inTest Corporation

Welcome to the Intest Corporation 2020 fourth quarter financial results conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. At that time if you have a question you will need to press star 1 on your phone. As a reminder this conference is being recorded. A replay will be accessible at www.intest.com. I will now turn the call over to Intest's Investor Relations Consultant, Laura Garant.

Please go ahead.

Thank you, Operator, and thank you for joining us for Intest's 2020 Fourth Quarter and Year-End Financial Results Conference Call. With us today are Nick Grant, Intest's President and CEO, and Hugh Reagan, Treasurer and Chief Financial Officer. Nick will briefly review the quarter's highlights as well as current business trends, then spend some time describing the company's new strategic plan. Hugh will then review Intest's detailed financial results for the quarter and discuss guidance for the 2021 first quarter. We'll then have time for any questions. A copy of today's press release can be obtained on Intest's website, www.intest.com. In addition to our press release, we have issued supplemental information, which can be downloaded from our website on the Investors page just mentioned. The supplemental information is offered to provide shareholders and analysts with additional information and detail for analyzing our results in advance of the quarterly results conference call. Before we begin the formal remarks, please note that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements do not convey historical information but relate to predicted or potential future events that are based upon management's current expectations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In addition to the factors mentioned in our press release, Such risks and uncertainties include but are not limited to the risk factors set forth from time to time in our Securities and Exchange Commission filing, including but not limited to our annual report on Form 10-K for the year ended December 31, 2019, quarterly reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020. Any forward-looking statement made by us in this conference call is based only on information currently available to us and speaks to circumstances only as of the date on which it is made. We undertake no obligation to update the information on this call to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated or unanticipated events. During today's call, we will make reference to non-GAAP financial measures. We have provided additional information concerning these non-GAAP financial measures including a reconciliation to the directly comparable gap financial measure in our press release, as well as in the supplemental information and the slide presentation for this call. The release and supplemental information are posted on the investor page of our website, www.intest.com. The slide deck will be posted after the call's conclusion. And with that, let me now turn the call over to Nick Grant. Please go ahead, Nick.

Thank you, Laura, and welcome, everyone. Thanks for joining us for the fourth quarter and year-end 2020 financial results conference call. 2020 was a very challenging year as we all adapted to the changes brought about by the geopolitical environment and the global pandemic. I'm pleased to report that Intest rose to the challenges, managing through a number of logistical complexities, and we ended the year with notable momentum. I wish to express my sincere thanks to the entire Intest team for their dedication and execution throughout the year, as well to our customers and suppliers for their continued partnership and support. We've made a lot of progress over the last six months at Intest. We have simultaneously moved manufacturing, which cost us a little bit of production capacity late in the quarter, but we did so while we enjoyed strong order momentum in the semiconductor business. We also picked up some opportunistic industrial-related leads, which really haven't hit us yet because of timing. We've strengthened our management team, not only at the CEO level, and as we previously discussed in the earnings report for the third quarter, we've taken a number of non-recurring charges in the fourth quarter to better position us for 2021 and beyond. I like where we are and where we are heading. Now let's look at the fourth quarter performance. While results for the fourth quarter were at the high end of our prior guidance, I believe the real story is in the surge in orders that we experienced during the quarter, driven by increasing demand for our innovative test and process technology solutions across a diverse set of end applications. The momentum surpassed our internal expectations and continues into the current quarter. Heading into 2021, we have a healthy backlog of $11.5 million. up approximately $6 million compared to where we were a year ago. And we continue to generate positive cash flow. And as you can see from our press release, we expect to approach record booking levels for the company in the first quarter of 2021. Order activity, especially in the semi-market, has heated up. And that continues as we share our results with you today. Fourth quarter consolidated bookings of $17.6 million. increased 22% sequentially and 58% year-over-year, with semi accounting for 63% of the total bookings for the quarter and multi-market making up 37%. This is compared with a 50-50 split last quarter. Fourth quarter semi bookings increased 53% to $11.1 million sequentially, while multi-market bookings of $6.5 million declined 9%. The industrial sector continues to be our largest