Transcat - Earnings Call - Q2 2026
November 3, 2025
Executive Summary
- Strong topline with broad-based growth: revenue grew 21.3% YoY to $82.3M, gross profit +26.2% with 120 bps margin expansion; distribution was the standout (rentals mix), while service grew 19.9% including M&A contribution. Adjusted EBITDA rose 36.7% to $12.1M with 160 bps margin expansion.
- Mixed EPS outcome: GAAP diluted EPS fell to $0.14 on higher interest and a higher effective tax rate tied to CEO succession costs, but adjusted diluted EPS of $0.44 compared to $0.52 LY; management flagged similar one-time costs and elevated tax rate in 2H FY26.
- Estimate context (S&P Global): Revenue beat ($82.27M vs $79.51M*). Adjusted/Primary EPS beat ($0.44 vs $0.24*). SPGI EBITDA lens shows a miss (actual $10.0M vs $11.6M*), reflecting definitional differences vs company Adjusted EBITDA [GetEstimates].
- Outlook/tone: Management reiterated expectation for a return to high single-digit service organic growth in 2H, citing recent wins and pipeline visibility; distribution margin expansion should continue albeit at a moderated 250–300 bps YoY pace; leverage spiked to fund Essco acquisition but is expected to decline as margins expand.
What Went Well and What Went Wrong
- What Went Well
- Rentals-driven distribution strength: Distribution revenue +24% to $29.4M with gross margin +530 bps to 33.2%, driven by higher rentals mix and improved execution post-integration of Axiom; distribution operating income rose to $2.6M and adjusted operating income to $5.0M.
- Adjusted EBITDA outperformance: Adjusted EBITDA +36.7% to $12.1M with 14.7% margin (+160 bps), reflecting double-digit growth across both segments and mix shift to higher-margin rentals.
- Accretive M&A traction: Early results from Essco Calibration were “very strong”; Martin and Essco both growing double digits since acquisition; integration and synergy capture “second to none” per management.
- What Went Wrong
- GAAP profitability pressure: Net income fell 61% to $1.3M; diluted EPS dropped to $0.14, driven by higher interest expense (new facility and acquisition) and a higher-than-anticipated effective tax rate tied to CEO succession.
- Service margin compression: Service gross margin fell 90 bps to 32.2% and service operating income decreased 75% to $0.9M, as organic growth ran below historical levels and Transcat Solutions remained a drag YoY (stabilizing sequentially)*[0000099302_2228565_7]**.
- Opex elevated with M&A and equity comp: Total operating expenses +33.1% YoY on acquired businesses, stock-based comp, amortization, and higher sales incentives; consolidated operating income declined 6%.
Transcript
Operator (participant)
Greetings and welcome to the Transcat Second Quarter Fiscal Year 2026 Financial Results Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Howe, Senior Director of Financial Planning and Analysis. Thank you, John. You may begin.
John Howe (Senior Director of Financial Planning and Analysis)
Thank you, Operator, and good afternoon, everyone. We appreciate your time and your interest in Transcat. With me here on the call today is our President and CEO, Lee Rudow, and our Chief Financial Officer, Tom Barbato. We will begin the call with some prepared remarks, and then we will open the call for questions. Our earnings release crossed the wire after markets closed this afternoon. Both the earnings release and the slides that we will reference during our prepared remarks can be found on our website, transcat.com, in the Investor Relations section. If you would please refer to slide two. As you are aware, we may make forward-looking statements during the formal presentation and Q&A portion of this teleconference.
These statements apply to future events which are subject to risks and uncertainties, as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in the news release as well as in the documents filed by the company with the SEC. You can find those on our website, where we regularly post information about the company, as well as on the SEC's website at sec.gov. We undertake no obligation to publicly update or correct any of the forward-looking statements contained in this call, whether as a result of new information, future events, or otherwise, except as required by law. Please review our forward-looking statements in conjunction with these precautionary factors. Additionally, during today's call, we will discuss certain non-GAAP measures which we believe will be useful in evaluating our performance.
