Transcat Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2024

There are 7 speakers on the call.

Operator

Greetings and welcome to Transcat Inc. 2nd Quarter Fiscal Year 2025 Financial Results Conference Call. 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.

Operator

It is now my pleasure to introduce your host, Mr. Tom Balboto, Chief Financial Officer. Thank you, Mr. Balboto. 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 Ruto and our Chief Operating Officer, Mike West. We will begin the call with some prepared remarks and then we will open up the call for questions. Our earnings release crossed the wire after market closed yesterday.

Speaker 1

Both the earnings release and the slides that will be referenced during our prepared remarks

Speaker 2

can be found on our website, transcat.com,

Speaker 1

in the Investor Relations section. If you would please refer to Slide 2. As you are aware, we 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 additional information in isolation or as a substitute for results prepared in accordance with GAAP.

Speaker 1

We've provided reconciliations of non GAAP to compared GAAP measures in the tables accompanying this earnings release. With that, I'll turn the call over to Lee.

Speaker 3

Thank you, Tom. Good morning, everyone. Thank you for joining us on the call today. Transcat delivered strong performance from our core calibration services business again in the Q2 of fiscal 2025. Consolidated revenue was up 8% to $67,800,000 driven by consistent demand for our calibration services as well as solid performance in our traditional rental business, which includes both Transcat and Acxiom rental platforms.

Speaker 3

Consolidated gross profit grew 5% was driven by growth in both our service and distribution segments. In the second quarter, service recorded its 62nd straight quarter of year over year revenue growth as our calibration services continued to perform at a very high level. Overall, service revenue growth was 6% and 4% organic growth. The 6% growth is below historical trends and was significantly impacted by a decline in our Nexa cost control and optimization services business that was beyond the magnitude of what we anticipated. We've identified the root causes that need to be addressed, which primarily center around the immediate need for Nexa to be fully integrated into Transcat's dynamic and proven sales and marketing processes.

Speaker 3

In addition, we are renaming the business Transcat Solutions to fully leverage Transcat's industry leading brand. All of these actions are underway with Nexa. We are making meaningful progress and we're committed to reverting back to growth in the near future. On a positive note, when excluding Nexa in the Q2, we generated organic service growth of 9% versus prior year. We have a strong pipeline of new business opportunities entering the back half of the fiscal year.

Speaker 3

The core service business continues to benefit from recurring revenue streams as well as our industry leading value proposition, which continues to resonate throughout the highly regulated markets we serve, including both life sciences and aerospace and defense. Turning to distribution, in the 2nd quarter, gross profits grew 10% on double digit revenue growth. However, Becknell revenue and profit was negatively impacted by 2 hurricanes in the Gulf of Mexico, which pressured 2nd quarter distribution margins. Overall, Transcat's core business performed well in the Q2 of fiscal 2025 and our exceptional team is working to overcome the near term Nexa challenges, which we believe are very fixable and include channel marketing and pipeline expansion, which is already strengthening. We are confident the business will return to growth

Speaker 4

in the

Speaker 3

Q1 of fiscal 2026. Becknell continues to be a well run company and a strong niche market with significant opportunity for sustainable growth. We fully expect Becknell to deliver sequential improvements in the 3rd and 4th quarters and distribution margins to return to levels consistent with the second half of fiscal twenty twenty four. The balance sheet remains strong. Our revolving credit facility was paid off last year and we are in an excellent capital position to support our strategic growth plan that includes a very active M and A initiative.

Speaker 3

With that, I'll turn things over to Tom for a more detailed look at the Q2 financial results.

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 Q2 of fiscal 2025. 2nd quarter consolidated revenue of $67,800,000 was up 8% versus prior year. Looking at it by segment, service revenue grew 6% with 4% of the growth coming organically and the other 2% from acquisition. As Lee mentioned, service revenue grew 9% organically when excluding Nexa.

Speaker 1

Turning to distribution revenue of $23,700,000 grew 11%, and we continue to see good performance from the higher margin traditional rental businesses. Turning to slide 5. Our consolidated gross profit for the 2nd quarter of $21,200,000 was up 5% from prior year. Service gross profit increased 4% versus prior year. We continue to leverage higher levels of technician productivity and our differentiated value proposition, but that could not offset the pressure we saw as a result of the lower than expected Nexa revenue.

