Q3 2025 Transcat Inc Earnings Call
Mikael: [music].
Greetings and welcome to Transcon incorporated third quarter fiscal year 2025 financial results at this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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Speaker Change: As a reminder, this conference is being recorded I would now like to turn the call over to your host Tom Tom Barth Battle. Thank you you may begin.
Speaker Change: Thank you operator, and good morning, everyone. We appreciate your time and your interest in Transcon.
Speaker Change: With me here on the call today is our president and CEO Lee Rudow.
Mike West: And our Chief operating Officer, Mike West.
Mike West: I'll begin the call with some prepared remarks, and then we'll open it up to <unk>.
Mike West: All questions our earnings release crossed the wire after markets closed yesterday.
Mike West: The earnings release and the slides.
Mike West: We'll reference during our prepared remarks can be found on our website Trans cat Dot com in the Investor Relations section.
Mike West: If you would please refer to slide two 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 our future to future events, which are subject to risks and uncertainties as well as other factors that could cause the actual result.
Mike West: To differ materially from where we are today.
Mike West: These factors are outlined in the new news release as well as in the documents filed by the company with the SEC you can find those on our website, where we regularly post information about the company as well as on the Sec's website at SEC Gov. We undertake no obligation to publicly update or correct any of the forward looking.
Mike West: <unk> contained in this call.
Mike West: Whether as a result of new information future events or otherwise.
Mike West: Except.
Mike West: As required by law.
Mike West: Please review our forward looking statements in conjunction with these precautionary factors.
Mike West: Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe will be useful in evaluating our performance.
Mike West: Should not consider the presentation of this additional information in isolation.
Mike West: Or as a substitute for results prepared in accordance with GAAP.
Mike West: We've provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release.
Lee Rudow: With that I'll turn the call over to Lee.
Mike West: Yeah.
Speaker Change: Thank you Tom and good morning, everyone and thank you for joining us.
Speaker Change: Fiscal 2025 third quarter consolidated revenue was up 2% to $66 $8 million. However, organic service revenue declined 4% from prior year third quarter.
Speaker Change: Last quarter, we talked about the next the solutions channel and that our expectations were that softness in that channel would continue through.
Speaker Change: Through the current fiscal year. This continues to be our view and the team is focused on pipeline development and getting new solutions deals across the finish line.
Speaker Change: Well, we did not anticipate in the third quarter was the December decline in core calibration service demand following in October and November which was largely in line with expectations. We discovered that the midweek Christmas holiday drove extended manufacturing closures in the back half of the month.
Speaker Change: Essentially.
Speaker Change: This affected the incoming calibration service work in two ways.
Speaker Change: The front end of December many of our customers ramped up manufacturing to meet demand up to and through the holiday shutdowns intensified production makes it difficult to send in equipment for calibration.
Speaker Change: Back end of December extended holiday facility closures and reduced staff reduce reduced staffing levels contributed to a reduced volume of incoming equipment through the end of the calendar year. So.
Speaker Change: Timing contributed to the December service shortfalls, and as one would expect service revenue picked up significantly in January as a result of pent up demand from December.
Speaker Change: Stepping away for a moment from the quarterly performance on December 10th we acquired Martin calibration.
Speaker Change: We're very excited to get this deal done as Martin satisfies all of our strategic acquisition requirements.
Speaker Change: With annual revenues more than $25 million Martin gifts Trans cat, a strong presence in the Midwest, including Minneapolis, Chicago, and Milwaukee, as well at Tempe, Arizona, and Los Angeles, California.
Speaker Change: Martin flagship lab is in Minneapolis scenario, rich and medical device and life Science. This is a region that relies heavily on quality calibrations and related services and solutions.
Speaker Change: From a bolt on perspective, we anticipate the ability to leverage our current operational infrastructure by combining our Arizona and L. A labs with the Martin facilities are in very close proximity.
Speaker Change: From a capabilities perspective, the two companies are very complementary.