You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release. With that, I'll turn the call over to Lee.
Lee Rudow (President and CEO)
Okay. Thank you, John. Good afternoon, everyone. Thank you for joining us on the call today. Transcat delivered strong performance again in our second quarter of fiscal 2026. The key to Transcat's ongoing success is the consistent execution of our unique strategy, which includes the diversity of our product and service portfolio. As a reminder, there are four key elements to our strategy: organic service growth, inherent operating leverage in our service platform, strategic acquisitions, and growth in our highly profitable rental channel. The combination of all four creates a unique and proven resiliency in our business model, which can be seen clearly in the first half of our fiscal 2026 year. In the second quarter, despite continued economic uncertainty and volatility, consolidated revenue increased 21% to $83 million.
Stable calibration revenue driven by customer retention, strong performances by our two recent acquisitions, Martin Calibration and Esko Calibration, and significant growth in our rental channel drove double-digit revenue growth in both our service and distribution segments. In addition, in the second quarter, consolidated gross profit grew 26%, and gross margins expanded 120 basis points. Our differentiated strategy also enabled adjusted EBITDA growth of 37% with 160 basis points of margin expansion. Amidst macroeconomic uncertainty and continued headwinds, the team did an excellent job finding ways to win, grow, and position the company for sustainable long-term growth throughout both segments. Turning to the service results in the second quarter, service revenue increased 20% and recorded a 66th straight quarter of year-over-year growth. Early results of our most recent acquisition, Esko Calibration, have been very strong.
As expected, Esko is a perfect fit, and as we like to say, right down the fairway for Transcat. Esko, like the Martin Calibration acquisition earlier in the fiscal year, demonstrates our ability to attract and acquire highly sought-after calibration companies that expand our capabilities, geographic footprint, leadership, and most importantly, our ability to deliver long-term organic service growth. Transcat's reputation as a strategic acquirer of choice in the calibration industry continues to be an important differentiator. We firmly believe our methodology and culture around integration and synergy capture is second to none. The acquisitions of both Esko and Martin have made Transcat a very difficult company to compete with. Turning to distribution in the second quarter, distribution revenue grew 24% from high demand, especially in our rental channel.
Gross margin expanded 530 basis points versus prior year, driven primarily by an increase in the mix of higher-margin rental revenue within the distribution segment. The strength of our balance sheet continues to support Transcat's proven growth strategy. Our new syndicated credit facility nearly doubles Transcat's resources to execute on proven acquisition and growth strategies, automation, and many new AI programs in the works. We expect AI to generate new data streams and associated insights that will benefit both sales and operations, from productivity to capacity planning, from marketing to customer retention. We are engaged in a new level of data management and delivery. Overall, we're pleased with our second quarter performance, which, like the first quarter, remains strong despite continued economic headwinds. With that, I'll turn things over to Tom for a more detailed look at the second quarter financial results.
Tom Barbato (CFO)
Thanks, Lee. I'll start on slide five of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for the second quarter of fiscal 2026. Second quarter consolidated revenue of $82.3 million was up 21% versus prior year as both segments grew double digits. Looking at it by segment, service revenue grew 20%, despite continued economic volatility. Distribution revenue of $29.4 million grew 24%, primarily due to strong performance from the higher-margin rental business. Turning to slide six, our consolidated gross profit for the second quarter of $26.8 million was up 26% from the prior year. Service gross profit increased 17% versus prior year. We continue to leverage higher levels of technician productivity and our differentiated value proposition. That said, service margins continue to be pressured by lower-than-historic levels of organic growth, as well as lower year-over-year Transcat solutions revenue.
Distribution segment gross profit of $9.8 million was up 48%, with 530 basis points of gross margin expansion driven primarily from the performance in our rental channel. Turning to slide seven, Q2 net income of $1.3 million decreased $2 million versus the prior year, driven by higher interest expense and increased tax rate within the quarter. Q2 net income was negatively impacted by both one-time expenses related to the company's CEO succession plan and a higher effective income tax rate. The income tax rate was impacted by higher-than-anticipated excluded compensation expenses also tied to the CEO succession plan. Diluted earnings per share came in at 14 cents. We expect additional one-time CEO succession costs and a similar resulting impact on the company's effective tax rate in the second half of fiscal 2026.
