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Transcat Inc (NASDAQ:TRNS)
Q1 2021 Earnings Call
Jul 22, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to today's Transcat First Quarter Fiscal Year 2021 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Mr. Craig Mihalick, Investor Relations. Thank you, you may begin.

Craig Mihalick -- Investor Relations

Yeah. Thank you and good morning, everyone. We certainly appreciate your time today and your interest in Transcat. With me on the call today we have our President and Chief Executive Officer, Lee Rudow; and our Chief Financial Officer, Mike Tschiderer. After formal remarks, we will open the call for questions. If you don't have the news release that crossed the wire after markets closed yesterday, it can be found on our website at transcat.com. The slides that accompany today's discussion are also on our website.

If you would, please refer to Slide 2. As you are aware, we may make forward-looking statements during the formal presentation and Q&A portion of this teleconference. Those 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 with documents filed by the Company with the Securities and Exchange Commission. 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.

I would like to point out as well that 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 have 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 to begin the discussion. Lee?

Lee D. Rudow -- President and Chief Executive Officer

Thank you, Craig. Good morning, everyone, and thank you for joining us on the call today. I hope you and your families are navigating this challenging environment well and are in good health.

I'll start today's call by acknowledging our dedicated team; the 750 people that work at our 42 Transcat laboratories across North America. Without their tireless efforts and adaptability, we could not have produced the solid results that we did in the first quarter. Meeting our commitments to our customers, both on the Distribution and Service side of the business was no easy task, but we got it done. And as I mentioned in the past, many of our customers include those who are working to develop a COVID-19 vaccine, treatments and the medical devices required to save lives. Our team has made an incredible difference. And in my opinion, they define the word essential and I'm very grateful for their efforts.

On this call, I'll provide an overview of our first quarter results, which, as many of you know, exceeded our expectations. The results validate our strategy, which entails providing calibration services to the life science and other regulated industries and leveraging technology to improve our processes and enhance our gross and operating margins. At the conclusion of my overview, I'll turn things over to Mike to provide a closer look at the first quarter financials, before I return and speak to our outlook for fiscal 2021 and beyond.

Turning to our Service segment. Despite the headwinds created by the COVID-19 pandemic, we achieved our 45th consecutive quarter of year-over-year Service growth. Perhaps even more important, we made significant improvement in our Service gross margins, even with a modest service revenue growth of 2.5% in this challenging environment. Service gross margins expanded 240 basis points to 26.4%. The main driver behind the gains was the continued increase in productivity. Productivity, which is something we've been talking about, over the last couple of years benefited in the quarter by the effective execution of our operational excellence initiatives.

The initiatives included a combination of improved processes, technical training and lab management, all of which we believe are sustainable. The improvements resulted in the generation of $1 million of the first quarter operating income. This exceeded our expectation of operating income being in the breakeven range for the quarter that we forecasted in May 2020 when we released our year-end results. In addition, our first quarter operating margin expanded 160 basis points, as we generated $4 million of cash from operations. So while our Service segment was not immune to the headwinds created by COVID-19, it did hold up pretty well. And as we generate higher revenue growth at some point when we move beyond and through this present pandemic that we're experiencing, we would anticipate additional traction and continued margin enhancement.

Moving on to Distribution. As expected, the segment felt the brunt of the impact from COVID-19, reduced demand from oil and gas-related businesses and most of the industrial sector drove the softness. We have experienced an uptick in Distribution sales related to the thermal and infrared measurement of body temperature. That makes perfect sense during these times and we're in the process of introducing a new program to sell, install and calibrate permanently installed elevated body temperature measurement systems. That market is a very natural fit for Transcat. And as you've heard me say many times in the past, the Distribution segment continues to be a differentiator as we leverage the segment touches to grow our Service business.

With that, I'll turn things over to Mike.

Michael J. Tschiderer -- Vice President of Finance and Chief Financial Officer

Thanks, Lee. And good morning, everyone. Today I will be starting on Slide 4, which provides some detail regarding our revenue on a consolidated basis and by business segment. As a reminder, we have two reportable business segments; Service and Distribution. Also included in our results is the previously reported acquisition of TTE laboratories, which was effective February 21, 2020. Going forward, we will be referring to TTE as pipettes.com. The pipettes.com URL was one of the assets we acquired in that acquisition.