portion of the multi-market business, and the sequential decline was the result of three primary drivers. The first, a delayed timing of some large orders that slipped into the current quarter. Second, the global pandemic resurgence in the fourth quarter. And finally, the traditional seasonal holiday slowdowns. On the positive side, we continue to see strength in a couple of our targeted growth markets, such as electric vehicles and cannabis, which I'll talk more on in just a minute. Q4 consolidated revenues of $14.9 million increased 3% sequentially, and we're at the high end of our guidance. Again, driven by the semi and industrial markets. As a percentage of the overall revenue, semi comprised 51%, and multi markets were at 49%. consistent with last quarter. Semi-revenues for the fourth quarter increased 3% sequentially to 7.6 million, and Q4 multi-market revenues increased 3% to 7.3 million. As I noted, we also successfully advanced our manufacturing consolidation program in Q4 to the point where we were able to transition manufacturing of our EMS interface products from California to our New Jersey facility. I would like to thank the entire team that was managing this project for their efforts and dedication to complete the move by the end of the year. Also, while Hugh will discuss the financials in detail, I think it's important to note that as we discussed last quarter and as we expected, our Q4 net loss included $1.3 million in restructuring and other non-recurring costs. Excluding these charges, we would have been profitable in the fourth quarter. The majority of these restructuring and other non-recurring costs were associated with the previously mentioned consolidation of our California manufacturing operations into New Jersey. The actions we took in the fourth quarter will not only provide ongoing cost reductions through footprint optimization, but they also allow us to better serve our customers globally through streamlined operations going forward, which from a timing perspective couldn't have been better given our recent order surge. We expect the consolidation of our EMS manufacturing operation will result in annual savings of approximately $600,000 going forward, and that the operational upgrades that we are making will position us for improved growth and profitability in 2021 and beyond. For the full year, 2020 consolidated bookings of 59.7 million increased 13% compared to 2019, with SEMI accounting for 54% of the total bookings for the year and multi-market making up 46%. This was compared to 48% and 52% respectively in 2019. Stronger semi-markets, especially in the second half, were driven by consumer electronics, 5G, and automotive pent-up demand, while industrial markets were slower, impacted by COVID and the global demand drop-off. 2020 consolidated revenues of $53.8 million decreased 11% compared to 2019, due to a number of factors, including a weak backlog coming into the year, continued softness in the semi-markets earlier in 2020, the impacts of COVID-19, as well as the timing of orders in the second half. Semi- and multi-market revenues were evenly split, each accounting for 50% of the total revenues for the year, compared with 51% and 49%, respectively, in 2019. We had a net loss of $895,000, nine cents per diluted share for 2020 compared to net earnings of 2.3 million or 22 cents per diluted share in 2019. Included in the 2020 results were 1.8 million of restructuring and other non-recurring costs. Excluding these restructuring and other non-recurring charges, we would have been profitable for 2020 and our net earnings would have been 693,000 or 7 cents per diluted share, non-GAAP. Now, let's turn to the quarterly performance of our two operating segments, along with some customer highlights, starting with EMS, where we continue to secure new customers and broaden our geographic reach. After a couple of years of headwinds due to the trade wars, automotive contraction, and COVID-19, The semi-industry is experiencing a significant demand spike, which I'm sure you've all been hearing from others in this space. As the world comes out of the pandemic, many businesses and industries are struggling with shortages of semiconductors, and this has the industry scrambling to increase capacity. Our EMS business is benefiting from this broad-based recovery. experiencing strong increase across all of our product lines driven by pent-up demands by the automotive industry, coupled with the continued increasing demand for consumer electronics, mobility, and PCs as more people continue to work and study from home. While we've seen order surges from our largest customers, we're also seeing increased business from many of our other customers, as well as adding new customers to drive further diversification. As we noted in our earlier press release, Q4 EMS bookings were up a substantial 91% sequentially to $6.6 million, while EMS revenues of $4.2 million increased by 13% sequentially during the period where we were also consolidating manufacturing. We are pleased to have the EMS entering 2021 with an expanded backlog and good momentum. Let me share with you some specific EMS highlights in the quarter. After a long development and qualification cycle, the business started receiving orders from a major player in the memory test space. This is very exciting for us as we are making inroads into the memory market, which is where we have not had a presence before. While we are early in entering this market, it is the key win, and it puts us in a good position for opening up more opportunities over time. A couple of other notable accomplishments in the fourth