Transcat Inc: Form 10-Q for the period ended Sep 27, 2025

Forward-Looking Statements. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, estimates, beliefs, assumptions and predictions of future events and are identified by words such as “anticipate,” “believes,” "continue," “estimates,” “expects,” "focus," “potential,” “outlook,” “seek,” “strategy,” “target,” “could,” "can," “may,” “will,” “would,” and other similar words. Forward-looking statements are not statements of historical fact and thus are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or those expressed in such forward-looking statements. You should evaluate forward-looking statements in light of important risk factors and uncertainties that may affect our operating and financial results and our ability to achieve our financial objectives. These factors include, but are not limited to, general economic conditions applicable to our business, inflationary impacts and changes in interest rates, the highly competitive nature of the industries in which we compete and in the nature of our two business segments, the concentration of Service segment customers in the life science and other FDA-regulated businesses as well as the industrial manufacturing, aerospace, defense, energy and utilities industries, the significant competition we face in our Distribution segment, any impairment of our goodwill or intangible assets, tariffs and changing trade relations, regional and international conflicts and political conditions, negative publicity and other reputational harm, our ability to successfully complete and integrate business acquisitions, potential unexpected liabilities associated with companies we acquire, cybersecurity risks, the risk of significant disruptions in our information technology systems, our ability to recruit, train and retain quality employees, skilled technicians and senior management, fluctuations in our operating results, our ability to achieve or maintain adequate utilization and pricing rates for our technical service providers, the prices we are able to charge for our services in our Service segment, our ability to adapt our technology, reliance on our enterprise resource planning system, technology updates, supply chain delays, disruptions or product shortages, the risks related to current and future indebtedness, foreign currency rate fluctuations, risks related to protecting our intellectual property, geopolitical events, adverse weather events or other catastrophes, natural disasters or widespread public health crises, the volatility of our stock price, the relatively low trading volume of our common stock, changes in tax rates, changes in accounting standards, legal requirements and listing standards, and legal and regulatory risks related to our international operations. These risk factors and uncertainties are more fully described by us under the heading “Risk Factors” in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 29, 2025. You should not place undue reliance on our forward-looking statements, which speak only as of the date they are made. Except as required by law, we undertake no obligation to update, correct or publicly announce any revisions to any of the forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to our critical accounting policies and estimates from the information provided in our Annual Report on Form 10-K for the fiscal year ended March 29, 2025.

RESULTS OF OPERATIONS

Executive Summary

During our second quarter of fiscal year 2026, we had consolidated revenue of $82.3 million. This represented an increase of $14.4 million or 21.3% versus the second quarter of fiscal year 2025. This increase was primarily due to acquisitions and a $5.7 million increase in distribution revenue. Acquired revenue, which represents revenue from acquisitions completed after the end of the prior period, was $9.8 million. Organic revenue, increased by 6.8% versus the second quarter of fiscal year 2025. See Note 5 – “Business Acquisitions” to our unaudited consolidated financial statements in this report for more information about the impact of our acquisitions.

Our second quarter of fiscal year 2026 gross profit was $26.8 million. This was an increase of $5.6 million or 26.2% versus the second quarter of fiscal year 2025. Consolidated gross margin was 32.5%, an increase of 1.2% versus the second quarter of fiscal year 2025. This increase in gross profit percentage was primarily due to higher margins from the Distribution segment when compared to the prior year period.

Total operating expenses were $23.3 million in the second quarter of fiscal year 2026, an increase of $5.8 million or 33.1% when compared to the prior fiscal year second quarter. Included in operating expenses during the second quarter of fiscal year 2026 were incremental operating expenses from the acquisitions of Martin and Essco, including customer base amortization and acquisition-related costs, increased stock-based compensation and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were 28.3% in the second quarter of fiscal year 2026, up 2.5% from 25.8% in the second quarter of fiscal year 2025. Operating income was $3.5 million, a decrease of $0.2 million, or 6.2% and operating margin decreased from 5.5% to 4.3% in the second quarter of fiscal year 2026.

