TRANSCAT INC (TRNS)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, involvement in legal proceedings, the volatility of our stock price, the relatively low trading volume of our common stock, the material weaknesses in our internal control over financial reporting, 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 28, 2026. 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 28, 2026.

RESULTS OF OPERATIONS

Executive Summary

During our first quarter of fiscal year 2027, we had consolidated revenue of $92.9 million. This represented an increase of $16.5 million or 21.6% versus the first quarter of fiscal year 2026. This increase was primarily due to acquisitions, service organic revenue growth (a non-GAAP measure) and a $3.1 million increase in distribution revenue. Acquired revenue, which represents revenue generated from acquisitions for twelve months subsequent to the acquisition date, was $6.9 million. Service organic revenue increased by 12.8% versus the first quarter of fiscal year 2026. 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 first quarter of fiscal year 2027 gross profit was $30.7 million. This was an increase of $4.9 million or 19.0% versus the first quarter of fiscal year 2026. Consolidated gross margin was 33.1%, a decrease of 0.7% versus the first quarter of fiscal year 2026. This decrease in gross profit percentage was primarily due to lower margins from the Distribution segment when compared to the prior year period.

Total operating expenses were $27.0 million in the first quarter of fiscal year 2027, an increase of $6.5 million or 31.9% when compared to the prior fiscal year first quarter. Included in operating expenses during the first quarter of fiscal year 2027 were more than $2.5 million of incremental operating expenses related to the SCM and Essco acquisitions, including

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customer base amortization, depreciation and acquisition-related costs, increased stock-based compensation and executive transition costs. As a percentage of total revenue, operating expenses were 29.1% in the first quarter of fiscal year 2027, up 2.3% from 26.8% in the first quarter of fiscal year 2026. Operating income was $3.7 million, a decrease of $1.6 million, or 30.3% and operating margin decreased from 7.0% in the first quarter of fiscal year 2026 to 4.0% in the first quarter of fiscal year 2027.

Net income was $1.3 million in the first quarter of fiscal year 2027 versus net income of $3.3 million in the first quarter of fiscal year 2026. The decrease was primarily due to a $6.5 million increase in operating expenses, including an increase in amortization of acquisition-related intangible assets, stock-based compensation, executive transition costs and interest expense. The increase in expenses was partially offset by a $4.9 million increase in gross profit.

The following table presents, for the first quarter of fiscal year 2027 and fiscal year 2026, the components of our Condensed Consolidated Statements of Income:

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THREE MONTHS ENDED JUNE 27, 2026 COMPARED TO THREE MONTHS ENDED JUNE 28, 2025 (dollars in thousands):

Revenue:

Total revenue was $92.9 million, an increase of $16.5 million, or 21.6%, in our fiscal year 2027 first quarter compared to the prior fiscal year first quarter.

Service revenue, which accounted for 67.3% and 64.3% of our total revenue in the first quarter of fiscal years 2027 and 2026, respectively, increased $13.4 million or 27.3% from the first quarter of fiscal year 2027 to the first quarter of fiscal year 2026. This year-over-year increase included $6.9 million of incremental service revenue from the acquisitions of Essco and SCM. Service organic revenue increased 12.8% over the prior year period primarily due to growth in client-based labs and calibration services for biomedical customers.

Our fiscal years 2027 and 2026 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 quarter of fiscal year 2027 and each quarter in fiscal year 2026 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

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outsourcing. The following table presents the source of our Service revenue, and the percentage of Service revenue derived from each source for the first quarter of fiscal year 2027 and for each quarter during fiscal year 2026:

Our Distribution revenue accounted for 32.7% of our total revenue in the first quarter of fiscal year 2027 and 35.7% of our total revenue in the first quarter of fiscal year 2026. During the

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this annual report. In addition to historical information, the following discussion and analysis includes forward looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” and elsewhere in this annual report. See the discussion under “Cautionary Note Regarding Forward Looking Statements” beginning on page 1 of this annual report.