We report adjusted diluted earnings per share as well to normalize for the impact of upfront and ongoing acquisition-related costs. Q2 adjusted diluted earnings per share was 44 cents. A reconciliation of diluted earnings per share to adjusted diluted earnings per share can be found in the supplemental schedules attached to this presentation. Flipping to slide eight, where we show our consolidated adjusted EBITDA and adjusted EBITDA margin, we use adjusted EBITDA, which is non-GAAP, to gauge the performance of our business because we believe it is the best measure of our operating performance and ability to generate cash. As we continue to execute on our acquisition strategy, this metric becomes even more important to highlight as it does adjust for one-time deal-related transaction costs, as well as increased levels of non-cash expenses that will hit our income statement from acquisition purchase accounting.
Second quarter consolidated adjusted EBITDA of $12.1 million increased 37% from the same quarter in the prior year with 160 basis points of margin expansion. Please note that segment non-GAAP results are now labeled adjusted operating income, but the calculation did not change. As always, a reconciliation of adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation. Moving to slide nine, operating cash flow is up 5% versus the prior year, and CapEx is in line with expectations and continues to be centered around service segment capabilities, rental pool assets, technology, and future growth projects. Slide 10 highlights our strong balance sheet. At quarter end, we had total debt of $111,900,000. $38.1 million available for borrowings under our secured revolving credit facility and a leverage ratio of 2.25x. We were pleased to close the Esko Calibration deal in the second quarter.
Esko was a coveted calibration company that is highly synergistic and fulfills all of our strategic acquisition drivers. Our expanding adjusted EBITDA margin will drive a lower leverage ratio in subsequent quarters. Lastly, our Form 10Q will be filed November 5th after the market closes. With that, I'll turn it back to you, Lee.
Lee Rudow (President and CEO)
All right. Thank you, Tom. As I mentioned earlier, our diversified portfolio of products and services, along with a strong financial profile, has generated consistent results over an extended period of time and through various economic cycles. This should not be understated as our business model continues to demonstrate its resiliency. In addition, we will continue to leverage technology as a competitive advantage by investing in state-of-the-art capabilities, systems, processes, and AI, all of which drive sustainable growth and efficiencies into our business model. This is the Transcat way. As previously discussed, we expect a return to high single-digit organic service growth in the second half of fiscal 2026. In addition, we would expect margin expansion as we return to historical rates of organic growth. We have a strong acquisition pipeline to support an increase in our geographic footprint, capabilities, and overall market share.
Where it makes sense, we will continue to expand our addressable markets through acquisition. Our leadership team across multiple levels of the organization continues to get stronger and is a major contributor to our ability to continue to deliver sustainable long-term value for our shareholders. With that, operator, we can open the call up for questions.
Operator (participant)
Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may withdraw your question by pressing star two. Once again, to ask a question, please press the star and one on your telephone keypad. We'll take our first question from Greg Palm with Greg Palm. Please go ahead. Your line is open.
Greg Palm (Senior Research Analyst)
Hi. Good afternoon. Thanks for taking the questions. I wanted to start with just in terms of the quarter, distribution was, I think, the highlight again. Maybe a two-parter. Number one, what's driving the rentals acceleration? I do not know if it's how much is market-related versus company-specific that you're doing to drive incremental sales. Are you able to give us kind of the mix of what was rentals in the quarter as a percent of distribution?
Tom Barbato (CFO)
Yeah. Greg, it's Tom. How are you doing? I think when we talk about rentals, I think there are two things driving the growth there. I think one is, and we've talked about this before, right? I mean, we acquired Axiom Test Equipment about two years ago, and we made a conscious effort to focus last year on really accelerating the integration of that business. I think part of what we're seeing is that integrated team is performing at a very high level. I'll just say winning more opportunities that are presented to them and really helping to drive some of the growth we're seeing. I think there is some rent versus buy impact to the results as well, given some of the macroeconomic challenges that exist. I think this one is heavily weighted towards execution on our part and the benefits of the integration work we did last year.