Speaker 1

Distribution segment gross profit of $6,600,000 was up 10%, but margins were lower than expected as a result of the 2 Gulf of Mexico hurricanes impacting BeckNow results in the quarter. Turning to Slide 6, Q2 net income of $3,300,000 was up from $500,000 in the prior year. Q2 of last year included a $2,800,000 non cash charge related to the amended Nexa earn out agreement. Diluted earnings per share came in at $0.35 up $29 percent or $0.29 for the prior year. We reported adjusted diluted earnings per share as well to normalize for the impact of upfront and ongoing acquisition related costs.

Speaker 1

Q2 adjusted diluted earnings per share was 0 point 5 $2 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 metrics 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. With that in mind, 2nd quarter consolidated adjusted EBITDA of $8,900,000 was down 5% from the same quarter in the prior year as lower than expected Nexa revenue negatively impacted Services EBITDA and Becknell pressured distribution EBITDA. As always, a reconciliation of adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation.

Speaker 1

Moving to Slide 8, operating cash flow was mostly consistent with last year. Q2 capital expenditures were $2,200,000 higher than prior year, year, continued to be centered around service segment capabilities, rental pool assets, technology and future growth projects. The spend was in line with expectations. Slide 9 highlights our strong balance sheet. At quarter end, we had total net cash of $20,800,000 with a leverage ratio of 0.08x.

Speaker 1

We had $80,000,000 available from our credit facility. Lastly, we expect to file our Form 10 Q on November 6. With that, I'll turn it back to you, Lee.

Speaker 3

Okay. Thanks, Tom. Over the past 12 years, we successfully and consistently delivered organic service revenue growth, sustainable gross margin expansion and delivered strong free cash flow. We expect these metrics to improve in the back half of fiscal twenty twenty five and return to more normal levels in the first half of fiscal twenty twenty six. Given the temporary setback in the Nexa sales channel, for the full 2025 fiscal year, we expect organic service revenue growth in the mid single digits when normalized for the extra week in fiscal 2024.

Speaker 3

Our M and A strategy has been very successful and will continue to be an important component of our overall growth plan as we look to continue to strengthen our core business and expand our adjustable markets. Through acquisitions, we expect to expand our geographical footprint, capabilities and expertise. And of course, we're always interested in bolt on opportunities where we can leverage our current infrastructure to drive both cost synergies and growth opportunities. We currently have a very robust acquisition pipeline with the potential to increase the trajectory of our business. And as I mentioned earlier, we have a strong balance sheet, which will continue to support the conversion of our M and A pipeline.

Speaker 3

We will continue to leverage continuous process improvement and automation as key enablers to future margin expansion and we expect service gross margin expansion for the full 2025 fiscal year. As we move through the back half of fiscal twenty twenty five, our dedicated and talented team will continue to focus on generating sustainable long term value for our shareholders. With that, operator, please open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. The first question comes from the line of Scott Buck with H. C. Wainwright.

Operator

Please go ahead.

Speaker 5

Hey, good morning guys. Thanks for taking my questions. Lee, can you give us a sense of when you started to recognize that Nexo was kind of falling short of expectations?

Speaker 3

Well, listen, we have Scott, we have multiple sales channels throughout the organization, probably 10 or so. And at any given time, in any given quarter, they're not all going to be operating to full capacity, all cylinders, if you will. And so there's always little pockets that you keep your eye on. And I think we probably saw some of that in the Q1, but nothing that would have led us to believe that we would have the drop off we had in Q2. So that kind of came up a little unexpected.

Speaker 3

Like I said in the earnings script, I mean, we dove right into the root causes. It's a really good business, but we dove right into the root causes and just saw that there was just some very fixable processes within their the way they manage their pipeline. And so we're all over it and we'll get them turned around pretty quickly. But that it's kind of subtle in the Q1 and just kind of hit us a little bit unexpected in the second. That's how I would characterize it.

Speaker 5

I appreciate that. And it sounds like there's no additional read through on the rest of the business or any kind of macroeconomic read through based on the softness you saw in the Q2 there, right?

Speaker 3

No, I don't think so. I mean, like I said, the core calibration business organically grew 9%. So we like not only the performance in the Q2, we like the pipeline going into back half of the year. So that's steady. Certainly, the rental business, which is a big component these days of the distribution segment, that's very strong.