As expected, our first quarter performance was impacted by the economic downturn from the COVID-19 pandemic, which reduced customer demand, especially for the Distribution segment and resulted in consolidated revenue declining 8% to $39 million. Compared to Q1 of the prior fiscal year, fiscal 2021 Q1 Service revenue was up 2.5% and Distribution was down 20.3%. Pipettes.com provided approximately $1.6 million of incremental revenue on a consolidated basis. We are pleased with the performance and integration progress to date. The increase in service revenue, the $23 million, reflects the essential nature of our work to largely regulated industries, especially with our life sciences sector focus. We saw increased demand and secured new business from that sector, such that the life sciences sector now represents almost 50% of our Service revenue.

Included in the Service revenue results was $1.1 million of incremental revenue from pipettes.com. The 20% decline in Distribution sales was not a surprise, and as we mentioned was the result of COVID-19 impact on customer confidence in demand, as Distribution is a barometer of changes in economic conditions. You may recall that our Distribution sales had historically been focused on oil and gas and general industrial manufacturing sectors. Although in life science, we have seen more opportunities with pipettes.com in the sale of handheld thermometers and elevated body temperature equipment that Lee referenced. For Distribution, pipettes.com contributed approximately $500,000 of revenue to that segment in the quarter.

We're very pleased with the gross margin performance we achieved. Our consolidated gross margin expanded 50 basis points to 24.2%, largely due to strong margin improvement in Service. Service gross margin was the highlight for the quarter, where multi-year productivity initiatives showed results and are still gaining traction. Service gross margin expanded 240 basis points to 26.4% on modest top line growth. The Distribution gross margin reflects some mix changes, as we saw less demand from core product sales, which tend to have a slightly lower margin profile. Also impacting that segment were actions taken by our vendors to lower their own cost during these challenging times, as they reduced our cooperative advertising and rebate programs. We anticipate that headwind continuing into the second fiscal quarter.

Rental revenues were $1 million in the quarter. Slide 5 shows our operating income performance. We were able to deliver operating income of $1 million in the quarter, which exceeded our expectation of operating income being in that breakeven range that we had forecast. And we continue to invest in our technology capabilities to support our planned growth and to advance our operational excellence initiatives. In the quarter, we did have incremental amortization expense related to pipettes.com purchase accounting as well as some associated non-recurring start-up costs. We also recognized $400,000 of severance expense in the quarter. Some of our technology enhancements have reduced and are expected to further reduce certain operating costs going forward, but we did pay some severance in the first quarter as a part of that evolution. The severance costs are noted in our adjusted EBITDA reconciliation as an add back under restructuring expense, as we view them as non-recurring. Please see the supplemental slides for more information regarding this non-GAAP measure.

On Slide 6, we show our bottom line results. We recognized a tax benefit in both the first quarter of fiscal 2021 and fiscal 2020 due to the tax accounting impact of share-based payments and stock option activity. As a result, we have lowered our full fiscal year 2021 tax rate expectations to range between 20% and 21%, which includes federal, state and Canadian income taxes. On Slide 7, we show adjusted EBITDA and adjusted EBITDA margin. Among other measures, we use adjusted EBITDA, which is a non-GAAP measure, to gauge the performance of our segments. I encourage you to look at the provided reconciliation of adjusted EBITDA to the closest GAAP measures, which for us are operating income and net income. We continue to generate cash in this challenging environment. And as shown on the slide, you can see the strength and overall importance the Service segment has on our business. In the quarter, Service EBITDA increased more than 33% to $2.9 million and Service EBITDA margin expanded 290 basis points.