quarter for AMS were a major win at a customer for their advanced traffic automotive radar systems featuring next generation ultra high definition technology and designing the first automatic probe card changer for a specific ATE tester model. I'm pleased with the progress the EMS business is making and expect that the new products being designed in by our customers now will lead to additional growth opportunities going forward. Another example of organic growth traction as it relates to new products for EMS is the continued adoption of our intelligent test cell technology, which we launched early last year. We are developing an early presence in this emerging automation market, and we are pleased with the market traction to date. As a result of the technological advances, our automatic test manipulators and intelligent docking systems are capable of increasing customers' tools utilization and yield. With these innovative solutions, we are poised to achieve deeper penetration into our current customer base as they expand and move to upgrade older systems, as well as driving growth across the industry in new accounts. Moving now to the thermal segment. In Q4, thermal bookings were up slightly, which in a quarter that saw some resurgence of COVID-19 restrictions and the traditional holiday slowdown. This was in line with our expectations. We continue to make inroads across multiple industries and verticals. The nominal quarter-over-quarter drop in revenues for this segment was due to the timing of larger deliveries in Q3 and the holiday season. Let me share some details of recent thermal successes. Both of our businesses in this segment are also benefiting from the semiconductor surge, as Ambrose saw nearly $1 million in orders placed for a front-end CBD application. And ITS thermostring bookings for the backend test base have averaged over $1 million per month for eight consecutive months now, which is the first time this has happened since 2018. In multi-market, we are focused on diverse applications in growth markets and verticals outside of semi. Electric vehicles and cannabis are two emerging markets where we continue to see significant growth opportunities for our thermal solutions. Electric vehicles are becoming more mainstream each year, and I believe the EV market is at an inflection point, with many of the majors, including GM, Ford, Jaguar, and Volkswagen, all recently announcing plans to move heavily in this direction. I see NCES as being very well positioned. Ambril really only started developing opportunities for this space back in 2018, and we are pleased with the customer acceptance and adoption by noteworthy EV manufacturers. Since 2018, we've seen our bookings in this space essentially double each year. The EV success is a high-profile example of our strategy to focus on end markets, applications, and product development for higher growth opportunities. Another area of organic growth is with our ITS thermonic chillers for cannabis extraction, where we continue to make inroads. Our solutions are widely used in THC and CBD extraction processes, where it's critical to cool hydrocarbons and ethanol to ultra-low temperatures. I'm pleased to announce that during the fourth quarter, we delivered the first units of our next generation liquid nitrogen extraction chillers to one of the largest cannabis extraction processors in the U.S. These new chillers include new features such as heat and cooling of the process fluid, variable fluid flow rates, and a dry gas purge to eliminate frosting, all technologies that this emerging market is of value. In addition, we saw an increase in medical-related orders placed in the quarter for applications in MRI systems, stents, vascular closure systems, and surgical devices, evidence of progress across thermal, positioning us for growth and expanding markets. All in all, we're making strides positioned cuts for growth in 2021 and beyond, which would be driven by stronger semi-market, improving general industrial segments, and targeted growth investments. Now, let's turn to our plan and view for the future at Intest. I'm pleased to share with you today an overview of the corporate strategy that we have formulated to drive new and more sustainable long-term growth. As mentioned on our last earnings call, in early October, the executive management team met to kick off the development of corporate strategy that would define what Intest would collectively strive to become. We defined a vision and mission to guide us on the journey that we are embarking on. We identified the growth strategy that we believe will transform this company, and we outlined the initiatives we'll be driving within each of these strategies. Out of that meeting, we've developed a solid go-forward plan for the company with an emphasis on growth and on customer focus. As James Carville will say, it's all about growth. So it starts with a vision, and for us, it's to be the supplier of choice for innovative test and process technology solutions. While this may seem like motherhood and apple pie, let's break it down to see what it's really inspiring us to be. Supplier of choice. indicates we want customers to think of in-test when they have a need for a test or process solution. That only happens when you're a market leader that's focused on customer satisfaction day in and day out. Innovative. That means we need to focus on bringing unique and differentiated solutions to our customers. Innovation must be at the core of our DNA. Interestingly, Innovation is something that Intest used to pride itself on, holding numerous patents around its technologies. We