Speaker Change: Martin brings a higher level of expertise on the mechanical and dimensional side and represents an ideal match with trans cats advanced capabilities on the temperature pressure and electrical sides of the business.
Speaker Change: So in addition to the cost synergies you would expect over time with bolt on acquisitions, we expect to drive service growth by leveraging the expanded combined capabilities at both Martin and Trans Cat. The integration process is off to a great start and as we work and we work to maximize the early returns on this exciting coveted.
Speaker Change: Unity.
Speaker Change: Turning to distribution revenue grew 7% in the quarter the third quarter.
Speaker Change: However, due to the extended closure of many of our customers our rental channel experienced a similar decline in demand as our core calibration services channel.
Speaker Change: The rental revenue decline in December resulted in a distribution segment mix change that negatively impacted distribution service margins and before I turn things over to Tom.
Speaker Change: I want to point out that the transcon team has consistently delivered excellent results over an extended period, we have a demonstrated track record of driving growth and productivity.
Speaker Change: <unk> team is working to overcome the near term challenges we've encountered in the last couple of quarters and this primarily pertains to the year over year softness of the solutions channel.
Speaker Change: From a traditional calibration services channel perspective, we currently have a very strong pipeline of new high probability opportunities as we close out fiscal 2025.
Speaker Change: We are prepared for a strong fiscal 2026, so with that I'll turn things over to Tom for more detailed look at the third quarter financial results.
Tom: I'll start on slide four of the earnings deck posted on our website, which provides detail regarding our revenue.
Tom: On a consolidated basis and by segment for the third quarter of fiscal 2025.
Tom: Third quarter consolidated revenue of $66 8 million was up 2% versus prior year driven by growth in distribution looking.
Tom: Looking at it by segment service revenue grew slightly.
Tom: 3.8% organic decline was offset by growth from acquisitions.
Tom: As Lee mentioned service revenue was negatively impacted by the unexpected extended December holiday closures at our customer sites as well as the anticipated year over year decline in the Trans Cat next.
Tom: Solutions channel.
Tom: Turning to distribution revenue of $25 2 million grew 7% driven by strong product sales and rental growth.
Tom: Turning to slide five our consolidated gross profit for the second quarter of $19 7 million was down 6% from prior year.
Tom: Service gross profit declined 8% versus prior year continued leverage from higher levels of technician productivity could not offset the headwinds caused by lower organic revenue levels.
Tom: Distribution segment gross profit of $7 3 million was down 2% as margins were pressured in the third quarter due to mix.
Tom: Turning to slide six Q3, net income of $2 4 million was down $1 million versus prior year.
Tom: Diluted earnings per share came in at 25.
Tom: <unk> 13 cents.
Tom: We report adjusted diluted earnings per share as well to normalized for the impacts of upfront and ongoing acquisition related cost Q3, adjusted diluted earnings per share was 45 cents.
Tom: Flipping to slide seven where we show our adjusted EBITDA and adjusted EBITDA margin.
Tom: We use adjusted EBITDA, which is non-GAAP to gauge the performance of our business.
Tom: Because we believe best measures, our operating performance and ability to generate cash as.
Tom: 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 transaction costs as well as the increased level of noncash expenses that will hit our income statement from acquisition purchase accounting.
Tom: Third quarter consolidated adjusted EBITDA of $7 9 million was down 13% from the same quarter in the prior year.
Tom: As extended December holiday closures, and they expect the solutions revenue softness negatively impacted third quarter EBITDA.
Tom: As always a reconciliation of adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation.
Tom: Moving to slide eight operating cash flow operating free cash flow were both higher year over year.
Tom: Q3 capital expenditures were $1 $4 million higher than prior year and continue to center around service segment capabilities rental pool assets technology and future growth projects.
Tom: The spend was in line with expectations.
Tom: Slide nine highlights our strong balance sheet at quarter end, we had total net debt of $40 8 million.
Tom: With a leverage ratio of <unk> 97 X.
Tom: We had $39 5 million available from our credit facility as previously.