Net income was $1.3 million in the second quarter of fiscal year 2026 versus $3.3 million in the second quarter of fiscal year 2025. The decrease was primarily due to an increase in administrative costs, interest expense and income tax expense.

The following table presents, for the second quarter of fiscal year 2026 and fiscal year 2025, the components of our Condensed Consolidated Statements of Income:

(Unaudited)

(Unaudited)

Second QUARTER ENDED September 27, 2025 COMPARED TO Second QUARTER ENDED September 28, 2024 (dollars in thousands):

Revenue:

Total revenue was $82.3 million, an increase of $14.4 million, or 21.3%, in our fiscal year 2026 second quarter compared to the prior fiscal year second quarter.

Service revenue, which accounted for 64.2% and 65.0% of our total revenue in the second quarter of fiscal years 2026 and 2025, respectively, increased $8.8 million or 19.9% from the second quarter of fiscal year 2025 to the second quarter of fiscal year 2026 despite economic volatility. This year-over-year increase included $9.8 million in service revenue from the acquisitions of Martin and Essco. Organic revenue, decreased by 1.7% primarily due to lower revenue from the Transcat Solutions business.

Our fiscal years 2026 and 2025 Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows:

Within any fiscal year, while we add new customers, we also have customers from the prior fiscal year whose service orders may not repeat for any number of factors. Among those factors are variations in the timing of periodic calibrations and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of Service segment orders can vary on a quarter-to-quarter basis, we believe trailing twelve-month information provides a better indication of the progress of this segment.

The following table presents the trailing twelve-month Service segment revenue for the first and second quarters of fiscal year 2026 and each quarter in fiscal year 2025 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period:

Our strategy has been to focus our investments in the core electrical, temperature, pressure, physical/dimensional and radio frequency/microwave calibration disciplines. We expect to subcontract approximately 13% to 15% of our Service revenue to third-party vendors for calibration beyond our chosen scope of capabilities. We continually evaluate our outsourcing needs and make capital investments, as deemed necessary, to add more in-house capabilities and reduce the need for third-party vendors. Capability expansion through business acquisitions is another way that we seek to reduce the need for outsourcing. The following table presents the source of our Service revenue, and the percentage of Service revenue derived from each source for the first and second quarters of fiscal year 2026 and for each quarter during fiscal year 2025:

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Our Distribution revenue accounted for 35.8% of our total revenue in the second quarter of fiscal year 2026 and 35.0% of our total revenue in the second quarter of fiscal year 2025. During the second quarter of fiscal year 2026, Distribution segment revenue was $29.4 million which was an increase of $5.7 million or 24.0%. This increase was due to incremental traditional rental revenue, higher revenue from our non-rental products and $0.8 million of incremental revenue primarily related to the acquisition of Martin.

The following table presents the quarterly historical trend of Distribution revenue in fiscal years 2026 and 2025 compared to the prior year fiscal quarter:

The Distribution segment revenue increase for the second quarter of fiscal year 2026 versus the second quarter of fiscal year 2025 was due to revenue primarily increases in traditional rental products, higher revenue from non-rental products, and incremental revenue related to the acquisition of Martin.

Distribution revenue includes orders for instruments that we routinely stock in our inventory, customized products, and other products ordered less frequently, which we do not stock. Product backorders are the total dollar value of orders received for which revenue has not yet been recognized. Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in our service centers prior to shipment, orders required by the customer to be shipped complete or at a future date, and other orders awaiting final credit or management review prior to shipment. Management uses pending product shipments and backorders as measures of our future business performance and financial performance within the distribution segment.

The following table presents our total pending product shipments and the percentage of total pending product shipments that were backorders at the end of the first and second quarter of fiscal year 2026 and each quarter of fiscal year 2025:

Our total pending product shipments at the end of the second quarter of fiscal year 2026 were $7.5 million, an increase of $3.4 million versus the end of the second quarter of fiscal year 2025 and an increase of $3.3 million since June 28, 2025. The increase in pending product shipments and backorders since June 28, 2025 was due in part to a one-time significant order.