must bring this back and challenge ourselves on developing unique solutions for the industries and customers we serve. Test and process technology solutions. We are laser-focused on targeted technology applications and must move away from a product-centric sale to more of a solution sales. which bundle in our broader product portfolio services and support while driving increased value to our customers. The vision also guides us to who we do not want to become, and that's a supplier of off-the-shelf commodity products or solutions. Our focus will be on broader niche value-added segments where we can stand out. Now let's look at how we get there. Our mission is to leverage our deep industry knowledge and expertise to develop and deliver high-quality, innovative customer solutions and superior support to solve complex global challenges. What I like about this is that we'll be building off our core strength of know-how and expertise to deliver solutions that customers value and are broadly applicable across multiple markets, customers, and regions. The quality aspect is directing us to ensure we have the best in class engineering, manufacturing, and quality systems. We certainly have some work to do in this area, but we are starting from a good place. While the vision and mission are there to guide and inspire us, it's in the strategies where the rubber meets the road. We've identified five core growth strategies that will be collectively driven to generate sustainable growth, which will allow us to execute the mission and deliver the vision. Let's look at each, starting with global and market expansion. This is an area that we believe will provide significant growth for the company through a larger installed base. We will be making investments to drive further penetration in existing markets going deeper and wider. We'll look to increase our global footprint and coverage to better serve customers, and we'll be targeting expansion into new markets with existing products. Next is innovation and differentiation, which basically provides growth through innovative technologies. I can't emphasize enough how critical this is and how highly I value it. We'll start by leveraging our know-how and expertise to deliver innovative solutions others can't. We will be putting increased focus on spending more dollars on developing solutions that are new to the business, new to the industry, or new to the world, and that are more broadly applicable through standardized platforms that offer late-stage configurations. The focus of driving more standardization to increase market availability and lower costs will have a positive impact on the company, its customer breadth and depth, as well as the employee skill set. Turning to service and support, which is a valuable way of strengthening customer satisfaction, loyalty, and retention. We must challenge ourselves to ensure we are serving the customers the best we can day in and day out. whether that's by ensuring we have the best service coverage and response time or through expanded and enhanced service offerings, we must improve to drive growth. We'll be looking at adding more resources to fill gaps as well as adding remote service capabilities which can monitor the health of the assets the customers purchase from us. This is certainly an important feature in this day and age. Another area we will be focusing on is driving more consumables more ongoing business that allows us to touch customers more frequently through our best-in-class support and pre- and post-sales efforts. As mentioned, this is an area that should be a much larger part of our business, and I believe it will over time. Shifting now to our growth strategy around talent and culture. Any business can have the best laid out plans, but without the right talent to execute them or the right culture to support the plans, they're destined to fail. Changing a company's culture is not easy, but from what I've seen during my first six months at Intest, I believe it can be done. The enthusiasm I've seen and felt across the company is real, and I believe the organization is ready to embrace this change. Again, crucial to our success will be ensuring the right people are in the right roles and empowering them to deliver success. It starts there, and it's supplemented by creating a culture and environment of openness, one that's results-oriented and drives accountability across the organization. Along these lines, I'm pleased to communicate to you today that I recently appointed a new VP and GM of our EMS products business, Joe McManus. Joe joins us with over 20 years of semiconductor experience, as well as more recently exposure in the industrial markets. He spent the majority of his career at Acreon Systems, a leading supplier of advanced wafer surface prep solutions, in a number of diverse roles and increasing responsibilities, ranging from global product management to director of worldwide sales, the VP of sales, marketing, and project management. Throughout his career there, he had a track record of increasing sales and driving growth. What I like is the similarities between Akrion and our EMS products business. In the early 2000s, they were a small technology organization, less than 20 million in size. And during his tenure, they grew both organically and inorganically over time to exceed 65 million in size. Joe was a key enabler of that growth. He later made a switch out of STEMI and moved into the industrial markets joining Seco Environmental, where he had senior leadership roles as well. We are very pleased to welcome Joe to the NCEST organization and look forward to