Transcat Inc: Form 10-Q for the period ended Dec 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,” “intend,” “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 third quarter of fiscal year 2026, we had consolidated revenue of $83.9 million. This represented an increase of $17.1 million or 25.6% versus the third quarter of fiscal year 2025. This increase was primarily due to acquisitions, service organic revenue growth (a non-GAAP measure) and a $5.0 million increase in distribution revenue. Acquired revenue, which represents revenue generated from acquisitions for twelve months subsequent to the acquisition date, was $9.8 million. Service organic revenue increased by 7.3% versus the third quarter of fiscal year 2025. See "Non-GAAP Financial Measures" below for a description and reconciliation of the non-GAAP measure. See Note 5 – “Business Acquisitions” to our unaudited consolidated financial statements in this report for more information about the impact of our acquisitions.

Our third quarter of fiscal year 2026 gross profit was $25.3 million. This was an increase of $5.6 million or 28.3% versus the third quarter of fiscal year 2025. Consolidated gross margin was 30.1%, an increase of 0.6% versus the third 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 $25.2 million in the third quarter of fiscal year 2026, an increase of $7.6 million or 43.2% when compared to the prior fiscal year third quarter. Included in operating expenses during the third 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 30.0% in the third quarter of fiscal year 2026, up 3.7% from 26.3% in the third quarter of fiscal year 2025. Operating income was $0.1 million, a decrease of $2.0 million, or 95.8% and operating margin decreased from 3.1% in the third quarter of fiscal year 2025 to 0.1% in the third quarter of fiscal year 2026.

Net loss was $1.1 million in the third quarter of fiscal year 2026 versus net income of $2.4 million in the third quarter of fiscal year 2025. The decrease was primarily due to an increase in amortization of acquisition-related intangible assets, stock-based compensation, CEO transition costs and interest expense.

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

(Unaudited)

(Unaudited)

Third QUARTER ENDED December 27, 2025 COMPARED TO Third QUARTER ENDED December 28, 2024 (dollars in thousands):

Revenue:

Total revenue was $83.9 million, an increase of $17.1 million, or 25.6%, in our fiscal year 2026 third quarter compared to the prior fiscal year third quarter.

Service revenue, which accounted for 64.0% and 62.3% of our total revenue in the third quarter of fiscal years 2026 and 2025, respectively, increased $12.1 million or 29.1% from the third quarter of fiscal year 2025 to the third quarter of fiscal year 2026 despite economic volatility. This year-over-year increase included $9.0 million of incremental service revenue from the acquisitions of Martin and Essco. Organic revenue increased 7.3% over the prior year period primarily due to successful integration of historical acquisitions and consistent demand in highly regulated end markets.

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, second and third 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, second and third quarters of fiscal year 2026 and for each quarter during fiscal year 2025:

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Our Distribution revenue accounted for 36.0% of our total revenue in the third quarter of fiscal year 2026 and 37.7% of our total revenue in the third quarter of fiscal year 2025. During the third quarter of fiscal year 2026, Distribution segment revenue was $30.2 million which was an increase of $5.0 million or 19.8%. This increase was primarily due to incremental traditional rental revenue and higher revenue from our non-rental products.

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 third quarter of fiscal year 2026 versus the third quarter of fiscal year 2025 was primarily due to a favorable sales mix driven by rental revenue.

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, second and third quarter of fiscal year 2026 and each quarter of fiscal year 2025:

Our total pending product shipments at the end of the third quarter of fiscal year 2026 were $6.3 million, an increase of $2.4 million versus the end of the third quarter of fiscal year 2025 and a decrease of $1.2 million since September 27, 2025. The decrease in pending product shipments and backorders since September 27, 2025 was due in part to a one-time significant order outstanding at the end of the second quarter of fiscal year 2026.

Gross Profit:

Total gross profit for the third quarter of fiscal year 2026 was $25.3 million, an increase of $5.6 million or 28.3% versus the third quarter of fiscal year 2025. Total gross margin was 30.1% in the third quarter of fiscal year 2026, up from 29.5% in the third quarter of fiscal year 2025, a 0.6% increase.