OVERVIEW

Operational Overview. We are a leading provider of accredited calibration services, cost control and optimization services, and distribution and rental of value-added professional grade handheld test, measurement, and control instrumentation.

We operate our business through two reportable business segments, Service and Distribution, which offer a comprehensive range of services and products to the same customer base.

Our strength in our Service segment is based upon our wide range of disciplines, our investment in quality systems and our ability to provide accredited calibrations to customers in highly regulated targeted market segments. Our services range from the calibration and repair of a single unit to managing a customer’s entire calibration program. We believe our Service segment offers an opportunity for long-term growth and the potential for continuing revenue from established customers with regular calibration cycles and recurring laboratory instrument service requirements.

Our Service segment has shown consistent revenue growth over the past several years, ending fiscal year 2026 with its 68th consecutive quarter of year-over-year growth. This segment has benefited from both organic growth as well as acquisitions over those 68 quarters. The business acquisitions that we made have been focused on expanding our service capabilities, increasing our geographic reach and leveraging our Calibration Service Centers and other infrastructure to create operational synergies.

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Our Service segment revenue growth was 19.7% for fiscal year 2026 from fiscal year 2025.  This increase was primarily due to the acquisitions of Essco and Martin. Acquired revenue, which represents revenue generated from acquisitions for twelve months subsequent to the acquisition date, was $30.9 million. The Service segment gross margin decreased by 90 basis points. Service segment gross margin decreases were primarily due to costs associated with new customer wins and lower than expected levels of organic growth in the first half of the fiscal year, which rebounded in the second half of the year.

In our Distribution segment, we sell and offer for rent, professional grade handheld test and measurement instruments. Because we specialize in professional grade handheld test and measurement instruments, as opposed to a wide array of industrial products, our sales and customer service personnel can provide value-added technical assistance to our customers to aid them in determining what product best meets their particular application requirements. We have expertise in the procurement and sale of used equipment, furthering our ability to add value for our customers. We also have a higher-end electronic test and measurement equipment rental business that augments our organically grown test and measurement equipment rental business. Through our website and sales teams, customers can place orders for test and measurement instruments and can elect to have their purchased instruments calibrated and certified by our Calibration Service Centers before shipment as well as on regular post-purchase intervals. Pre-shipment calibration and certification allows our customers to place newly purchased instruments into service immediately upon receipt.

Sales in our Distribution segment are generally not consumable items but are instruments purchased as replacements, upgrades or for expansion of manufacturing or research and development facilities. As such, this segment can be heavily impacted by changes in the economic environment. As customers increase or decrease capital and discretionary spending, our Distribution sales will typically be directly impacted.

In fiscal year 2026, Distribution segment sales increased by 18.2%. This increase in sales primarily due to rentals of $7.5 million, product sales of $10.2 million, including contributions from the Martin and Essco acquisitions of $4.4 million.

The Distribution segment gross margin in fiscal year 2026 increased by 320 basis points. The increase in segment gross margin was primarily due to increased margins from rental revenue and a favorable mix of higher margin products sold.

Our focus remains on adding new in-demand vendors and product lines, expanding the number of SKUs that we offer with and without pre-shipment calibration and offering equipment rental and used equipment options. Management believes this diversification strategy will mitigate the impact that any particular industry or sector will have on the overall performance of this segment as well as help to further differentiate us from our competitors going forward.

Financial Overview. A discussion regarding our financial condition and results of operations for the fiscal year ended March 29, 2025 and year-to-year comparisons between fiscal year 2025 and fiscal year ended March 30, 2024 ("fiscal year 2024"), which are not included in this Form 10-K, can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2025 and are incorporated by reference herein.

Total revenue for fiscal year 2026 was $331.9 million. This represented an increase of $53.5 million or 19.2% versus total revenue of $278.4 million for fiscal year 2025.  This increase was primarily due to recently completed acquisitions, increased rental sales, subcontracted third-party vendor sales and product/equipment sales.