I think year-over-year, the Becknell rental business is also performing very well on a year-over-year basis, and we're seeing consistent demand there as well.
Greg Palm (Senior Research Analyst)
What kind of visibility levels do you have for the second half of that business? Because obviously, the revenue growth in the first half, from a number standpoint, is pretty incredible.
Tom Barbato (CFO)
Yeah. I think we started seeing in the second half of last year, we started seeing some of the benefits of better performance, better execution post-integration. I think it's not a reasonable expectation to think that we're going to continue to see the growth rates we saw in the first half of the year. I'm still expecting reasonable margin expansion, not to the tune on a year-to-date basis. We're seeing north of 500 basis points of margin expansion year-over-year. I think we'll continue to see margin expansion, probably something more in the 250-300 basis points. You should expect to continue to see good performance.
Greg Palm (Senior Research Analyst)
Okay. And then on the service side, I think by my math, still kind of low single-digit organic decline. What gives you the confidence to sit here today and still say, "Yes, we're going to return to high single-digit organic in the back half of the year"? Because it strikes me going from a low single-digit decline to a high single-digit, that's a pretty big move, pretty big uptick.
Lee Rudow (President and CEO)
I'll take this one. Greg, this is Lee. If you factor out solutions, we like to look at it both ways. The growth was probably in the 1-2% range. We're going to call that pretty stable given this environment. We have no real issues on the retention. The customers that we have today continue to do business with us as they have in the past. Where we've struggled a little bit in this fiscal year has been on closing new business and starting new business. I think the economy is such that the longer time to close has become more normal. The incremental cost for our customers to change vendors at this particular time with some of the uncertainty has been a challenge.
The reason why we're still quoting in the high single-digit range is because a number of accounts have been won recently and will come to fruition, and we expect revenue as we drive through the third quarter into the fourth. I think there's enough there that we have fairly good sight lines into more growth than we've experienced in the first half, which, by the way, is what we've been guiding to softly for the last several quarters. This is what we thought would happen, and it's not too far off from our original expectations.
Greg Palm (Senior Research Analyst)
Okay. Understood. That's it for me. Best of luck. Thanks.
Lee Rudow (President and CEO)
Okay. Thanks, Greg.
Operator (participant)
Thank you. Our next question comes from Max Michalis with Lake Street Capital Markets. Please go ahead. Your line is open.
Max Michaelis (Equity Research Associate)
Hey, guys. Thanks for taking my questions. Congrats on the quarter. Maybe just a question towards Esko, maybe looking back 90 days since you guys acquired them on the 5th of August. Maybe are there some things with that acquisition that have become more of a positive than you originally thought? And then maybe, on the other hand, some negatives that you or maybe some obstacles you've run in with the Esko acquisition as well.
Lee Rudow (President and CEO)
This is Lee, Max. Very few obstacles. I mean. In addition to acquiring the company, we acquired a really good management team. They understand their business. And that business has done really well. We do not really count in our organic growth numbers when our acquisitions grow in the first year, but we have had really impressive growth from Esko. Actually, we have from Martin as well. So both those companies are in a double-digit range for growth since we acquired them, and I expect that to continue. As far as negatives, I really cannot think of any. I mean, there are always some challenges just trying to get to know people. Most of the planning sessions have gone well. Our sales are integrated almost day one without any real issues whatsoever that have at least come to my attention.
I think it has been as smooth as we have experienced. I think you are going to get that with the better quality companies. We saw it with Martin. We are seeing it again. That is almost commonplace, and it is part of you get what you pay for. We have been pleased, really pleased.