Speaker 3

And we expect Beknell to perform well. So as we look in the back half of the year now, I think the other areas of the company are performing as we would expect. We just have this sort of isolated miss that we're going to fix.

Speaker 5

No, that's helpful. And then on M and A, besides the larger deal at the beginning of the year, it's been relatively slow. Can you talk a little bit about pricing and what you're seeing there? Clearly, you guys are open to doing deals. So I'm just curious what the other side of those transactions look like today?

Speaker 3

Right. So from an M and A pipeline perspective, I don't have any concern. We have a as good of an M and A pipeline as robust. We ought to use that word. I think it characterizes it well and accurately.

Speaker 3

We have a great pipeline. We're working strategic deals that we think are a good fit for the company. And it appears quiet externally. I get that internally. It's not quiet at all.

Speaker 3

And we'll continue to work that pipeline. And I think you'll see you look at what we've done in the past, you'll see that layout in the near future as time goes by. And we have the capacity to get even more deals done if they're appropriate and they're good fit than we've got done in the past because we built the infrastructure, Scott, to do that. So no, no concern on my end. I like the way the pipeline looks.

Speaker 5

Great. Appreciate that Lee. And then last one, Tom, just curious, OpEx for the second half of the year, is the first half a fair run rate? Or should we see some operating expense creep there as you support some of these growth initiatives?

Speaker 1

Yes. I would expect some increase sequentially into Q3 and Q4.

Speaker 5

Okay, perfect. I appreciate the time guys. Thank you.

Speaker 3

Thank you.

Operator

Thank you. Next question comes from the line of Craig Palm with Craig Hallum Capital Group. Please go ahead.

Speaker 2

Yes. Thanks. Good morning. Thanks for taking the questions. I wanted to follow-up a little bit on Nexa.

Speaker 2

It wasn't too long ago that you were kind of characterizing that business as exceeding expectations. I think it was even, I don't know, end of last year, earlier this year, where you talked about that business more than doubled since being acquired. So I guess I'm still a little bit confused on what went wrong in such a short amount of time. Maybe you can just dig into that a little bit more if you can.

Speaker 3

Yes, I get the question. Thanks, Greg. Yes, look, this business, the first couple of years since we acquired in the 1st couple of years was really flying high. We're talking about high growth rates, really performing well. And I think because of that, we probably gave them more autonomy than we typically would for an acquisition.

Speaker 3

Greg, we integrate quickly. We do a good job integrating. We get the synergies. We bring these companies together. And that's what makes us different.

Speaker 3

And I think we didn't run that playbook, to be honest, with Nexa because we never company that was doing so well for the 1st couple of years. We're not talking quarters, we're talking years, so 4 quarters, I made a decision, it's kind of on me and the team made the decision to support me. Let's let them keep doing what they're doing. We collaborated. They helped us win calibration business, but we didn't get involved with the day to day operations, the processes, the procedures, the pipeline, the marketing.

Speaker 3

We just kind of let them do their thing. And I think that was probably a mistake. We probably went too long. We got it now. I mean, we get it.

Speaker 3

And we have all of our top people working on expanding their pipeline, coordinating the marketing and making them a Transcat company under the name Transcat Solutions. We're very confident that will solve the problem. So I guess, sometimes success hides some flaws and that's probably a fair way to characterize it. But again, high flyer for 2 plus years, that's why it kind of costs a little bit off guard, but we'll get it fixed up.

Speaker 2

Yes. No, I appreciate that. That's helpful color. I mean, if you're able to, can you provide the revenue decline specific to Nexa? I don't know if you've got the year to date level as well.

Speaker 2

And then just remind us, is it mostly project based revenue? I'm just kind of curious to know kind of what the visibility is like.

Speaker 3

Yes. We're not going to get into the specific numbers, but it's a combination. So they've got some project based business. They've got some sort of ongoing business. It depends on what channel within their company, but it's a mix that leans towards project based, which is probably some of the sort of core issues around what we got behind on without the recognition.

Speaker 3

So yes, we know how to combat that and fix it. So hopefully won't be an issue once we get them kind of turned around.

Speaker 2

Yes. But just to be clear, it sounds like you're characterizing this as more company specific than something market related, competitively related, something of that nature. It sounds fixable, I guess that's what I'm trying to get at.