Service revenue was $217.2 million in fiscal year 2026, an increase of $35.8 million or 19.7%. Service revenue accounted for 65.4% of our total revenue during fiscal year 2026. Of our Service revenue in fiscal year 2026, 85.0% was generated by our Calibration Service Centers and cost control and optimization services while 13.6% was generated through subcontracted third-party vendors, compared with 86.1% and 12.8%, respectively, in fiscal year 2025. The remainder of our Service revenue in each period was derived from freight charges.

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Distribution sales were $114.7 million in fiscal year 2026, an increase of $17.7 million or 18.2%.  Distribution sales accounted for 34.6% of our total revenue in fiscal year 2026.

Sales to domestic customers comprised 94.4% of total Distribution sales in fiscal year 2026, while 4.6% were to Canadian customers and 1.0% were to customers in other international markets.

Operating expenses were $95.0 million, or 28.6% of total revenue, in fiscal year 2026 compared with $71.6 million, or 25.7% of total revenue, in fiscal year 2025. Operating income was $13.3 million, or 4.0% of total revenue, in fiscal year 2026 compared with $17.9 million, or 6.4% of total revenue, in fiscal year 2025. The year-over-year increase in selling, marketing and warehouse expenses was primarily due to amortization expense of $5.3 million related to recent acquisitions, $3.1 million due to employee compensation, including incentive-based employee costs due to higher sales. The year-over-year increase in general and administrative expenses was due to incremental expenses from acquired businesses (including stock expense of $3.8 million), increased payroll costs of $5.9 million, executive transition costs of $1.7 million and continued investments in technology of $1.1 million.

CRITICAL ACCOUNTING ESTIMATES

An appreciation of our critical accounting policies and estimates is necessary to understand our financial results. These policies may require management to make difficult and subjective judgments regarding uncertainties, including the business and economic uncertainty resulting from volatile geopolitical conditions and the high interest rate and inflationary cost environment, and as a result, such estimates may significantly impact our financial results. The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes. We applied our critical accounting estimation methods consistently in all material respects and for all periods presented.

Our critical accounting estimates are:

The following items in our Consolidated Financial Statements require significant estimation or judgment:

Revenue Recognition. Revenues are recorded based on the amount of consideration we expect to be entitled to as a result of satisfying our performance obligations. Revenue on our point in time contracts is recognized when the customer obtains control of the product. Revenue on our over time contracts is recognized using the output method as this portrays the transfer of control to the customer. The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration, as applicable. We estimate and reserve for our expected credit loss exposure based on our experience with past due accounts and collectibility, write-off history, the aging of accounts receivable, our analysis of customer data, and forward-looking information, leveraging estimates of creditworthiness and projections of default and recovery rates for certain of our customers.

We assess the goods and services promised in our contracts to identify separate performance obligations. This evaluation requires judgment, particularly in determining whether goods or services are distinct and should be accounted for separately or combined. Changes in these judgments could affect the timing of revenue recognition. The transaction price may include fixed and variable consideration, such as discounts, rebates, refunds, or credits. We estimate variable consideration using either the expected value or most likely amount method, subject to the constraint that it is probable that a significant reversal of revenue will not occur. Estimating variable consideration requires significant judgment, including historical experience, current and expected market conditions and customer-specific factors.

See Note 1 to our consolidated financial statements for further information on our revenue recognition and related policies.

Goodwill and Intangible Assets. Goodwill represents the excess of the purchase price over the values assigned to the underlying net assets of an acquired business and is not amortized. As of March 28, 2026, we had $218.2 million of recorded goodwill allocated to the Company's two reporting units - Service and Distribution. We test goodwill for impairment, typically by assessing qualitative factors, for each reporting unit on an annual basis during the fourth quarter of each fiscal year or more frequently if conditions indicate that such impairment could exist. Events that would indicate impairment and trigger an interim impairment assessment include, but are

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