Tom: And as previously announced we acquired mountain and calibration for $79 million in fiscal Q3 paid in combination of $69 million in cash and $10 million in company stock.
Tom: Lastly, we expect to file our Form 10-Q on February 5th.
Lee Rudow: With that I'll turn it back to you Lee.
Lee Rudow: Okay. Thanks, Tom.
Lee Rudow: As we wind down the fourth quarter, we expect fiscal 2025 organic service revenue to be in the low to mid single digits. Once adjusted for the 53 week.
Lee Rudow: 50, <unk> week in fiscal 2024.
Lee Rudow: Of course that is below our expectations and as I mentioned earlier, it's driven by the softness.
Lee Rudow: Primarily driven by the softness in our solutions channel that negatively impacted our organic growth rates in fiscal 2025, we're certainly looking forward to improve solutions performance in the year ahead.
Lee Rudow: Relative to our core calibration business, we have a strong pipeline and momentum.
Both are building as we get ready to embark on fiscal 2026, we believe organic service growth in fiscal 2026 will be more in line with our historical performance.
We will continue to focus on the full integration of Martin calibration working together, we expect to capitalize on the numerous opportunities we have.
Lee Rudow: For both service growth and productivity gains.
Lee Rudow: Sure My vision for the company over the years, which includes strong organic service growth and industry leading value proposition.
Lee Rudow: Parents service operating leverage lower cost of goods sold and SG&A overtime, driven by process improvement automation and other productivity improving initiatives strong operating cash flow and sensible expansion of addressable markets, we still believe in our and our vision.
Lee Rudow: Our goals and our ability to achieve them.
Lee Rudow: We're excited for the fiscal year ahead, and with that Rob you can open the line for questions.
Speaker Change: Thank you at this time, we'll be conducting a question and answer session.
Speaker Change: If you'd like to ask a question. Please press star one on your telephone keypad.
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Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing this darkies one moment, please while we poll for questions.
Speaker Change: My first question comes from Greg Palm with Craig Hallum. Please proceed with your question.
Greg Palm: Yeah. Good morning, Thanks for.
Greg Palm: Taking the questions here I wanted to start I guess with the.
The near term outlook. So you don't understand the some of the timing around the holidays you still it sounds like things picked up in January but you still took down the full year guide.
So I'm just curious.
Greg Palm: If it was timing just things slipping from December to January you know you wont expect that guide to come down but it did so is there sort of more of a deferral or what I guess, what what's kind of the incremental weakness here relative to what we were talking about three months ago.
Lee Rudow: So so this is Lee I'll start and maybe.
Lee Rudow: Tom can add some color as well yeah. So we had the slowness in December we spoke to many of our customers.
Lee Rudow: During and.
Lee Rudow: After that the slow down and so we kind of confirm that that was taking that took place and impacted the numbers businesses generally gotten very busy in January so we made some of that back.
Lee Rudow: Just looking at the full year looking at the solutions impact continued impact.
Lee Rudow: Well you know we're just we're you know we're confident that we'll be in the you know the mid single digit range for organic growth.
Lee Rudow: Generally speaking at.
Lee Rudow: And you know there's there's been you know there has been some relative delays in some orders and I think.
Lee Rudow: With high probability that we expect it to close in Q3, some will close in the back end of Q4, maybe even early into the into fiscal year in April, but we just being conservative in the guidance.
Lee Rudow: Yep Okay.
Lee Rudow: Can you, maybe just give us a little bit more color on the visibility in the pipeline.
Lee Rudow: And really tie this back into kind of expectations for next year, what last quarter.
Lee Rudow: You were kind of confident are we talking about returning to high single digit organic growth.
Lee Rudow: The commentary is a little bit more VAG understandably, so, but you know just.
Lee Rudow: Any comments on visibility pipeline, you know timing around some of the closures.
Lee Rudow: That'd be pretty helpful.
Lee Rudow: Yeah right right now our core calibration pipeline is very strong so it's about as strong as I probably have ever seen it which is good. There's a couple of big opportunities for example, where we've gotten verbal confirmation. Yes, you know we're going to go with Trans Cat. We're gonna proceed accordingly.