Gross Profit:

Total gross profit for the second quarter of fiscal year 2026 was $26.8 million, an increase of $5.6 million or 26.2% versus the second quarter of fiscal year 2025. Total gross margin was 32.5% in the second quarter of fiscal year 2026, up from 31.3% in the second quarter of fiscal year 2025, a 1.2% increase.

Service gross profit in the second quarter of fiscal year 2026 increased $2.4 million, or 16.5%, from the second quarter of fiscal year 2025. Service gross margin was 32.2% in the second quarter of fiscal year 2026, a decrease of 0.9% compared to 33.1% in the second quarter of fiscal year 2025. This decrease in Service gross margin was the result of organic revenue decreases and lower margins from the Transcat Solutions business.

The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:

Our Distribution gross margin includes net sales less the direct cost of inventory sold and the direct costs of equipment rental revenues, primarily depreciation expense for the fixed assets in our rental equipment pool, as well as the impact of rebates and cooperative advertising income we receive from vendors, freight billed to customers, freight expenses and direct shipping costs. In general, our Distribution gross margin can vary based upon the mix of products sold, price discounting, and the timing of periodic vendor rebates offered and cooperative advertising programs from suppliers.

The following table reflects the quarterly historical trend of our Distribution gross margin as a percent of Distribution revenue:

Distribution segment gross margin was 33.2% in the second quarter of fiscal year 2026 versus 27.9% in the second quarter of fiscal year 2025, an increase of 5.3%. The increase in Distribution gross margin was due to increased rental revenue and the mix of non-rental products sold.

Operating Expenses:

Total operating expenses were $23.3 million in the second quarter of fiscal year 2026 versus $17.5 million during the second quarter of fiscal year 2025. The year-over-year increase in selling, marketing and warehouse expenses is primarily due to increased expenses related to recent acquisitions, including acquisition related amortization expense. The increase in general and administrative expenses is primarily due to an increase in stock-based compensation and increased payroll costs for new employees.

As a percentage of total revenue, operating expenses were 28.3% in the second quarter of fiscal year 2026 and 25.8% in the second quarter of fiscal year 2025, an increase of 2.5%.

Income Taxes:

Our effective tax rate for the second quarter of fiscal years 2026 and 2025 was 37.5% and 11.5%, respectively. The increase in effective tax rate is due to the timing of our discrete items in relation to the timing of our pre-tax net income. Our provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the second quarter of fiscal years 2026 and 2025 was an expense of less than $0.1 million and a benefit of $0.6 million, respectively. We continue to evaluate our tax provision on a quarterly basis and adjust, as deemed necessary, our effective tax rate given changes in facts and circumstances expected in the future.

Net Income:

Net income for the second quarter of fiscal year 2026 decreased $2.0 million or 61.4% versus the second quarter of fiscal year 2025. As a percentage of revenue, net income was 1.5% in the second quarter of fiscal year 2026, down from 4.8% in the second quarter of fiscal year 2025. The year-over-year decrease in net income was primarily due to lower operating income, higher interest expense, net and an increase in income tax expense.

Adjusted EBITDA:

Total Adjusted EBITDA, a non-GAAP measure, for the second quarter of fiscal year 2026 was $12.1 million, an increase of $3.3 million or 36.7% versus the second quarter of fiscal year 2025. See “Non-GAAP Financial Measures” below for a description of the non-GAAP measures we use and a reconciliation to the most directly comparable GAAP measures. As a percentage of revenue, Adjusted EBITDA increased to 14.7% for the second quarter of fiscal year 2026 from 13.1% for the second quarter of fiscal year 2025. The increase in Adjusted EBITDA during the second quarter of fiscal year 2026 was primarily driven by depreciation and amortization expense, interest expense and non-cash stock compensation.