Slides 8 and 9 provide some detail regarding our balance sheet and our cash flow. We ended the quarter with sufficient flexibility and liquidity and we generated cash from operations, which was used in part to fund our capex and to reduce our debt. At quarter end, we had total debt of $28.5 million, which was down $1.8 million from fiscal 2020 year-end. Our leverage ratio was 1.50:1 and is calculated as the total debt on the balance sheet at a period end, divided by the trailing 12 months adjusted EBITDA, including giving credit for any acquired EBITDA. Other companies may calculate such a metric differently. In the fiscal quarter, as previously announced, we amended our credit facility, increasing our borrowing capacity an additional $10 million and included some favorable covenant modifications.

We had $23.6 million available under our revolving credit facility at the end of the quarter, and more than $27 million in net working capital. Net cash provided by operations was $4 million compared with less than $900,000 in the prior fiscal year first quarter, primarily from changes in accounts receivable and inventory levels at the measurement dates. Capital expenditures were $1.4 million for the quarter. Our capital plan for fiscal 2021 is unchanged and expected to be between $5 million and $5.5 million. The focus is expected to largely center on technology and service infrastructure and growth-oriented opportunities and for rental pool asset purchases. This amount is inclusive of our maintenance capex, which is expected to be consistent with fiscal 2020 at approximately $1 million to $1.5 million.

Lastly, we expect to timely file our Form 10-Q on or about August 5.

With that, I'll turn it back to you, Lee.

Lee D. Rudow -- President and Chief Executive Officer

Okay. Thank you, Mike. As we move forward, we continue to focus on the safety and well-being of our employees and customers. We believe we're in a strong position and have the right strategies and leadership to succeed in our markets, especially at this time. We believe we have sufficient flexibility and liquidity to maintain our investments in technology and growth. Technology remains one of the four pillars of our strategic plan, which also includes strong organic growth, acquired Service growth add capabilities, expertise and geographic footprint and leveraging Distribution as a differentiator to drive our Service business.

As mentioned in our earnings release for the quarter, demand for our services strengthened through June and into July and we expect modest service growth in the second quarter and with similar improved margins like we generated in the first quarter. Though Distribution pulse picked up just a bit over the last week or so, we remain cautious and expect Distribution sales to remain relatively unchanged sequentially in the second quarter. That's especially true, given the recent trend in the new virus cases around the country.

As we look at the consolidated business, we believe that we can deliver second quarter consolidated operating income around $2 million, approximately $1 million growth sequentially over the first quarter. On the acquisition front, Transcat remains an acquisitive company and we expect there to be opportunities for acquisitions as we move through and beyond the current pandemic. Overall, we believe we're managing and navigating this pandemic well and we're going to continue to advance our growth and profitability strategies.

With that, operator, we can open the line for questions.

Questions and Answers:

Operator

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Dick Ryan with Colliers. You may proceed with your question.

Dick Ryan -- Colliers -- Analyst

Thank you and congratulations on the strong profitability showing, guys. So, Lee, is there a way to parse the margin performance in Service kind of between the better productivity issues and your cost reductions? I'm just trying to gauge the kind of sustainability you might have with margins.

Lee D. Rudow -- President and Chief Executive Officer

Right. We -- Dick, we haven't broken that out and disclosed it, but I think I understand the nature of your question and the way I'd characterize, the way we look at it is the margin improvement that you saw in Service for the first quarter, as I mentioned, is sustainable. The only elements of sort of the cost structure went into Service that aren't going to go forward are things like some modest severance payments that some affect above and below the lines in service. But I think almost all of the improvements you saw were driven by an uptick and increase in productivity. Less -- I'd say less tax, but tax doing more and spending more time on the bench, being better at what they're doing and the overall management of our labs, this increase in operational excellence oriented activities. I would expect that you'll see most of this improvement, if not all, continue and I think -- and I still think there's upside. We're still in the early days of this journey on margin improvement. So we're pleased. That's how I would characterize it.

Dick Ryan -- Colliers -- Analyst

Okay. Great, thanks. How are you sitting with the technicians? Is it you're at a level that -- looking beyond the next quarter or so, is it at a good level for you guys?