Max Michaelis (Equity Research Associate)
Yeah. I guess kind of go back to sort of the question Greg had just with the back half of the second half of the year with service returning to organic growth. You talked about some economic uncertainty, barring any economic uncertainty, further obstacles. I mean, what is that? How would you define that, this economic uncertainty stalling you guys from growing in the second half of the year? I mean, just kind of getting a gauge on what is kind of what we should be looking for, I guess, to kind of model out the second half of the year for service growth.
Tom Barbato (CFO)
I think what we're alluding to, Max, is maybe kind of more of what we've seen in the first half of the year. A lot of uncertainty around tariff levels and where things are going from an interest rate environment standpoint. I think it's got some of our customers reacting a little slower than what we normally see. I think with recent news, we're expecting that to improve some. It just seems like in this environment we're operating in, things are subject to change at any point in time.
Max Michaelis (Equity Research Associate)
I mean, have you seen customer sales cycles shrink since maybe three, four months ago up until now?
Lee Rudow (President and CEO)
I don't think the sales cycle has shrunk. I think we've experienced for the last half a year to three-quarters of a year, we've had consistent delays for customers who originally expressed, "Yes, we're going to go with Transcat. We like the value proposition. Here's when we're going to make the change." That seems to get delayed and delayed again. I've seen this before. It's not uncommon. It's why we try not to focus quarter to quarter. Try to look at the bigger picture of who we are, where we're headed, where we've been in terms of a service company. We love the position we're in. You're going to have economic cycles like this that are just going to be a little bit softer than you like. Our revenue and retention relative to our revenue relative to retention has been solid. We've made two terrific acquisitions in the space.
20% growth in services. This is what you want. To do it in an economic environment like this, I think, says a lot about our company, which I tried to allude to in the script. We're right on target. I consider it's really good performance given some of the headwinds we have. We'll see how it all plays out. We are seeing sight lines. We are seeing signs of customers actually giving us the go on new orders. That's where the confidence is coming from in the back half.
Max Michaelis (Equity Research Associate)
Awesome. Thanks, guys. Great quarter.
Lee Rudow (President and CEO)
Okay. Take care.
Max Michaelis (Equity Research Associate)
Thanks, Max.
Operator (participant)
Thank you. Our next question comes from Ted Jackson with Northland Securities. Please go ahead. Your line is open.
Ted Jackson (Managing Director and Senior Research Analyst)
Thanks very much. I want to just—it's not really a question, but it is a question. Just with regards to rental, the rental business has been going really well. You keep it buried in distribution. What's going to get you to break that out? Why I ask is, I mean, it's becoming a pretty important piece of business, and it's an important piece of your CapEx. I mean, if I'm not mistaken, I don't think you break your rental CapEx out. The CapEx is substantially larger than it was before. You're clearly investing in your rental assets. I mean, at what point do we get to where you're going to start showing a little more about that so we can get a better handle on the return you're getting off that investment rather than deciding it just via growth drive on the top? That's my first question.
Tom Barbato (CFO)
Yeah. Hey, Ted. It's Tom. One of the beauties of the rental business, right, and part of the way that we got this business started, right, is that to a large extent, we're renting equipment that we would otherwise sell through the distribution channel, right? There was a low cost of entry, right? We could take something off the distribution shelf and put it on the rental shelf. If there was a customer that was willing to pay to rent it, we would be able to do that in a kind of seamless way. The kind of beauty in having that flexibility and being able to execute that and grow that business from nothing to something is also, internally, there's a lot of, I'll just say, blurred lines in terms of we have the same people supporting in our warehouse, right? It's the same people supporting distribution and supporting rental.
We're working with the same vendors. There's a lot of overlap between those businesses. It's not easy to necessarily kind of break it apart. I think at some point in time, we may be there. Currently, it's kind of operated as one business internally from a resource standpoint, so on and so forth. I think when we talk about CapEx, I would just think in the context of about a third of our CapEx budget is allocated towards rentals. When we talk about rentals, you got to think about CapEx from a net standpoint, right? Because anytime you have an effective rental business, you also have to have a way to identify slow-moving equipment and have a used program to churn that equipment out, generate cash, and reinvest it in assets that do have demand, right?