Six MONTHS ENDED September 27, 2025 COMPARED TO Six MONTHS ENDED September 28, 2024 (dollars in thousands):

Revenue:

(dollars in thousands)

Total revenue was $158.7 million, an increase of $24.2 million, or 18.0%, in the first six months of fiscal year 2026 compared to the first six months of the prior fiscal year.

Service revenue, which accounted for 64.3% and 65.3% of our total revenue in the first six months of fiscal years 2026 and 2025, respectively, increased $14.1 million or 16.1% from the first six months of fiscal year 2025 to the first six months of fiscal year 2026. This year-over-year increase included $16.1 million in service revenue from the acquisitions of Martin and Essco. Organic revenue, decreased by 1.7% primarily due to lower revenue from the Transcat Solutions business.

Gross Profit:

(dollars in thousands)

Total gross profit for the first six months of fiscal year 2026 was $52.6 million, an increase of $8.7 million or 19.9% versus the first six months of fiscal year 2025. Total gross margin was 33.1% in the first six months of fiscal year 2026, slightly up from 32.6% in the first six months of fiscal year 2025, a 0.5% increase.

Service gross profit in the first six months of fiscal year 2026 increased $3.7 million, or 12.6%, from the first six months of fiscal year 2025. Service gross margin was 32.6% in the first six months of fiscal year 2026, a 0.9% decrease versus the 33.5% in the first six months of fiscal year 2025. This decrease in Service gross margin was the result of organic revenue decreases and lower margins from the Transcat Solutions business.

Distribution gross profit in the first six months of fiscal year 2026 increased $5.0 million, or 34.7%, from the first six months of fiscal year 2025. Distribution gross margin was 34.2% in the first six months of fiscal year 2026, a 3.4% increase versus the 30.8% in the first six months of fiscal year 2025. Distribution gross margin for the first six months of fiscal year 2025 was due to lower revenue and margin contribution from Becnel, which was impacted by hurricanes in the Gulf of Mexico during that period.

Operating Expenses:

(dollars in thousands)

Total operating expenses were $43.7 million in the first six months of fiscal year 2026 versus $35.0 million during the first six months of fiscal year 2025. The year-over-year increase in selling, marketing and warehouse expenses is due to increased expenses related to recent acquisitions, primarily attributable to acquisition related amortization expense. The increase in general and administrative expenses is due to incremental expenses related to acquired companies, an increase in stock-based compensation and increased payroll costs for new employees.

As a percentage of total revenue, operating expenses were 27.6% in the first six months of fiscal year 2026 and 26.0% in the first six months of fiscal year 2025, an increase of 1.6%.

Income Taxes:

(dollars in thousands)

Our effective tax rate for the first six months of fiscal years 2026 and 2025 was 31.3% and 13.9%, respectively. The increase in effective tax rate is due to the timing of our discrete items in relation to the timing of our pre-tax net income. Our provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the first six months of fiscal years 2026 and 2025 was an expense of $0.2 million and a benefit of $1.1 million, respectively. We continue to evaluate our tax provision on a quarterly basis and adjust, as deemed necessary, our effective tax rate given changes in facts and circumstances expected in the future.

Net Income:

Net income for the first six months of fiscal year 2026 decreased $3.2 million or 41.1% versus the first six months of fiscal year 2025. As a percentage of revenue, net income was 2.9% in the first six months of fiscal year 2026, down from 5.7% in the first six months of fiscal year 2025. The year-over-year decrease in net income was primarily due to higher interest expense, net and a higher provision for income taxes.

Adjusted EBITDA:

Total Adjusted EBITDA, a non-GAAP measure, for the first six months of fiscal year 2026 was $23.9 million, an increase of $4.8 million or 25.2% versus the first six months of fiscal year 2025. See “Non-GAAP Financial Measures” below for a description of the non-GAAP measures we use and a reconciliation to the most directly comparable GAAP measures. As a percentage of revenue, Adjusted EBITDA increased to 15.0% for the first six months of fiscal year 2026 from 14.2% for the first six months of fiscal year 2025. The increase in Adjusted EBITDA during the first six months of fiscal year 2026 was primarily driven by increases in operating income, depreciation and amortization expense and non-cash stock compensation.