Lee D. Rudow -- President and Chief Executive Officer

We're at a good level, and right now, still we're at overcapacity. So as additional revenue comes in, we'll be able to handle it and we've -- that's what's interesting, we've achieved the margins we did, and the performance we did and we could have handled more. And so that's an indication that more would drop to the bottom line if and when that revenue comes in and it's going to come in. We're just trying to get through this pandemic environment, but we're in a good situation, because we're in overcapacity and we're holding strong.

Dick Ryan -- Colliers -- Analyst

Sure. How is the life science exposure? You said it's 50% of Service, but when you look at your roster of labs out there, is it concentrated in a few, or is it broad based, where a lot and most of labs participate in life science?

Lee D. Rudow -- President and Chief Executive Officer

I would say most of the labs participate. It's broad based. Not every single lab. So there are couple of labs in certain regions that may be more process-oriented, for example, our Houston lab. But generally speaking, whether you're talking about Southern California, or the New England area, Mid-Atlantic, most of them do a fair amount of life science work. It's broadly distributed.

Dick Ryan -- Colliers -- Analyst

Okay, good. Thank you. And, again, congratulations on the performance.

Michael J. Tschiderer -- Vice President of Finance and Chief Financial Officer

Thanks, Dick.

Lee D. Rudow -- President and Chief Executive Officer

Take care, Dick.

Operator

Our next question comes from the line of Greg Palm with Craig-Hallum. You may proceed with your question.

Greg Palm -- Craig-Hallum -- Analyst

Yeah. Great, thanks. Good morning. Nice job on the quarter here. I was hoping maybe we can start, if you have any qualitative commentary, a little bit more detail on the cadence of demand in the quarter. It sounds like you saw some strengthening in June and into July with Service. And then when you referenced the expectation for modest growth in the upcoming quarter, are you talking organic or overall?

Lee D. Rudow -- President and Chief Executive Officer

Greg, when we saw modest growth in the quarter, it's always a combination of organic and even acquired growth, because we did acquire TTE, pipettes.com in February. So, as we go through the year, a certain element of our growth will be certainly attached to that and a byproduct of that acquisition. However, as we -- we would expect organic growth along the way as well. And so, when we see an uptick, when we use those words uptick in June and into July, we're talking organic.

Greg Palm -- Craig-Hallum -- Analyst

Okay, that's helpful. Back to back really impressive quarters margin wise on the Service segment. If I think about your bridge to 30% Service segment margins, which I think you've referenced a few times in the past, how much improvement in productivity is left and can be realized versus maybe some of the volume or leverage that you'll get on higher revenue? I don't know if there's a way to sort of bucket out those items, but we're sort of curious to get sort of how you're looking at the bridge as we sit today.

Lee D. Rudow -- President and Chief Executive Officer

Right. Well, you bring us some good points. The -- when you look at the impact of increased revenue and the fact that we have the capacity for -- you're right, volume alone will be an asset, will help margins as we go forward. We're doing the work, we're doing -- producing the results without the kind of volume. We normally look for mid-to-high single-digit organic growth. And so without that, we were able to get the margin increase. So I would expect volume would be helpful. Of course, it would be, because there is inherent leverage in the business.

But in addition to that, we're still, Greg, very, very much in our infancy on automation. And I know we've been talking about that for a year and a half. I'm sensitive to the fact that we're probably a little bit behind our expectations for the impact we anticipated, but it's still very tangible initiative that we're working on, a lot of folks are concentrating it on and we would expect automation to impact this business, impact our margins, and it has not yet in any kind of material way. So when you're looking at the margin gain that we've gotten, it's through improved processes, improved training with our technicians, better lab management. We're doing it without the volume and we are doing without the automation, and so we talk about that bridge, you used the word bridge, to bridge the gap between where we are and where we could be. Those are some of the elements that are going to contribute to getting that profit gain over time.

Greg Palm -- Craig-Hallum -- Analyst

Okay. So, if it's still early days, and you'll likely see leverage at some point, maybe 30%, could end up being conservative?

Lee D. Rudow -- President and Chief Executive Officer

Those are your words, not mine. It's not unrealistic to make a statement like that though. So, right now, we'll stick in that range of 30% as our goal.

