is a good fit. Stericol is an example of that.

Speaker 2

I feel pretty comfortable saying Stericol won't be the last acquisition we ever make on ANNEXA. Although, the Transcat way is, Let's walk before we run and let me prove this out. Let's make sure that it fits as well as we think it's going to fit and that their leadership team Can integrate this as well as we plan on integrating it. I like to see things proven. And so I get the question.

Speaker 2

Yes, there will be more acquisitions Likely in this space. We would expect that. But we're not going to rush it until the opportunity hits us that we think fits And that our leadership team has proven that on that side of the equation, they could do well with acquisitions. I have every reason to believe and every confidence that they will, It's just the Transcat way to prove it before we jump in too far. So I kind of want to make that comment.

Speaker 2

But again, it's the same way with all of our acquisitions. Our pipeline is diverse, Because we want to be able to support all these areas and it just made sense. CerroQuote is the next one up that fit and There will be others in time. Thanks. Can I just sneak in one quick last one, which is around the distribution side of the business?

Speaker 2

And You clearly are seeing some really big growth in the rental side of the equation there. Probably as you mentioned answering the prior question On the equipment actual sales side, you're exiting some of the lower end stuff where there's low margins, a lot of competition and stuff. No, nothing is secret there. But how should we think of that in kind of an aggregate going forward? In the past, we've kind of always viewed it as, call it, a GDP growth Line item kind of but I mean as you're kind of sort of retooling that business and kind of walking away From things that you should walk away from, things where there's really not much of a profit margin in it, Medusa that was the squeeze.

Speaker 2

Does that Change that calculus in terms of how we should think about the longer term growth for distribution? I would I'm not sure I would characterize it exactly The way you did in that we're not directly exiting the distribution business. I think it's more No, no, no. I totally get it. Totally get it.

Speaker 2

I'm thinking more in line with allocation of future incremental capital. As we have Capital spending, we look at both at the service business over here with recurring revenue streams and driven by regulation. We've got the next business with cost control and how that plays between Some of our other channels, we've got rentals, which is kind of like a bridge to everything. When we look at how we allocate capital, it's just that Core distribution allocation is decreasing as a percentage on a go forward basis. And by the way, it has for the last 5 years.

Speaker 2

We've had investors over time that said, can you double the size of your distribution business? Can you make it $150,000,000 And we said, well, we could, but we won't because that's not our strategy. And so, as we go forward, think about we like the rentals mix more than the old line distribution mix Because the margins are better and

Speaker 4

it has more of a

Speaker 2

recurring nature to it by customer. And so We've incrementally spent more dollars and that's been for the last 3, 4, 5 years running. That's how we got these margins. That's why they're sustainable. This is not an overnight thing.

Speaker 2

This is It's evolved over the last half a decade and continues to pick up momentum. That's how I characterize it. So if we continue, if you kind of draw the line out, It continues that pattern of allocation, you're going to see similar growth results, I think, in that margin over time and that profile over time. Tom, would you describe that way or Mark or

Speaker 1

Yes. I mean, I think ultimately, Ted started with the question of Is the GDP like growth rate, which we should expect going forward? And I would just say yes. And again, there's we expect to continue To perform well here, the only caution I would say is that we have been getting some benefit from these Advanced Fives that we've been doing. And I think that's the piece of it that will kind of moderate as we get into the second half of the year and Kind of changed the trajectory on the margins a little bit, but still I think we're talking about a mid-20s kind of margin business versus A low 20s margin business that we had 3 or 4

Speaker 2

years ago. It's more sustainable. It's more sustainable. Okay. Yes.

Speaker 2

And Tom, I did catch that comment with regards to the advanced buys. So, but thanks for reiterating. And again, congrats on the quarter.

Speaker 1

Thank you.

Operator

There are no further questions at this time. I would like to turn the floor back over to Lee Rudolf for closing comments. Please go ahead.

Speaker 2

Well, thank you all for joining us on the call today. We certainly Appreciate your continued interest in Transcat. We will be participating at the Oppenheimer Conference, which is on the 26th Excuse me, which is the 26th Annual Tech Conference for them on August 9th. We'll be participating. Feel free to call on us there or join us.

Speaker 2

If not, feel free to check-in with us at any time. We look forward to speak with everybody again at the end of next quarter. So again, thanks for participating.

Operator

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation and have a good day.

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Key Takeaways

  • Transcat delivered better-than-expected Q1 results with consolidated revenue up 11% to $60.6 million and service revenue rising 18% (11% organically), marking the 57th consecutive quarter of year-over-year service growth.
  • Consolidated gross margin expanded 160 bps to 30.9%, driven by a 50 bps gain in service margins to 32.5% from lab automation and process improvements, and a 270 bps boost in distribution margins to 27.7% led by 15% rental growth.
  • Adjusted EBITDA increased 16% to $8.5 million and adjusted diluted EPS rose to $0.52 (GAAP EPS $0.38), while operating cash flow of $7.5 million and a net leverage ratio of 1.5× underscore a strong balance sheet.
  • The company completed bolt-on acquisitions—Cerequal for commissioning and validation services and TIC Metrology Services—enhancing the Nexa cost-control platform and creating cross-selling synergies within regulated life-science markets.
  • Looking ahead, Transcat expects high-single to low-double digit organic service growth, ongoing margin expansion, disciplined capital deployment into strategic M&A and regulated channels, and sustained resilience across economic cycles.
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