Non-GAAP Financial Measures

Adjusted EBITDA

In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, non-cash stock compensation expense, acquisition related transaction expenses, contingent consideration, and certain other expenses), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, stock-based compensation expense and other items, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.

Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

(dollars in thousands)

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Adjusted Diluted Earnings Per Share

In addition to reporting Diluted Earnings Per Share, a GAAP measure, we present Adjusted Diluted Earnings Per Share (net income plus acquisition related amortization expense, acquisition related transaction expenses, acquisition related stock-based compensation and acquisition amortization of backlog; divided by the average diluted shares outstanding during the period), which is a non-GAAP measure. Our management believes Adjusted Diluted Earnings Per Share is an important measure of our operating performance because it provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.

Adjusted Diluted Earnings Per Share is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of Diluted Earnings Per Share and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted Diluted Earnings Per Share, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

Note: Income tax effect is calculated using the expected annual tax rate, which was 31.1% and 25% for the fiscal year 2026 and 2025 periods, respectively.

LIQUIDITY AND CAPITAL RESOURCES

We expect that foreseeable liquidity and capital resource requirements will be met through cash and cash equivalents, anticipated cash flows from operations and borrowings from our revolving credit facility. We believe that these sources of financing will be adequate to meet our future requirements including anticipated operating expenses, capital expenditures, interest payments on our long-term debt, and planned business acquisitions. To the extent that we do not satisfy our liquidity requirements through cash and cash equivalents, anticipated cash flows from operations and borrowings from our revolving credit facility, we intend to satisfy such requirements through proceeds from the issuance of common stock.

On July 29, 2025, we entered into a Credit Agreement (the “Credit Agreement”) with a group of three lenders establishing a new five-year $150.0 million secured revolving credit facility (the “Credit Facility”). Borrowing options under the Credit Facility include: (i) a revolving loan option; (ii) a swingline loan option; and (iii) letters of credit, each of which is provided on a committed basis. The Credit Facility replaced the Company’s former $80.0 million credit facility (the “Replaced Facility”), which included a letter of credit subfacility of $10.0 million and our 2018 term loan, with an original principal amount of $15.0 million (the “2018 Term Loan”). We used initial borrowings under the Credit Facility to repay amounts due under the Replaced Facility, including the remaining amounts under the 2018 Term Loan, and for the acquisition of Essco.

Under the Credit Agreement, we can use up to $50.0 million for acquisitions in any single fiscal year, with an exception for the Essco acquisition. In addition, we are permitted to make restricted payments up to $25.0 million in the aggregate over the term of the Credit Facility and up to $10.0 million in any single fiscal year to repurchase shares and pay dividends.

As of September 27, 2025, $150.0 million was available for borrowing, subject to covenant restrictions, under the Credit Facility, of which, $111.9 million was outstanding. During the first six months of fiscal year 2026, we used approximately $83.0 million, drawn from the Credit Facility, for a business acquisition.

Most borrowings under the Credit Facility bear interest, at our election, at a fixed base rate or the daily simple SOFR rate, plus a margin. Any swingline loan will bear interest at the fixed base rate plus a margin. The applicable margin is based on our then-current leverage ratio. Under the Credit Facility, the applicable margin was reduced for most levels of leverage ratio for comparable categories of borrowings under the Replaced Facility. The applicable margin ranges from 0.00% to 0.75% for base rate loans and 1.00% to 1.75% for SOFR loans. We will pay a commitment fee based on the daily unused amount under the Credit Facility multiplied by the applicable margin, which ranges from 0.10% to 0.20% for the commitment fee.