Greg Palm -- Craig-Hallum -- Analyst

Okay, great. Last one, you brought up this opportunity in thermal cameras and body temp measurement. How big of a market is that currently right now for the Company? And I guess, more importantly, how big could that opportunity be if you put some resources behind that?

Lee D. Rudow -- President and Chief Executive Officer

Right. So the short answer is, I'm not sure and we don't know. We definitely have gotten a significant amount of inquiries from our existing customer base and from new customers, asking if we can do this work. We've sold hundreds, if not thousands, of individual infrared thermometers that have a relatively low to mid-price point, but what we're talking about, the system installation and this sort of ongoing permanent need, it's just too early for us to tell. It was -- it's very easy for us because that natural fit that I spoke to convert and to offer this to our customers. So it wasn't an investment. It took a lot of analysis.

We just took a couple of our components, packaged them together with our ability to get on site with a customer and do this work. So the risk is almost zero or very low, and so our analysis to figure out the upside in the market just isn't there yet. It's too early. I like the market, I like the fit and it's a really easy thing for us to do. So, depending on -- we are just going to continue to dig deeper and figure out what the opportunity is, but we are jumping in, because it's just easy to do it and a good fit. So more to come back on that. We call it EBT, elevated body temperature. More to come on EBT.

Greg Palm -- Craig-Hallum -- Analyst

Good, good. All right. Thanks for the color. Best of luck going forward.

Lee D. Rudow -- President and Chief Executive Officer

All right, Greg, thanks.

Operator

Our next question comes from the line of Gerry Sweeney with ROTH Capital. You may proceed with your question.

Mike -- ROTH Capital -- Analyst

Hi, this is Mike on for Jerry. Thanks for taking my questions.

Michael J. Tschiderer -- Vice President of Finance and Chief Financial Officer

Hi, Mike.

Lee D. Rudow -- President and Chief Executive Officer

Hi.

Mike -- ROTH Capital -- Analyst

Hey. So, first, just looking at the cadence of fiscal 2021, is it reasonable to expect a little improvement in Service activity and margins each quarter, barring any new economic developments?

Lee D. Rudow -- President and Chief Executive Officer

Well, I think, as I mentioned before, there is still a lot of unknowns. In normal circumstances, if you just rewind the clock to last year at this time, we were doing very, very well in the marketplace. We were well positioned for growth. So we would have expected high-single-digit organic growth. In a COVID environment, where half our business is life science and half of it is generally other regulated industries that run from aerospace and defense and runs a gamut, there is going to be some muted expectation on revenue growth, probably for the next quarter or so. We can't really define any more detail than that.

We did see uptick. We have seen uptick in Service flow of new work in the last several weeks. So, will it continue? We hope so. We know it's going to continue. We would expect it to continue over time, but we're really talking about what's going to happen in the next quarter, which is the nature of your question and nobody knows. So I would expect, we're fairly confident we'll have modest growth. The margin, as I said before, we've gone -- we've come a long way from what we would call our lowest point a couple of years ago to where we're headed in the 30% range. We're halfway there and I would say, over time, you're going to see this company, we would expect to generate improved margins. Not every single quarter, but over time, up and to the right with margins based upon volume, improvement in our productivity, improvement in our processes, including automation. And these things will get the job done, we would expect, over time. So that's as much -- that's the best I can do to define it.

Michael J. Tschiderer -- Vice President of Finance and Chief Financial Officer

Yeah. And then, Mike, I'd just kind of say, related to these productivity things that have impacted our margins, they're not over, neither evolutionary and continuing. So it's not like we finished a project and now we're going to see the fruits of it. We'll see the fruits of the ones that had been completed, but there is other ones that are still in various phases of implementation. So at the lease point, we'd expect to kind of see it going up into the right each quarter, may not be as linear as some might like, but there is no reason to think it won't continue even without volume, which will just be an added impetus.

Mike -- ROTH Capital -- Analyst

Okay, thanks. That's helpful. And last one for me, the $2 million of operating income you're expecting in the second quarter, does that assume any meaningful changes to the cost structure or bringing back any expenses that were previously scaled back?