seeing the success he will bring to our EMS products business. Before I move on to M&A, I would like to highlight that key initiatives under this talent and culture strategy will be focusing on promoting diversity and inclusion across our workplace. We respect the unique needs, perspectives, and potentials of all of our team members and strive for equal involvement and support in all areas of the workplace and have identified actions to drive this important initiative. Finally, a key part of our growth strategy will be strategic acquisitions and partnerships, an area that I know well and will be accelerating efforts in. We will be aggressively driving M&A activities both top down and bottoms up, and are always looking for deals that will help us to build out our portfolio of technologies to better serve customers. These could be a bolt-on to an existing business that adds an expansion to their product line or expands their geographic presence, as well as new businesses coming into the segments or divisions that allow us to touch more customers in new markets and in new ways, while also better serving existing customers. There's a lot of work to be done in this space, and I'm excited to see the impact our efforts can create. It's clear that path management focused heavily on pursuing deals in our thermal segment while largely de-emphasizing our EMS segment. This will change. We will explore opportunities across both segments with an eye towards expanding our electronic test capabilities, widening our thermal test capabilities in areas such as environmental tests, and finally going out around the processing technologies that Ambril added to the company. The market appears very active to us right now, and we look forward to exploring M&A opportunities. As mentioned, we have identified key initiatives across the businesses that we'll be executing under each of these core growth strategies, and I look forward to continually updating you on our progress in the quarters and years ahead. So, to summarize the strategy, market expansion, innovation, acquisitions, and increased service initiatives will be the key growth enablers. The critical success factors that underpin the strategy are first and foremost people. Add to that the right processes and finally having the discipline to stay the course and drive the business to achieve growth levels that we and you expect. This is the journey we are embarking on with executable steps along the way. It won't happen overnight and it will require some adjustments and investments in our organization, which always takes time. But we are very focused on prioritizing investments in these areas that can generate near-term impact while positioning us for long-term sustainable growth. I launched this strategic plan to the organization earlier this year and have received overwhelmingly positive feedback. The organization is getting behind it while the business leaders and I own it. It's really all about execution now. It's important to note that this will be a living strategy, one that we will revisit regularly and fine-tune from time to time to ensure we are developing the right initiatives to drive the business forward over the next five years. I believe we have identified the right areas for growth, and our plans are very executable, which, if done successfully, will enable us to increase shareholder value. So what do I see from a growth perspective? I could see this business organically doubling in the coming years. I expect that by layering on strategic acquisitions for diversification, bringing in new technology and better serving customers, we will transform this company. I'm pleased to report that we are already advancing the plan with key investments made and others currently underway across the company. We have hired a business development manager at Ambril to focus on the rapidly growing EV market. We've released our next generation chiller for cannabis industry. We are expanding engineering and service capabilities across all three businesses while increasing R&D programs with an innovative focus. And finally, systems and tools are being upgraded to support growth. It's exciting to see the amount of change that has already occurred in just six months with the company. So what are the key takeaways? Intest has a new strategy that extends from leadership down to every employee. We are laser focused on our customers, on growth, and on innovation. with an eye towards standardization and scalability, which should open up new markets and customer opportunities. Before I turn it over to Hugh to walk you through the financials, I want to once again thank the entire Intest team for delivering a truly solid quarter and for weathering a challenging 2020. With business conditions continuing to improve, coupled with our growth initiatives, we enter 2021 optimistic for the year ahead. Market tailwinds and investments are driving growth. The worldwide chip shortage is expected to last into next year. Utilization rates are projected to stay historically high, which normally correlates to strong semi-business and in-test, and we're making inroads into a number of growth markets and segments outside of semi. We continue to meet the demanding requirements of our customers with an impressive breadth of products through operations that are now more streamlined to better serve our global customer base. From this level of execution, I believe we are building a foundation for positive change. I will now turn it over to Hugh Regan, our CFO, to walk you through the details of the most recent quarter performance and full year results. Hugh, over to you.