The Credit Agreement has certain financial covenants with which we must comply. The leverage ratio covenant under the Credit Agreement requires us to maintain our ratio of outstanding indebtedness to consolidated EBITDA to be no greater than 3.00 to 1.00, provided that we may temporarily increase the leverage ratio covenant if we complete a material permitted acquisition under the terms of the Credit Agreement. The Company's leverage ratio, as defined in the Credit Agreement, was 2.26 on September 27, 2025, compared with 0.78 on March 29, 2025. We must also maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. We were in compliance with all loan covenants and requirements of the Credit Agreement and the Replaced Facility, as applicable, during the first six months of fiscal year 2026.

Cash Flows: The following table is a summary of our Condensed Consolidated Statements of Cash Flows (dollars in thousands):

Operating Activities: Net cash provided by operating activities was $16.5 million during the first six months of fiscal year 2026 compared to $15.8 million of net cash provided by operating activities during the first six months of fiscal year 2025. The year-over-year increase in cash provided by operating activities was primarily the result of changes in net working capital (defined as current assets less current liabilities). The significant working capital fluctuations were as follows:

• Receivables: Accounts receivable and other receivables increased $3.6 million during the first six months of fiscal year 2026, inclusive of $2.9 million of accounts receivable acquired during the period. During the first six months of fiscal year 2025, accounts receivable and other receivables decreased $1.7 million inclusive of $3.1 million accounts receivable acquired during the period. The year-over-year variation reflects changes in the timing of collections. The following table illustrates our “days sales outstanding” as of September 27, 2025 and September 28, 2024 (dollars in thousands):

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• Inventory: Our inventory strategy includes making appropriate large quantity, high dollar purchases with key manufacturers for various reasons, including maximizing on-hand availability of key products, expanding the number of SKUs stocked in anticipation of customer demand, reducing backorders for products with long lead times and optimizing vendor purchase and sales volume discounts. As a result, inventory levels may vary from quarter-to-quarter based on the timing of these large orders in relation to our quarter end. The decreases in inventory are primarily due to the timing of shipments relative to strategic inventory purchases during the periods.
• Accounts Payable: Changes in accounts payable may or may not correlate with changes in inventory balances at any given quarter end due to the timing of vendor payments for inventory, as well as the timing of payments for outsourced Service vendors. Accounts payable decreased $1.6 million during the first six months of fiscal year 2026 inclusive of $0.2 million assumed in acquisition during the period. Accounts payable increased $1.5 million during the first six months of fiscal year 2025. The variances are largely due to the timing of inventory and capital expenditures and other payments in the respective periods.
• Accrued Compensation and Other Current Liabilities: Accrued compensation and other current liabilities include, among other things, amounts paid to employees for non-equity performance-based compensation. At the end of any particular period, the amounts accrued for such compensation may vary due to many factors including changes in expected performance levels, the performance measurement period, and timing of payments to employees. During the first six months of fiscal year 2026, accrued compensation and other current liabilities decreased by $3.8 million inclusive of $3.2 million of accrued compensation and other current liabilities assumed during the period. During the first six months of fiscal year 2025, accrued compensation and other current liabilities decreased by $4.6 million, inclusive of $0.2 million from assumed liabilities and purchase price holdbacks and contingent consideration from acquisitions. The decreases are largely due to the annual payment of incentive-based compensation accruals and payments of acquisition related holdback and accruals.

Investing Activities: During the first six months of fiscal years 2026 and 2025, we invested $9.0 million and $7.6 million, respectively, in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and our rental business.

During the first six months of fiscal years 2026 and 2025, we used $82.5 million and $15.9 million, respectively, for business acquisitions.

Financing Activities: During the first six months of fiscal year 2026, net proceeds and repayments from our revolving Credit Facility was $81.0 million, and $0.5 million in cash was generated from the issuance of common stock. In addition, we used $1.8 million for repayments of our term loan.

During the first six months of fiscal year 2025, $0.8 million in cash was generated from the issuance of common stock. In addition, we used $1.2 million for scheduled repayments of our term loan and $3.0 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in fiscal year 2025, which are shown as a repurchase of shares of our common stock.