Lee D. Rudow -- President and Chief Executive Officer

Generally, I think, you're going to look at a stable cost structure in any -- without any material changes from Q1 to Q2, when we make that estimate.

Michael J. Tschiderer -- Vice President of Finance and Chief Financial Officer

Yeah, agreed. It's one of the reasons we tried to break out some of the severance, because we do think that's a one-time, so that won't be recurring and a lot of the costs are variable in nature, so you'd expect those to be increased, but only when the revenue increase, Mike.

Mike -- ROTH Capital -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from the line of Scott Buck with B. Riley. You may proceed with your question.

Scott Buck -- B. Riley -- Analyst

Hi, good morning, guys. I'm curious on the Distribution segment. The more depressed revenue levels, do you think this is lost revenue or are we looking at a potential kind of backlog or build up in demand for either the back part of this year or early next year.

Lee D. Rudow -- President and Chief Executive Officer

That's an interesting question. I think it's going to be a little bit of both. There are some -- there is some loss revenue associated with just the softening of oil and gas, for example, that you're just not going to see that come back, but there is probably equal to or even greater amount at some point of across the spectrum of distribution revenue that is -- will be driven by some pent-up demand. I mean, people who manufacture products, they need test equipment to be able to do that and they're holding off and at some point, we'll see some of that back, but I wouldn't want to set up expectations that it's all going to come back. Maybe it's right down the middle in terms of loss versus the pent-up demand.

Scott Buck -- B. Riley -- Analyst

That's great, very helpful. Second one, I'm curious on the Services side, whether you're seeing a change in mix in how your customer base wants the services provided. For example, are you seeing less mobile work, because customers don't want new individuals coming into their facilities? Or are you seeing a pickup in kind of mail-in calibration work? Just curious what's going on there.

Lee D. Rudow -- President and Chief Executive Officer

Yeah. So that -- so it would be the latter. We are definitely seeing a pick up in people sending our products to our lab versus us going out to do the work. In fact, we've had a lot of cancellations from customers who don't want us to do the work on site. So in that case, you're either going to have pent-up demand or we've been able to convert them to sending stuff to our labs. So it's really going to be -- I think there is a element of pent-up demand there that we should see at the later point.

Now, when people do equipment to our labs, that is also a more profitable profile for us. So we like that and that is also a small, but contributing factor to the fact that our margins improve that we're not going out to do those on sites. It would be our goal that anybody we've converted from an on-site to a depot, where they send us to work, we want to offer a really spectacular service, so we can continue doing that in the future. It's our preferred way to do business. But we're very flexible in terms of what it takes to meet our customers' needs, but there is a combination pent-up demand there based upon some cancellations and people converting.

Scott Buck -- B. Riley -- Analyst

Great, that's very helpful. Last one from me on M&A. Curious if you guys are seeing a pickup in the number of acquisition candidates being presented to you, given the broader environment and how you're thinking about that going forward.

Lee D. Rudow -- President and Chief Executive Officer

Right. I wouldn't characterize it at this point that we've seen an uptick, but I would characterize it saying, we would expect at some point there would be an uptick. We've been through cycles like this before and it takes a little bit longer than 90 days. But at some point, this environment will have a negative effect on some companies and I think we'll provide somewhat of an increased level of activity around acquisitions. We're fairly confident in that, but I wouldn't want to point to it as something that exists today as we speak and set up expectations in the next quarter or so, but we're pretty confident that we will see a significant level increase at some point.

Michael J. Tschiderer -- Vice President of Finance and Chief Financial Officer

Yeah. And I think that's going to reinforced by the fact that we have not seen acquisitions being made by others who might be acquirers. So it's not like we're losing out. Still kind of in that wait-and-see period, but we do think it will be a good opportunity for us a little bit further out.

Scott Buck -- B. Riley -- Analyst

All right. I appreciate all the help, guys, thanks.

Michael J. Tschiderer -- Vice President of Finance and Chief Financial Officer

Thanks, Scott.

Operator

Our next question comes from the line of Mitra Ramgopal with Sidoti & Co. You may proceed with your question.