Service gross profit in the third quarter of fiscal year 2026 increased $3.1 million, or 25.2%, from the third quarter of fiscal year 2025. Service gross margin was 28.8% in the third quarter of fiscal year 2026, a decrease of 0.9% compared to 29.7% in the third quarter of fiscal year 2025. This decrease in Service gross margin was the result of lower margin on traditional calibration services as we onboard new customers and an increase in outsourced services' costs, which was partially offset by strong margins on calibration services provided by recent acquisitions.

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 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.

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

Distribution segment gross margin was 32.4% in the third quarter of fiscal year 2026 versus 29.1% in the third quarter of fiscal year 2025, an increase of 3.3%. The increase in Distribution gross margin was primarily due to a favorable sales mix driven by rentals.

Operating Expenses:

Total operating expenses were $25.2 million in the third quarter of fiscal year 2026 versus $17.6 million during the third 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 and payroll costs. The increase in general and administrative expenses is primarily due to an increase in stock-based compensation, executive transition costs and increased payroll costs for new and acquired employees.

As a percentage of total revenue, operating expenses were 30.0% in the third quarter of fiscal year 2026 and 26.3% in the third quarter of fiscal year 2025, an increase of 3.7%.

Income Taxes:

Our effective tax rate for the third quarter of fiscal years 2026 and 2025 was (23.5)% and 24.7%, respectively. The decrease in effective tax rate is primarily due to a net loss for the period. 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 third quarter of fiscal years 2026 and 2025 were an expense of less than $0.1 million and a benefit of $0.1 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 (Loss) Income:

Net income for the third quarter of fiscal year 2026 decreased $3.5 million or 146.7% versus the third quarter of fiscal year 2025. As a percentage of revenue, net loss the third quarter of fiscal year 2026 was (1.3%), and net income in the third quarter of fiscal year 2025 was 3.5%. The year-over-year decrease in net income was primarily due to lower operating income and higher interest expense, net. The increase in interest expense is related to the borrowing for the acquisition of Essco as well as an increase in interest rates on the Company's Credit Agreement.

Adjusted EBITDA:

Total Adjusted EBITDA, a non-GAAP measure, for the third quarter of fiscal year 2026 was $10.1 million, an increase of $2.2 million or 27.2% versus the third 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 12.0% for the third quarter of fiscal year 2026 from 11.9% for the third quarter of fiscal year 2025. The increase in Adjusted EBITDA during the third quarter of fiscal year 2026 was primarily driven by depreciation and amortization expense, non-cash stock compensation, interest expense and executive transition costs.

Nine MONTHS ENDED December 27, 2025 COMPARED TO Nine MONTHS ENDED December 28, 2024 (dollars in thousands):

Revenue:

(dollars in thousands)

Total revenue was $242.6 million, an increase of $41.3 million, or 20.5%, in the first nine months of fiscal year 2026 compared to the first nine months of the prior fiscal year.

Service revenue, which accounted for 64.2% and 64.3% of our total revenue in the first nine months of fiscal years 2026 and 2025, respectively, increased $26.2 million or 20.3% from the first nine months of fiscal year 2025 to the first nine months of fiscal year 2026. This year-over-year increase included $25.1 million in service revenue from the acquisitions of Martin and Essco.

Distribution revenue, which accounted for 35.8% and 35.7% of our total revenue in the first nine months of fiscal years 2026 and 2025, respectively, increased $15.0 million or 20.9% from the first nine months of fiscal year 2025 to the first nine months of fiscal year 2026. This year-over-year increase included $3.4 million in revenue from the acquisitions of Martin and Essco and revenue increases across all distribution channels.

Gross Profit:

(dollars in thousands)

Total gross profit for the first nine months of fiscal year 2026 was $77.8 million, an increase of $14.3 million or 22.5% versus the first nine months of fiscal year 2025. Total gross margin was 32.1% in the first nine months of fiscal year 2026, slightly up from 31.6% in the first nine months of fiscal year 2025, a 0.5% increase.

Service gross profit in the first nine months of fiscal year 2026 increased $6.8 million, or 16.4%, from the first nine months of fiscal year 2025. Service gross margin was 31.3% in the first nine months of fiscal year 2026, a 1.0% decrease versus 32.3% in the first nine months of fiscal year 2025. This small decrease in Service gross margin was the result of lower margins on traditional calibration services.