Speaker 3

I think so. I don't see a problem with the industry. We have other areas of our company that serve the exact same industry, almost in the exact same way. If you remember, we acquired a company called Cerequal. Got a validation business that operates in the same space with some of the same attributes and characteristics as the Nexa business and they're performing well.

Speaker 3

So we don't see it. I mean, that's not to say there aren't certain pockets of industry slowdown within life sciences that cycle in and out quarter to quarter, but nothing systemic. So I think it's that's why it's isolated and fixable.

Speaker 1

One thing I want to just mention, Greg, and maybe just correct something is when Lee in his prepared remarks talked about, we're confident the business will return to growth. I think you might have misspoken it. We said that business we believe will return to growth in the first half of fiscal twenty twenty six. So when we talk about it being fixable, we talk about the timeframe to fix it. It's kind of a near term fix in our mind.

Speaker 2

Yes. Okay. And then I guess my other last question just on Becknell. You talked about a little bit of issues related to the hurricanes. Was there a revenue issue as well or was it mostly on the cost side?

Speaker 2

And are you able to kind of quantify what that impact was? I don't know if you can give a gross margin ex techno kind of like you gave the organic service ex Nexa, but any sort of clarification there would be helpful as well?

Speaker 1

Yes. Well, just to clarify, Greg, right. So the issue with the hurricanes caused the revenue issue, right. So it's both a revenue and profit issue. And had we not seen those issues, and I think the way we've guided in the press release is that we expect distribution margins in the second half of this year to be kind of more in line with what we saw in the second half of last year.

Speaker 1

So certainly north of 30%.

Speaker 2

Got it. Okay. All right. I will leave it there. Thanks.

Speaker 3

Thanks, Greg.

Operator

Thank you. Next question comes from the line of Ted Jackson with Northland Securities. Please go ahead.

Speaker 4

Hey, good morning. Thanks for taking my questions.

Speaker 3

Hey, Ted. Good morning, Ted.

Speaker 4

I'm going to beat the dead horse of Nexa or Transcat Services now. So with the fall off in business there and the things that you're doing to kind of repair it, You've mentioned a couple of things and one of them was sales channels and now you had various sales channels and some were stronger and some were weaker and that you were going to basically go in terms management of those channels kind of make some repairs there. And so on that front, I'm kind of curious when you get into maybe some discussion around what are the different kind of channels from which you go to market with that business and where were the issues? And then with regards to pipeline management, what's the difference between how Transcat manages the pipeline in your processes vis a vis Nexa? What are the kind of the actual changes that you're making there to refill the pipeline?

Speaker 4

And then I've got some things outside of Nexa to ask after that. Thanks.

Speaker 3

Well, let me start with your last question first. When you think about pipeline development and you look at this way Nexa performed sales, execute their sales and marketing plan, they had one salesperson, for example, and they grew with that salesperson, like I said. Transcat has 80 salespeople. So if you count inside salespeople and customer service people as well and business development people, strategic account managers, we've got a lot of touches into the marketplace, particularly in life sciences where you see the next of services, soon to be Transcat Solutions operate. And so it's the difference of had we gotten our sales engine behind this sooner, it just would have helped, would have helped in a big way.

Speaker 3

And so that's the most obvious and clear solution. Plus from a marketing perspective, from a brand perspective, I mean Transcat has such a strong, strong brand within the instrumentation world. So whether you're talking distribution or calibration services, there's just no we're second to none in terms of brand strength. And so when you put that brand strength behind the solutions business, which is Nexa, you're going to get a lot of benefit. We have a core we do work with almost every single pharmaceutical company, med device company in North America.

Speaker 3

I mean, maybe not all of them, but most. And so had we opened up those channels earlier and instead of collaborating really integrated, I think we wouldn't have this problem today. So that's what we're doing now. As far as one of your other questions, Ted, about channels, I know we have pipette channels, we have rental channels, biomedical, marine. And like I said, generally most of them perform well.

Speaker 3

But in any given quarter, you might see softness here or timing there. I mean, you could have ships deployed to the Middle East, which could affect our marine business. There's just different things that can happen, but that's normal. That's normal and you don't dive into those numbers as long as you think you're going to hit your aggregated organic number, which we have just very, very consistently. So but there's a kind of type of channels that we were talking about.

Speaker 3

Again, that's how we characterize. I hope I got to all your questions. If I didn't, just shoot it back at me.