Mitra Ramgopal -- Sidoti & Co. -- Analyst

Yes. Hi, good morning. Thanks for taking the questions. Just a couple. First, Lee, I just wanted to get a sense in terms of, I know you had mentioned some of the impact from COVID will result in some of revenue not coming back, but just wondering on the customer side of things, how they're fearing in terms of maybe some of them potentially are closing up shop, etc., if you're seeing any of that?

Lee D. Rudow -- President and Chief Executive Officer

We made sure we haven't seen much of that. So, when I mentioned about revenue coming back versus not coming back, let's be careful to look at each segment differently. So when you talk about Service, that's a situation where in the case where there has been pent-up demand, and in some cases, there had been, we would expect that to come back at a 100% or somewhere in that range. Our retention rates are very, very high. Remember, this is a regulated business space. This work has to be done. If a line has slowed down or shut down, then you can delay that work, but at some point, it's logical to anticipate that it would return. So, no major concerns there.

On Distribution, going to -- I think, it was Scott's question, the -- that's a little bit different. People who aren't buying test equipment to go into manufacturing process, because their process is shut down or they go out of business, that's not going to return. In some cases, where they are holding off, it's delaying expenses that they need to -- opex that they need to spend, that's different, and we'll get that back. So it's really a blend, but I would think about the losses on a permanent basis more on the Distribution side of business and pent-up demand, where there is pent up demand on the service side. That's how I would characterize the difference.

Mitra Ramgopal -- Sidoti & Co. -- Analyst

Okay. No, that's great. And, obviously, on pipettes, that's come along. And I was just curious if it's still too early, given the environment for you to be more aggressive on that front as it relates to maybe cross selling opportunities, etc.

Lee D. Rudow -- President and Chief Executive Officer

Yes. But we are being aggressive on that front. And we really like that acquisition. Right acquisition, right management team, right time. One of the things that we like about it, just as a reminder, is that as powerful as their URL, pipettes.com is and as well as they run that company, it was really just a localized New England based pipette company. Because of our national footprint and because of our exposure to life sciences business, probably more than any other acquisition we've made since I've been here, this just offers more upside, more national exposure, more of the -- Transcat is a very strong in marketing and outreach and our domain authority and all of our link equities and all the things that from a digital world are important, that's our strength. And so when we buy a company with that power for URL, there's a lot of marketing upside under our ownership versus theirs and we'll call that a sales synergy, right. So all of that is to come. I don't want to build it up too much, but we are excited about growing and promoting that company. I think it's going to be an asset for years to come.

Mitra Ramgopal -- Sidoti & Co. -- Analyst

Okay. No, that's great. And then finally, I think you touched on it earlier, but just wanted to be clear. I know you had mentioned obviously in some of the project delays, you're expecting it to be maybe a quarter, quarter and a half out in light of what we are seeing with the environment, expected to get probably worse before it gets better. Has that timeframe changed for you in terms of your conversations with customers?

Lee D. Rudow -- President and Chief Executive Officer

It really hasn't. Generally speaking, still really hard to define. That's why Mike and I've used the words, modest growth. We want there to be growth, we expect it, but we don't want to set up expectations in the next 90 days, because we're just not sure. We're having a lot of great conversations with our customers. There is a lot of interest in Transcat services throughout our business development team, but at the same time, we are hearing from customers, we really like you guys, but we're not making any major changes in the next 30 days or we're going to start sending you some work, but we're -- we will give you an opportunity to start to get to know us, we'll get to know each other, but we're probably not going to make a move in this quarter.

We hear things like that, which is both good and bad news. Good news in that, they're very interested and we've done the heavy lifting and we've got a customer interest in our services. Kind of bad news in that, we wish we turned it -- sort of there will be more turnkey and it starts tomorrow. I'm not overly concerned with that, I think we're taking a balanced approach. And in the long run, we'll be just fine. But over the next quarter -- it's really hard to tell. I can't offer any more clarity than I have and what we have.

Mitra Ramgopal -- Sidoti & Co. -- Analyst

Okay. No, that's great. Thanks again for taking the questions.