Lee Rudow: These terms in this timing at some of those have been delayed which has affected sounds kind of our softer guidance trying to get our arms around exactly when somebody shops, starting as a variety of reasons why you have delays like this.
Lee Rudow: We can get into some of them if you'd like but generally speaking the pipeline is very strong I think that's the most important point.
Lee Rudow: And for US it's a matter you know they have to come to fruition of course and that doesn't always happen, but we feel pretty good about where we stand going into the year into the timing.
Lee Rudow: And I think when we when we talk about we're a little vague for Q4, but when we talk about next year, you know, particularly in the back half Greg asked some of these things come to fruition, we're feeling pretty good about you know the level of activity that we're seeing so not a lot has changed and I think.
Lee Rudow: When we look at the solutions business improving throughout next year, and we combine that with you know with the pipeline activities. The macros appear to be pretty strong and Theres. No reason to believe that we shouldn't back to more historic.
Lee Rudow: The levels in terms of sales.
Lee Rudow: Got it okay and that was going to be kind of my next.
Lee Rudow: Question or sort of final on this level of thinking just making sure that nothing structural has changed whether it's law of large numbers or something else, but you know historically we.
Lee Rudow: Demonstrated and you've talked about this high single digit low double digit organic growth profile for the service business and you know understand a couple of hiccups recently, but anything as you look ahead over the next handful of years Theres nothing that gives you hesitancy in your ability.
Lee Rudow: To sort of match those targets.
Lee Rudow: Absolutely not I mean, yeah, yeah, we have to keep things in perspective, you know we've had a lot of growth over very very long time quarter after quarter after quarter.
Lee Rudow: Nothing has changed still we have recurring revenue streams still the business is driven by regulation. There hasnt been any competition that we've noticed that's been able to that note was taking market share or doing anything differently. We're still in a really good position and when you just take a little bit of a broader perspective on the sales engine, which from our perspective to continue.
Lee Rudow: To get better there's always tweaks that you can make there's always technology that you can implement to make the sales process and other processes better and we're working on all of those things and to have a couple of quarters that you were in the mid single digit growth as opposed to high or even low double digits. That's to be expected you can't win every game the same way, but but we have a really good.
Lee Rudow: Team a really good plan. The fundamentals are the same and we expect that over the long term and in even the mid term. We expect strong performance from this company I can't point to anything today that would stop me from believing that so we expect a good year in the pipeline going into the year supports it so we'll see.
Lee Rudow: Now, 100%, but but I like the fundamentals nothing's changed and we just got to get over you know a couple of quarters of softness and me and for the most part that we have identified the areas and you need to be addressed so we feel pretty good about yep yep.
Lee Rudow: Thanks Lee.
Lee Rudow: No problem, Greg Thanks, Thanks, Greg.
Lee Rudow: Our next question is from Ted Jackson with Northland Securities. Please proceed with your question.
Speaker Change: Thanks very much.
Ted Jackson: Good morning, I got a list of questions, let's start with kind of the next day Transkei services and maybe get an update with regards to your kind of the actions that you've taken so far and kind of the actions that are left to kind of put that business back.
Speaker Change: Back where you want it to be.
Yeah. So from a solutions perspective, it's something we're talking a lot about.
Ted Jackson: There's two ways to look at the solutions business. One is as a standalone business that offers five or six service tracks in the in the ecosystem for calibration and that business has to be profitable and that business has to grow. That's those are our expectations. There is also Ted the benefit that you get from.
Ted Jackson: The solutions business in terms of organic growth for our calibration services business because they also sit at the table with us literally and figuratively.
Ted Jackson: Trying to win new business, there are a differentiator their suite of services make our calibration business in some cases more affordable and you know.
Ted Jackson: You know it helps our customers.
Ted Jackson: Accomplishing complete their goals so we like the business.
Ted Jackson: We just need a better pipeline development and he did a different way to sell it needed to our marketing team involved with doing all these things. Unfortunately.