Speaker 4

No, you did. And I do actually I'm

Speaker 3

going to ask a little bit

Speaker 4

more around Nexa before I

Speaker 6

move

Speaker 4

on. My perception with regards to kind of how you were managing Nexa, granted it was being very successful, was it you were letting them kind of you're building a business around them, if you would, and really kind of letting them operate. And you can correct me if I'm wrong. And so to me, like to me, this is why I think it seems like such a shift for us on the outside, because we're not on the inside seeing everything that happens. But Nexa with such a shift and you're kind of bringing Transcat processes and channels because at the end of the day, I mean it really is somewhat of a restructuring for Nexa.

Speaker 4

Nexa is at its core consulting business, which is really more of a person business. Should there be some concern with regards to turnover within some of the talent base of Nexa? If you go through and if you change your go to market and your pipeline management and bring it in to have it be more managed

Speaker 6

and structured. Yes.

Speaker 4

Transcatheter, I think it's a culture change and that's where I'm going with it. So just some discussion on that and then I'll drop next, I promise.

Speaker 3

Okay. I don't see that as a concern at all. When I look at what Nexa does well and still does well, it's the capabilities they have and the delivery of their services. You mentioned consulting services and some of them fit well with that, characterizing it that way. They've always had strong delivery of their services.

Speaker 3

So I don't see and probably 90% of their staff to 95%, that's exactly what they do. They do the CMMS work, they do the reliability work, they do the interval and optimization adjustments. That's not going to change. I mean, what we're bringing is really incremental. We're bringing sales and marketing leadership and a strong brand incrementally to the process that they have because where they their problem is with sales and like in hindsight it was predictable this was going to happen at some point.

Speaker 3

So I think when we put the companies together it really starts to become a 1 plus 1 equals 3. They'll keep doing what they do well. We'll interject, intercede and integrate where we have the expertise. And I think both companies get better. That's different than the collaboration we've done in the past.

Speaker 3

That's integration. And albeit late to the game by a quarter or 2, but that's where we are today. So that's why my confidence level is high. So we bring the incremental benefits and brand to their core delivery of their services, which has always been strong. So I don't see a cultural change at all.

Speaker 4

Okay. The other ones won't be as like sort of loosey. Going over to Becknell, the hurricanes impacted the business and this is just because I'm ignorant with regards to kind of how the business might flow. But say you get into like construction equipment and things like that, a lot of times after you have an event, in this case, 2 events, that there's actually it's more than just a business. You have a disruption in the business, but then because there's additional kind of maintenance, additional things that need to be done to actually repair because of the hurricanes that you actually have some extra wind in your sails.

Speaker 4

Would that be the case with Becknell or is it just to get it back to it'll just bounce back to kind of its normal state

Speaker 3

to where

Speaker 4

it would have been? Do you understand what I'm asking,

Speaker 1

Leer? Yes. It will be more normal state, Ted. The amount of incremental that could be generated is not meaningful.

Speaker 4

Okay. Okay. Then next question, your inventory dropped by, I mean, close to $3,000,000 sequentially. Is there something that drove that down? How would we think about that as we go beyond we go into the Q3, Q4 and beyond?

Speaker 1

No, it's just it's something that myself and Mike West have been hyper focused on the past couple of quarters. And as you know, when you get focused on inventory, it takes a little time to build some momentum. But obviously, that's it's just looking to improve the cash conversion cycle, right? So we've been hyper focused on that and it's not indicative of any changes in that distribution business.

Speaker 4

Well, but so would that be kind of the new norm then if I would you know how much I care about cash flow. Yes. So

Speaker 1

No, no, no, absolutely. I'm sorry, I missed making that point, right, is that yes, we would expect that to be the new norm. And on occasion, as you know, we get opportunities to make strategic buys at additional discounts and we'll continue to do that where it makes good financial sense. But hopefully when we do that, it'll kind of work its way through in the current quarter or maybe the subsequent quarter. But yes, think of it as more of the norm.

Speaker 4

And then on the gross margin side, particularly as it relates to the distribution business, your number there was at a level not seen since, I guess, Q1 of last year. Is that all Becknell? Is there anything else that went on in there that caused that to go down? Or it's just really just this one time?

Speaker 1

No, it's primarily back now. It's primarily back now and that's why we're comfortable saying that for the second half of the year, we should be back more to levels we had in the second half of last year, which are north of 30%.