Lee D. Rudow -- President and Chief Executive Officer

No problem.

Michael J. Tschiderer -- Vice President of Finance and Chief Financial Officer

Thanks, Mitra.

Operator

[Operator Instructions] Our next question comes from the line of Chris Sakai with Singular Research. You may proceed with your question.

Chris Sakai -- Singular Research -- Analyst

Hi, everyone. Just got a quick question on, I guess, the Distribution segment. Wanted to know is there a metric or something -- is there some way we can tell or have that you could -- that we could see as far as when there may be a bottom to the Distribution segment or when it may be growing again? Is there some way we can sort of -- is there something we can see to sort of help us understand when that may come?

Lee D. Rudow -- President and Chief Executive Officer

Chris, I would probably -- in an effort to answer that question, I would guide you back to 2016. So in 2016, If you recall, that was the -- that was the last time the oil and gas market, it's really deflated, the dollar was strong, exports were down. We don't export, but it has a derivative effect on the business and it's just a -- it was a softness in our Distribution business, and our goal coming out of that was to stabilize the business at that time with the exception of starting a rental business. It's a pretty good indicator of how long and what type of recovery we had. So go back to '16, look at '17 and '18 and I think you'll get a pretty good indication of what a reasonable person would assume is going to happen and what the recovery will look like. We did recover, we even got better both from a margin and revenue growth perspective, and I -- there's no reason to believe that a similar pattern wouldn't follow. I can't guarantee it, but that's certainly what we would expect from the business over time.

Michael J. Tschiderer -- Vice President of Finance and Chief Financial Officer

Yeah, it's really a hard one, Chris, only because it is so dependent on the economic uncertainty. If you could predict that the COVID impact on the economy and unemployment and US industrial output would stay the same, next quarter as it did last quarter, while you'd probably expect around the same results in Distribution, which is kind of what we're assuming, we're not assuming many changes. Now the downside of that could be if something very drastic happens with the pandemic, it could be that it could go down even further. We're not anticipating that based on what we're seeing now, but it really is a barometer of that economic uncertainty and confidence level of customers to spend dollars right now on equipment.

Lee D. Rudow -- President and Chief Executive Officer

Yeah. And I just thought by saying we're in a fortunate position. We've spent the last decade pivoting to our Service business, not in anticipation of a pandemic like COVID-19, but anticipation that at some point we were going to be a service-oriented company and that was our goal and that was our strategy and we've been laser-focused on it, and here a pandemic hits that does affect our Distribution business and affects everyone, everywhere and yet, we're able to be a very liquid profitable company, still generate cash, and still grow our business. So that's a testament to our strategy working and I think it would be nice when Distribution recovers. But we're going to be successful whether that takes a quarter, two quarters, we would anticipate being able to execute our strategy well regardless. And so, we're in a good spot, we hope it continues.

Chris Sakai -- Singular Research -- Analyst

Okay, great. Well, thanks. Thanks for that.

Lee D. Rudow -- President and Chief Executive Officer

Appreciate the question.

Michael J. Tschiderer -- Vice President of Finance and Chief Financial Officer

Thanks, Chris.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back over to management for closing remarks.

Lee D. Rudow -- President and Chief Executive Officer

Okay. I appreciate everybody joining us on the call today. Thank you. Your interest is always valued. Feel free to check on our -- check-in with us at any time. Mike and I are available to talk with each one of you if you have questions. And if not, then we will look forward to speaking with everybody at the end of second quarter when we send out our results. Again, thanks for participating. Appreciate it.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Craig Mihalick -- Investor Relations

Lee D. Rudow -- President and Chief Executive Officer

Michael J. Tschiderer -- Vice President of Finance and Chief Financial Officer

Dick Ryan -- Colliers -- Analyst

Greg Palm -- Craig-Hallum -- Analyst

Mike -- ROTH Capital -- Analyst

Scott Buck -- B. Riley -- Analyst

Mitra Ramgopal -- Sidoti & Co. -- Analyst

Chris Sakai -- Singular Research -- Analyst

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