Ted Jackson: The nature of that business is you're just not going to turn it around in a quarter or two it takes a few quarters. So we think we're doing all the right things the pipeline is better today that the fact that it was when we kind of discovered that we needed to work on it and I think we will get it to be an improved business stable and growth.
Ted Jackson: Time, I'm not overly concerned with it it's still a relatively small business, but we expect that it would be I'm going to say back on track next fiscal year and earlier the better.
Ted Jackson: Yeah.
Ted Jackson: Yeah.
Ted Jackson: Thanks Vince.
Speaker Change: Just kind of shifting over to more to some modeling questions.
Speaker Change: You know like service gross margins the lowest it wasn't you know like third quarter of 'twenty, three and I know volume was a big impact there, but you know were you expecting to see a rebound in the fourth quarter and carry forward into 'twenty. Six can you give us some kind of view on what you would expect your service margins to be next quarter and how we would think about that for next fiscal year.
Ted Jackson: Yeah, I I think Ted.
Ted Jackson: As we've talked in kind of gone through models.
Ted Jackson: I would expect Q4 to be.
Ted Jackson: More in line to be kind of flat year over year.
Ted Jackson: And then continues.
Ted Jackson: To to grow as we look into fiscal 'twenty six and beyond.
Ted Jackson: Yeah.
Ted Jackson: Right.
Ted Jackson: And then shifting over to distribution.
Ted Jackson: You did see I know you said it was a lot, but it was a little bit of a recovery from last quarter.
Ted Jackson: How do we think about that 25 mm and towards your fourth quarter 'twenty five 'twenty six and then can you provide some kind of you know I mean like did we get the recovery out of back now that we expected with regards to some of the rental stuff, maybe an update on that front yet.
Ted Jackson: Yeah. So let me let me take that in pieces right. So from a margin standpoint, you know certainly.
Ted Jackson: We've talked in the past about being consistently above 30% on the distribution side and growing from there as the mix towards rentals continues right.
Ted Jackson: If we you know we certainly would have been there if we didn't see the slowdown in rentals that Lee referenced in the.
Ted Jackson: The back half of December.
Ted Jackson: And then as we look ahead, you know that certainly that that the 30% threshold is one that you know we're we feel that we should be able to achieve and then as I said as we as we see a better a bigger mix towards.
Ted Jackson: Towards rentals, we should see some growth from there.
Ted Jackson: But now it was certainly better sequentially.
Ted Jackson: You know in Q3 versus Q2, and we expect it to be better in Q4 sequentially is that in Q3.
Okay and then.
Ted Jackson: I lost my train of thought I wanted to hit something else on one of your earlier answer on the margin.
Ted Jackson: I'll come back and maybe they'll come into my head.
Ted Jackson: How about just on pro forma earnings how should we think about you know you've just done a pretty large sized acquisition. How should we think about you know the amortization of intangible assets within your pro forma earnings and also acquisition deal costs for fourth quarter and FY 'twenty six.
Ted Jackson:
Ted Jackson: Why don't I follow up with you on that.
Ted Jackson: And that Ted I don't I don't have the numbers in front of me right now but.
Ted Jackson: You know I know when we when we talked about the model.
Ted Jackson: After the acquisition I think we we had done that update but I could follow up with you via email.
Yeah, I'm just double checking.
Ted Jackson: Shifting over to working capital.
Ted Jackson: You know your receivables grew up inventories were down payables were up you know the turns all followed all that kind of stuff. You know can you give us kind of a view on what you know kind of what's going on with some of those working capital levers and how you see them playing out for the next few quarters.
Ted Jackson: Well I think I think we should see them move kind of consistent with.
Ted Jackson: The growth in revenue.
Ted Jackson: We've had a we've been focused on inventory levels, all year and I think you've seen the improvements we've made.
Ted Jackson: Since the beginning of the year from an inventory standpoint.
Ted Jackson: Receivable part of the growth rate is just bringing on our business and as we bring on these bigger businesses right. We're bringing on the accounts receivable, but that goes along with that so you saw that addition, coming from the Martin acquisition in December but.