I would just say on a net basis, it's about a third of our CapEx budget.
Ted Jackson (Managing Director and Senior Research Analyst)
What is it in terms of a piece of your PP&E? I mean, it would not be in your inventory. It would be in your.
Tom Barbato (CFO)
I don't have that number off the top of my head, but I could follow up with you.
Ted Jackson (Managing Director and Senior Research Analyst)
Okay. I mean, you get where I'm going with it. I mean, it's turning into an important business driver. I just think there needs to be some more metrics around it. That's all. The next question is on the solutions business. I mean, it's been—I mean, now we have all these new headwinds. Prior to the election and everything that's taken place, it's been a drag for the business for quite a bit of time. You've signaled in the past that it's come to a point where it's stabilized. I mean, can you give a little more color? I mean, when you look at that solutions business for the third quarter, what was it relative to the second quarter? How did it come in? What was it relative to the prior year period? I mean, kind of how is it performing vis-à-vis your expectations when you went into the quarter?
Lee Rudow (President and CEO)
Yeah. This is Lee, Ted. I think it's in line. I'll say it's within pretty close range of our expectations. We wanted the business to be stable, meaning it had gotten to a certain point. There was a significant drop-off. Now we're not seeing drop-offs anywhere near what we saw back a year ago. That's what we're shooting for. From a sequential standpoint, if you look from Q1 to Q2, you did see stability, which is what we expected, what we guided towards. If you look year over-year, you still see declines. I'm going to say and characterize them within the range of what we thought were the possible expectations. That business, it's an important business because, in time and over time, it will help us drive organic service growth. We like it for that reason.
We would expect, once we get to the place where we think the business can go, its growth rate should be similar or than our normal, than what our typical overall growth rates are for calibration services. We'll see. Right now, it's close. I would say it's in range of the expectations that we set a year ago.
Ted Jackson (Managing Director and Senior Research Analyst)
If let's just say it was flat sequentially and it just trends flat—I mean, I'm not saying that that's your expectation or anything—but if it did that, at what point would you, would it stop being a drag with regards to growth metrics and the top line?
Lee Rudow (President and CEO)
Yeah. I mean, if it was a flat business. Then it's a business that. We're going to maintain a flat business. It's going to be for one reason only, and that is that it's a means to an end, and it drives calibration business for us. Therefore, it's a channel that we see value in. We don't see it today as a flat business in the long term. I think once we get it stabilized and get everything lined up the way we think we're capable of doing, that should be a growth business.
Ted Jackson (Managing Director and Senior Research Analyst)
No, no. I preface my questions with that. I'm just kind of—where I'm driving to is, to be honest, is at what point does it stop being a drag with regards to top-line growth? That's really what I'm coming at with it, given where you're at if you'd stabilize it.
Lee Rudow (President and CEO)
Yeah. Very soon. I mean, as we get through this fiscal year and the back half of the year, that's exactly what we would expect. We shouldn't be talking about the solutions business like we've talked about it for the last year as we get through third and fourth quarter. This is the time when we saw the declines. This is when we thought we'd get stabilized. We're close. I think, yeah, that conversation is going to be over in the next quarter or two.
Ted Jackson (Managing Director and Senior Research Analyst)
Okay. And then the last thing with regards to your transitions and stuff and the kind of added expenses, impacts on tax and stuff, that's not in your pro forma calculus for earnings at all. It's still flowing through the bottom line in your pro forma calculus, or is that being removed?
Tom Barbato (CFO)
It's adjusted out for the adjusted EBITDA number. And it's adjusted out for the adjusted EPS number per the reconciliation.
Ted Jackson (Managing Director and Senior Research Analyst)
Okay. I just wanted to make sure that, yeah, so that, what is it, $0.44 of adjusted earnings that has that removed. That's what I was asking.
Tom Barbato (CFO)
That's correct.
Ted Jackson (Managing Director and Senior Research Analyst)
Okay. All right. Hey, thanks very much. I'll step out of line.