Speaker 4

Okay. And that's it for me. I mean, your 10 Q will be out later today?

Speaker 1

No, on Wednesday, November 6.

Speaker 4

Okay. A week

Speaker 3

from tomorrow. All right. Thank you, Ted.

Speaker 4

All right. Thank you. Thanks. Bye

Operator

bye. Thank you. Next question comes from the line of Martin Yang with Oppenheimer and Co. Please go ahead.

Speaker 6

Hi, good morning. Thanks for taking my question. Can you help us get a sense of how big is Nexa in your revenue contribution on an annual basis?

Speaker 3

Yes. It's when we look at services, I'm going to say and Tom, correct me if I'm wrong, but it's somewhere between 5% 10%, probably right in the middle.

Speaker 1

Yes, closer to 10%.

Speaker 3

Closer to 10%. And that's what's so interesting. It's such a small part of the business, but where you didn't get labor out and you didn't kind of anticipate that some of the changes in revenue, Martin, it just that you can see the effect it has on the business. But again, we'll we got our arms around it now. But yes, I think that range is accurate.

Speaker 3

Yes.

Speaker 6

Thanks. One more question on organic growth for services. In the past quarters as well as this just reported quarter, when you track all the other acquired business, are they all of them growing have grown organically?

Speaker 3

So the way I mean,

Speaker 1

we don't really talk about performance at the individual unit level. So but keep in mind that from a service standpoint, most of our growth is impacted by organic growth, right, because we haven't had a we haven't acquired a services business since April of last year. So, we're the point we made is that when you back out Nexa, our organic growth was at 9% and the businesses are all contributing to that growth.

Speaker 6

Got it. One last question for me. So given what you have seen in Nexa, would you apply perhaps a bit more scrutiny to other acquired business in terms of sales marketing or other business processes?

Speaker 3

So interesting, I get the question. I mean, my knee jerk reaction is, of course, we always will and do. But remember, we integrate all the businesses we acquire. When we run the Transcat acquisition playbook, it's always our intention to integrate fast and integrate completely. And we think we're really good at it.

Speaker 3

And historically, our track record shows that. Nexa was an exception. It was a different business, although related and very much in the ecosystem in which we perform our calibration services. They were a high flyer. They were performing very, very well for an extended period of time and we kind of decided not to run the playbook, Martin.

Speaker 3

So I don't think this applies. The other businesses, while some businesses had better quarters than others, generally speaking, we always review this at the Board level and internally as well, these businesses performed very well, I mean, across the Board and through the year. So I think Nexo is more of an outlier and an exception and we did learn from it. There's no question about that. And I wouldn't expect that to happen again.

Speaker 3

So I think we'll get better in that respect for sure.

Speaker 6

Got it. Thanks, Lee.

Speaker 3

Okay. No problem.

Operator

Thank you. As there are no further questions at this time, ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Lee Rudolf for closing comments.

Speaker 3

Well, thank you all for joining us on today's call. We appreciate your continued interest in Transcat. We'll be attending the Craig Hallum 15th Annual Alpha Select Conference, which is in New York City on November 19th. Tom and I will be there. Feel free to check-in with us at the conference or really any other time.

Speaker 3

Otherwise, we'll talk to everybody after the Q3 results. So again, thanks for participating. Take care.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • Consolidated revenue rose 8% year-over-year to $67.8 million, driven by an 8% increase in calibration services (6% total growth, 4% organic) and an 11% gain in distribution revenue.
  • The Nexa cost-control and optimization business underperformed due to delayed integration into Transcat’s sales and marketing processes; it will be rebranded as Transcat Solutions and is expected to return to growth by Q1 FY 2026.
  • Distribution gross margins were pressured by two Gulf of Mexico hurricanes impacting Becknell’s operations, but management expects sequential improvements and a return to 2H FY 2024 margin levels in Q3 and Q4.
  • Transcat’s balance sheet remains strong with $20.8 million in net cash, a 0.08x leverage ratio and $80 million of undrawn credit; Q2 adjusted EBITDA was $8.9 million and diluted EPS rose to $0.35 from $0.29 a year ago.
  • The company targets mid-single-digit organic service revenue growth for FY 2025 (normalized for calendar shifts) and is leveraging a robust M&A pipeline, continuous process improvements, and automation to drive future margin expansion.
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