Ted Jackson: I think we've we've over time, we've seen those working capital numbers kind of flex Accordingly based on you know the inorganic and organic growth that we've experienced.
Ted Jackson: Okay.
Ted Jackson: Okay. That's it for me thank you very much.
Ted Jackson: Thanks Ted.
Speaker Change: As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Speaker Change: My mom it please poll for questions.
Speaker Change: Our next question comes from Martin Yang with Oppenheimer. Please proceed with your question.
Martin Yang: Alright. Thank you for taking my question first question on distribution.
Martin Yang: Do you attribute the weakness in distribution this quarter to the same reason that you described or services and how uniform or those two segments performing.
Martin Yang: Based on those seasonal seasonal patterns.
Martin Yang: Yeah.
Martin Yang: What we referred to Martin and in the earnings call script was the rental business.
Martin Yang: As part of the rental channel as part of the distribution that was impacted the same way that the calibration services. So that is to say that and we saw a decrease in demand throughout the month, particularly in the back half.
Martin Yang: That's what we're referring to and of course as you have that as rentals becomes.
Martin Yang: As rentals was lowered in the quarter that changes the mix the overall mix too.
Martin Yang: Heavy early it is weighted heavier towards core distribution, which has lower margins. So it has both an impact on margin which is significant.
Martin Yang: But also in volume so that's what that's the effect that you saw in distribution and yes. So it was similar to service in the month of December rental set is.
Martin Yang: Got it and then.
Martin Yang: When we look at the overall distribution on a year over year basis.
Martin Yang:
Martin Yang: Can you tell us about it.
Martin Yang: <unk> growth rate for rental versus non rental.
Martin Yang: So I think Mark what we've said, we've kind of said historically and it's still kind of plays out here is that.
Martin Yang: We expect kind of our core distribution.
Martin Yang: Decline.
Martin Yang: Slowly over time.
Martin Yang: And then you know we expect the rental business to grow at a similar rate to to service right and what we've seen historically with service you know like high single digits.
Martin Yang: That's the that's kind of the goal and that's what we've the trajectory we've been on over the past couple of years.
Martin Yang: Got it.
Martin Yang: Our next question is regarding your comment on what happened in December is there any other seasonal patterns.
Martin Yang: Every quarter or other certain times of the year.
Martin Yang: That could give you surprises like this past December.
Speaker Change: Not not really yeah was there certain patterns in the business you know typically volume for services.
Martin Yang: It's higher than our fourth quarter, which is January through March and typically distribution core distribution not rentals is a little bit stronger in our third quarter. I mean, there are some patterns that seem to repeat Martin year over year I think what happened this year.
Speaker Change: Again, you know when you have a.
Speaker Change: Holiday on a Wednesday, and you never know exactly how people react it just for whatever reason, which I don't think we saw as much in the past. So maybe it's an anomaly maybe it's a pattern don't know, yet, but but being having to how they land on a Wednesday people shut down that week and then you know things extend to 10 days and so on and so forth. So I don't know of.
We've been doing this a long time and typically there arent patterns like that I'm not sure. If this is a pattern or a one off.
Speaker Change: But either way car caught us a little bit off guard in terms of modeling and forecasting. So I guess, that's the best way to answer.
Speaker Change: Got it. Thank you that's it for me.
Martin Yang: Okay. Thanks Martin.
Speaker Change: We have reached the end of the question and answer session I'd now like to turn the call back over to management for closing comments.
Speaker Change: Okay. This is Lee and thank you all for joining us on our call. Today. We appreciate your continued interest in <unk>, we will be attending the Oppenheimer 10th annual emerging growth conference, which is February 26. So for those of you who are attending that conference up feel free to call on us check it on us.
Speaker Change: And maybe a sign up for our meeting time.
Speaker Change: Otherwise you're free to contact us anytime after that conference and I will be speaking to everybody again after our Q4 results. So thank you. Thanks again for joining us and take care.
Speaker Change: This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.