Tom Barbato (CFO)
Thanks, Ted.
Lee Rudow (President and CEO)
Take care.
Operator (participant)
Thank you. Our next question comes from Martin Yang with Oppenheimer. Please go ahead. Your line is open.
Zhihua Martin Yang (Executive Director and Senior Analyst in Equity Research)
Hi. Thank you for taking my question. I want to make sure I understand the different growth dynamics between newly acquired Esko and Martin and then your other service business. Other service businesses overall have organic growth rate at low single digits. You also mentioned Esko and Martin still on double-digit growth. What created such different growth profiles? Anything you can do to bridge to?
Lee Rudow (President and CEO)
Okay. I guess the question is, why are those businesses doing well?
Zhihua Martin Yang (Executive Director and Senior Analyst in Equity Research)
Yeah. So much better than the rest of your service.
Lee Rudow (President and CEO)
Right. There are probably a couple of reasons that I would point towards, Martin. First and foremost, it really depends. For example, Esko is in the New England area, which is their strength. There are certain life science customers that are doing very, very well. We do a lot of research. We churn a lot of data to figure out which customers are growing, which ones are descending, which ones have troubles, which ones are building plants, which ones are not. We knew in due diligence that their portfolio of customers was a really strong portfolio. We expected them to grow. Some of the ones that we have are just a little bit different. We have some of the same customers, but in some cases, they are different. Part of what made Esko Esko is the strength of their customer base and their trajectory of growth.
That has not come to us. That is not surprising to us. Really, the same thing with Martin too. In the particular region that they are in, which is Minneapolis, the life science companies that are there and the med device primarily that are there are companies that are performing really well. As you go around the country, I mean, we have 34 commercial labs. I would say 80% of our—do not hold me to this number—but a large percentage of our commercial labs are growing. We just have different pockets in different regions for different reasons where we have some headwinds. That is normal. We bought those companies for a reason, and we expected them to grow even with these headwinds. They are doing that. They are meeting our expectation.
Zhihua Martin Yang (Executive Director and Senior Analyst in Equity Research)
Got it. Another question on the next quarter. Part of Martin's performance will be characterized as organic growth come next quarter, correct?
Lee Rudow (President and CEO)
That's correct.
Tom Barbato (CFO)
The end of the quarter, yeah.
Zhihua Martin Yang (Executive Director and Senior Analyst in Equity Research)
Yeah. Are you able to quantify how much that can contribute to your organic growth target?
Tom Barbato (CFO)
I would just say, Martin, it's $25 million on a basis of, on a full year, on a base of $225 or $230 million of service revenue, right? It kind of gets diluted because it's 10% of the total. Yeah, I don't know how else to characterize it. I don't have a specific.
Zhihua Martin Yang (Executive Director and Senior Analyst in Equity Research)
Would you expect Martin and Esko to sustain their double-digit growth?
Tom Barbato (CFO)
I think we expect them to continue to perform well. I'm not sure how comfortable I am saying that they're continuing to perform double-digit growth, right? I mean, because every year you do that, the base gets larger. At some point, what Lee just said about their customer base, we could see some slowdowns there. We expect them to continue to perform well. I'm just not sure we could say that they're going to continue to perform in the double-digit range.
Zhihua Martin Yang (Executive Director and Senior Analyst in Equity Research)
Understood. Thank you, Tom. Thank you, Lee.
Lee Rudow (President and CEO)
Thank you. Thanks, Martin.
Operator (participant)
Thank you. We do have a follow-up from Greg Palm with Greg Hallam. Please go ahead. Your line is open.
Greg Palm (Senior Research Analyst)
Yeah. Thanks. Just a couple follow-ups on distribution. I feel like every year, it almost sort of builds throughout the year. I guess my question is, I mean, from a seasonality standpoint, do you expect anything different this year? Is there anything, any reason why you would have maybe higher-than-normal first-half revenues? I don't know if that's just timing or what you sort of see right now based on visibility levels. Just kind of curious how you think distribution plays out more specifically in the second half.