OUTLOOK

Our team delivered another solid quarter of revenue and adjusted EBITDA (a non-GAAP measure) performance in the fiscal second quarter highlighted by double-digit revenue growth and continued high demand in our rentals channel. Distribution revenue grew 24% in the quarter with a gross margin of 33.2%, driven primarily by the strategic mix increase of higher-margin rentals. We continue to see measured improvement from our organic and inorganic initiatives, paired with another quarter of robust revenue growth and disciplined cost management that enabled us to deliver 37% adjusted EBITDA (a non-GAAP measure) growth.

Acquisitions continue to be a cornerstone of our growth strategy. We are extremely excited about the recent acquisition of Essco Calibration, the largest deal in our history, supported by our new, larger credit facility. Essco is a perfect fit into our calibration service portfolio and creates a strong presence for us in the New England market. With the Essco deal following the acquisition of Martin Calibration in December 2024, we have acquired two leading regional calibration providers in an 8-month period. This demonstrates our ability to attract and acquire highly sought-after calibration companies to expand our capabilities and geographic reach, while increasing market share.

Looking forward, uncertainty in the macro environment remains a challenge, but our diversified portfolio of products and services combined with the ability to execute against strategic priorities will differentiate us in fiscal 2026 and beyond. We expect continued service revenue growth, benefiting from a larger presence in the New England and Midwest markets, and improving Service organic revenue. We expect a return to single-digit Service organic revenue growth in the second half of fiscal 2026. Our acquisition pipeline remains strong, and we will continue to leverage our integration expertise. We believe the combination of our talented team, portfolio differentiation, and strong financial profile positions us well to drive sustainable, long-term shareholder value.

We expect our income tax rate to range between 30% and 32% for full fiscal year 2026. This estimate includes federal, various state, Canadian and Irish income taxes and reflects the discrete tax accounting associated with share-based payment awards.

INTEREST RATES

Our exposure to changes in interest rates results from our borrowing activities. In the event interest rates were to move by 1%, our yearly interest expense would increase or decrease by approximately $1.1 million assuming our borrowing levels at September 27, 2025 remained constant under the Credit Facility. As of September 27, 2025, $150.0 million was available for borrowing, under the Credit Facility, of which $111.9 million was outstanding.

Under the Credit Agreement, effective July 29, 2025, at our option, we are permitted to borrow from the Credit Facility at a base rate or the variable Daily Simple SOFR (subject to a 1.00% floor), in each case, plus a margin. Our interest rate margin is determined on a quarterly basis based upon our calculated leverage ratio. Our weighted average interest rate for the second quarter of fiscal year 2026 for the Credit Facility was 6.0%. On September 27, 2025, we had no hedging arrangements in place for our Credit Facility to limit our exposure to movements in interest rates.

FOREIGN CURRENCY

Approximately 90% of our total revenues for each of the first six months of fiscal year 2026 and 2025 were denominated in U.S. dollars, with the remainder denominated in Canadian dollars and Euros. A 10% change in the value of the Canadian dollar to the U.S. dollar and the Euro to the U.S. dollar would impact our revenue by less than 1%. We monitor the relationship between the U.S. dollar and the Canadian dollar and the U.S. dollar and the Euro on a monthly basis and adjust sales prices for products and services sold in Canadian dollars or Euros as we believe to be appropriate.

We continually utilize short-term foreign exchange forward contracts to reduce the risk that future earnings denominated in Canadian dollars would be adversely affected by changes in currency exchange rates. We do not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a loss of $0.2 million and $0.4 million in the first six months of fiscal years 2026 and 2025, respectively, was recognized as a component of Interest and Other (Income) Expense, net in the Condensed Consolidated Statements of Income. The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated in Canadian dollars being hedged. On September 27, 2025, we had a foreign exchange contract, which matured in October 2025, outstanding in the notional amount of $0.6 million. The foreign exchange contract was renewed in October 2025 and continues to be in place. We do not use hedging arrangements for speculative purposes.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Our principal executive officer and our principal financial officer evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of such date.

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this quarterly report (our second quarter of fiscal year 2026) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.