Distribution gross profit in the first nine months of fiscal year 2026 increased $7.5 million, or 34.3%, from the first nine months of fiscal year 2025. Distribution gross margin was 33.6% in the first nine months of fiscal year 2026, a 3.4% increase versus 30.2% in the first nine months of fiscal year 2025. Distribution gross margin improvement is primarily due to a favorable sales mix driven by rental revenue.

Operating Expenses:

(dollars in thousands)

Total operating expenses were $68.9 million in the first nine months of fiscal year 2026 versus $52.6 million during the first nine 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 and payroll-related costs. The increase in general and administrative expenses is primarily due to an increase in stock-based compensation, executive transition costs and an increase in payroll-related costs.

As a percentage of total revenue, operating expenses were 28.4% in the first nine months of fiscal year 2026 and 26.1% in the first nine months of fiscal year 2025, an increase of 2.3%.

Income Taxes:

(dollars in thousands)

Our effective tax rate for the first nine months of fiscal years 2026 and 2025 was 33.5% and 16.7%, 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 nine months of fiscal years 2026 and 2025 was an expense of less than $0.1 million and a benefit of $1.3 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 nine months of fiscal year 2026 decreased $6.6 million or 65.9% versus the first nine months of fiscal year 2025. As a percentage of revenue, net income was 1.4% in the first nine months of fiscal year 2026, down from 5.0% in the first nine months of fiscal year 2025. The year-over-year decrease in net income was primarily due to higher interest expense, net, and higher depreciation and amortization expenses. The increase in interest expense is related to the borrowing for the acquisition of Essco as well as an increase in interest rates on the Company's Credit Agreement. Increased depreciation and amortization expense is primarily due to the Company's recent acquisitions.

Adjusted EBITDA:

Total Adjusted EBITDA, a non-GAAP measure, for the first nine months of fiscal year 2026 was $34.0 million, an increase of $7.0 million or 25.8% versus the first nine 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 14.0% for the first nine months of fiscal year 2026 from 13.4% for the first nine months of fiscal year 2025. The increase in Adjusted EBITDA during the first nine months of fiscal year 2026 was primarily driven by depreciation and amortization expense, non-cash stock compensation, interest expense and income tax expense.

Non-GAAP Financial Measures

Service Organic Revenue Growth

In addition to reporting service revenue growth, a GAAP measure, we present service organic revenue growth (current period service revenue less freight billed to customer less acquired revenue less prior period service revenue/prior period service revenue less freight billed to customer less divested revenue times 100). Acquired revenue is revenue generated from acquisitions for twelve months subsequent to the acquisition date. Divested revenue is revenue in the prior period related to businesses that were divested in the last twelve months. The Company's management believes service organic revenue growth is an important measure of operating performance because the measure provides a basis for comparison of our business operations across periods to assess core operating performance. As such, the Company uses service organic revenue growth as a measure of performance when evaluating its Service segment and as a basis for planning and forecasting.

Service organic growth 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. Service organic growth, 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.

Service Organic Revenue

* Non-GAAP measure

Adjusted EBITDA

In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, executive transition costs, non-cash stock compensation expense, gain on sale of assets, 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, executive transition costs 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)

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, executive transition costs, 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.

* Non-GAAP measure

Note: Income tax effect is calculated using the expected annual tax rate, which was 31.5% and 25.5% 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 December 27, 2025, $150.0 million was available for borrowing, subject to covenant restrictions, under the Credit Facility, of which, $99.9 million was outstanding. During the first nine 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%.

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 2.00 on December 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 nine 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 $28.6 million during the first nine months of fiscal year 2026 compared to $28.4 million of net cash provided by operating activities during the first nine months of fiscal year 2025. The significant working capital fluctuations were as follows:

• Receivables: Accounts receivable and other receivables increased $3.5 million during the first nine months of fiscal year 2026, inclusive of $2.9 million of accounts receivable acquired during the period. During the first nine months of fiscal year 2025, accounts receivable and other receivables increased $4.1 million, inclusive of $7.7 million accounts receivable acquired during the period. The year-over-year variation reflects the Company's growth and is impacted by changes in the timing of collections. The following table illustrates our “days sales outstanding” as of December 27, 2025 and December 28, 2024 (dollars in thousands):