Lee Rudow (President and CEO)
You're right. I think we're going to see it continue to be strong. I mean, typically, third quarter is a strong quarter historically for distribution. When we look at pulse, so pulse for us would be things like daily quotes and activity levels and so on and so forth. The pulse for distribution continues to be strong into third quarter, which is what we expected. I don't see anything right now on the radar, and I'll defer to Tom as well, that would lead me to believe there's a drop-off coming from the strong performance we've had.
Tom Barbato (CFO)
Certainly not a drop-off. I think, as I mentioned earlier, when we talk about rentals and some of the benefits that we're seeing from the execution and as a result of our integration, we started to see some meaningful acceleration and growth towards the back half of last year. I think as we look ahead to the second half of this year, I don't think we're certainly not going to see things reverse. I think the growth will moderate a little bit. That's why I'm also not expecting 500-plus basis points of margin expansion. I think something, as I mentioned earlier, 250-300 is probably more reasonable on slightly lower growth.
Greg Palm (Senior Research Analyst)
Yep. Okay. Fair enough. I was wondering if you could comment at all on the competitive landscape in the service segment with a couple of things going on. I do not know how that sort of relates to your expectations of accelerated organic service growth, but just kind of curious to get your thoughts there.
Lee Rudow (President and CEO)
When you look at the competitive landscape, there's a group of traditional customers that we've always competed against. You're talking to Simco, the Tektronix, the Trescal. From the information that we gather from the marketplace, in at least a couple of cases, those companies are struggling a bit with these particular headwinds that we have. There are reasons for that. I mean, over the longer term, Transcat has been so committed to the calibration market. We've invested year in and year out, not only in our people and our training, but the assets we put in, capabilities, the types of acquisitions we make. The competitors that I just referred to have not done that. They haven't acquired companies and increased capabilities. They have not put a lot of capital into their businesses. When you hit—look, this is my opinion and from the information that I have.
When you come up against headwinds, we're much better suited to withstand them than that group of competitors. I think we've done an excellent job doing that. I'm very proud, actually, of the organization. Yeah, maybe our organic growth is in a flat or low single-digit range. I think relative to others that are traditional.
Tom Barbato (CFO)
Better diversified.
Lee Rudow (President and CEO)
Better positioned, better diversified. I use the word diversified a couple of times in my script for that very, very reason, Greg. Now, we also compete these days with a new—there's a new group of competitors. There's some private equity in our business space who have sort of consolidated several, in some cases, smaller companies. Again, longer term, if you don't integrate those companies and you can't take advantage of the synergies, particularly the growth synergies, I think you're going to end up with the same scenario. If you invest the way we invest, you integrate the way we integrate, acquire the types of companies we acquire, I think we're going to continue to fare well with the old competition, which I described, and the new competition, which is more PE-backed. I like the position we're in. It doesn't mean we're not going to face headwinds like everybody else.
I just think we're going to fare better. In the longer term, we're going to be better positioned. We've proven that over time, and I think we're proving it right now.
Greg Palm (Senior Research Analyst)
Yeah. Okay. Makes sense. All right. Appreciate the color. Thanks.
Lee Rudow (President and CEO)
No problem.
Tom Barbato (CFO)
Thanks, Greg.
Operator (participant)
Thank you. This will conclude our Q&A session. I will now turn the call back to John Howe.
John Howe (Senior Director of Financial Planning and Analysis)
Thank you all for joining us on the call today. We have a number of upcoming conferences in the month of November. On November 11th, we will be attending the Baird 2025 Global Industrial Conference in Chicago, Illinois. On November 17th, we will be attending the Raymond James Sonoma Small Cap Summit in Sonoma, California. Finally, on November 19th, we will be attending the Stevens Annual Investor Conference in Nashville, Tennessee. For those attending the conferences, we look forward to seeing you there. Otherwise, feel free to reach out to us at any time. Thanks again for your interest in Transcat.
Operator (participant)
Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.