34

• 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. Any 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 increased $0.7 million during the first nine months of fiscal year 2026, inclusive of $0.2 million assumed in an acquisition during the period. Accounts payable increased $4.7 million during the first nine months of fiscal year 2025, inclusive of $0.5 million assumed in an acquisition during the period. The variances are largely due to the timing of inventory purchases, 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 nine months of fiscal year 2026, accrued compensation and other current liabilities increased by $3.7 million, inclusive of $3.3 million of accrued compensation and other current liabilities related to a current year acquisition. Accrued payroll and incentives increased $2.8 million, the current portion of lease liabilities increased $1.3 million and accrued interest increased $0.3 million. Accrued acquisition holdbacks decreased $0.5 million, and deferred revenue decreased $0.4 million. During the first nine months of fiscal year 2025, accrued compensation and other current liabilities decreased by $6.6 million, inclusive of $1.0 million from assumed liabilities, purchase price holdbacks and contingent consideration from acquisitions. The decrease is largely due to the annual payment of incentive-based compensation, payments of acquisition-related holdbacks, and income tax payments.

Investing Activities: During the first nine months of fiscal years 2026 and 2025, we invested $11.7 million and $10.5 million, respectively, in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and our rental business.

During the first nine months of fiscal years 2026 and 2025, we used $82.5 million and $86.1 million, respectively, for business acquisitions.

Financing Activities: During the first nine months of fiscal year 2026, net proceeds and repayments from our revolving Credit Facility was $68.6 million, and $0.7 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 nine months of fiscal year 2025, $1.8 million in cash was generated from the issuance of common stock. In addition, we used $1.7 million for scheduled repayments of our term loan and $3.2 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.

Non-GAAP Financial Measure

Operating Free Cash Flow

In addition to reporting net cash from operations, a GAAP measure, we present Operating Free Cash Flow (net cash from operations less capital expenditures), which is a non-GAAP measure. The Company’s management believes Operating Free Cash Flow is an important liquidity measure that reflects the cash generated by the business, after the purchases of technology, capabilities and assets, that can then be used for, among other things, strategic acquisitions, investments in the business and funding ongoing operations.

Operating Free Cash Flow 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 cash from operations and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Operating Free Cash Flow, 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.

Operating Free Cash Flow

* Non-GAAP measure

OUTLOOK

Our team delivered a strong quarter of revenue and adjusted EBITDA (a non-GAAP measure) performance in the fiscal third quarter highlighted by double-digit service revenue and gross profit growth. Service organic revenue growth was 7%, Distribution revenue grew 19.8% in the quarter with a gross margin of 32.4%, driven primarily by the strategic mix increase of higher-margin rentals. While the Company's net income decreased by more than 100% over the prior year period, the team's execution and robust revenue growth enabled us to deliver 27% adjusted EBITDA (a non-GAAP measure) growth.

We believe we are well-positioned to execute our acquisition strategy while returning to more historic levels of service organic growth.

Looking forward, we are optimistic given the momentum building in our service segment driven by strong retention, increased customer activity levels, and realization of business wins. We expect high single-digit Service organic revenue growth for the balance of fiscal 2026, barring any increased economic uncertainty. We believe our strong value proposition along with the recent acquisitions of premier service calibration companies that expand our geographical footprint 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 $1.0 million assuming our borrowing levels at December 27, 2025 remained constant under the Credit Facility. As of December 27, 2025, $150.0 million was available for borrowing, under the Credit Facility, of which $99.9 million was outstanding.

Under the Credit Agreement, effective as of 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 third quarter of fiscal year 2026 for the Credit Facility was 5.7%. On December 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 93% and 92% of our total revenues for the first nine months of fiscal year 2026 and 2025, respectively 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 utilized 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 did not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a loss of less than $0.1 million and a gain of $0.2 million in the first nine 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.

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. The Company's internal controls over financial reporting included those inherited from the Martin acquisition, which have been evaluated by management and supplemented where deemed appropriate. Our management, with the participation of our principal executive officer and principal financial officer, did not identify any other changes that occurred in our internal control over financial reporting during the quarter ended December 27, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.