Thanks, Nick. Our fourth quarter gross margin of 45% came in at the top of our guidance range and was consistent with the gross margin we reported for the third quarter. Q4 2020 component material costs were essentially unchanged at 35.1%, compared to 34.8% in the third quarter. These slightly increased component material costs were more than fully offset by reduced charges for inventory excess and obsolete materials, as well as lower direct labor costs. Selling expense increased 12% sequentially to $2 million in the fourth quarter, driven primarily by higher commission expense and to a lesser extent to increased spending on advertising and third-party installations. Engineering and product development expense decreased 5% sequentially to $1.2 million, primarily as a result of lower levels of spending on product development materials. General and administrative expense increased 4% sequentially to $3 million, driven primarily by increased stock-based compensation costs related to our new CEO, and to third-party recruitment costs related to the new GM in our EMS product segment. These increases were partially offset by reduced spending on professional fees. During the fourth quarter, we incurred restructuring and other charges of $1.1 million compared to $161,000 in the third quarter. The fourth quarter restructuring charges were primarily driven by costs associated with the recently completed restructuring and manufacturing consolidation of our EMS product segment, which totaled $889,000 during the quarter. We expect this restructuring and consolidation action will generate approximately $600,000 in annual savings. Also included in the fourth quarter restructuring charges was $189,000 accrued for costs associated with exiting the additional space in our Mansfield, Massachusetts offices. We accrued an income tax benefit of $74,000 in the fourth quarter, reflecting a 16% effective tax rate. This compares to a $25,000 income tax benefit accrued in the third quarter, which reflected an effective tax rate of a negative 6%. We expect that our effective tax rate in 2021 will range from 16 to 18%. For the fourth quarter, We reported a net loss of $380,000, or 4 cents per diluted share, compared to net earnings of $458,000, or 4 cents per diluted share for the third quarter. As previously guided, our fourth quarter results included $1.3 million in restructuring and other non-recurring costs. And when tax effected, these costs amounted to $1.1 million, or 11 cents per diluted share. Excluding these restructuring and non-recurring costs, our fourth quarter net earnings would have been $0.07 per diluted share, non-GAAP. For 2020, we reported a net loss of $895,000, or $0.09 per diluted share, compared to net earnings of $2.3 million, or $0.22 per diluted share, for 2019. Our 2020 results included $1.8 million in restructuring and other non-recurring costs, and when tax affected, these costs amounted to $1.6 million, or 16 cents per diluted share. Excluding these restructuring and other non-recurring costs, our 2020 net earnings would have been 7 cents per diluted share non-GAAP. We have provided a summary of 2020 non-recurring costs by quarter in the supplemental information posted to our website in connection with this call. Diluted average shares outstanding were $10.3 million for the fourth quarter of 2020 and during the quarter we did not issue any shares of restricted stock, nor had any forfeitures of restricted stock, and did not repurchase any shares. EBITDA was $12,000 for the fourth quarter, down from $908,000 in the third quarter. And for 2020, our EBITDA was $665,000, down from $4.5 million in 2019. Consolidated headcount at December 31st, was 204, an increase of four-step from the level we had at September 30. I'll now turn to our balance sheet. Cash and cash equivalents grew by $804,000 sequentially to $10.3 million, and cash flow provided by operations was $848,000 for the fourth quarter and $3.2 million for 2020. Cash today stands at approximately $12 million. We expect cash and cash equivalents to decline slightly in the first quarter as a result of the payment of 2020 annual bonuses and then increase throughout 2021. Accounts receivable declined $1.1 million sequentially to $8.4 million at December 31st with 52 DSO, down from 61 at September 30. Inventories grew $552,000, or 8% sequentially, to $7.5 million, driven by the increased semi-demand we are seeing. Capital expenditures during the fourth quarter were $138,000, down from $330,000 in the third quarter. Included in third quarter capital expenditures was $202,000 for tenant improvements to our Mount Laurel, New Jersey facility related to the EMS consolidation. We currently expect to spend $230,000 in the first quarter to complete these tenant improvements. Our backlog at December 31st was $11.5 million, up $2.7 million or 31% sequentially, and up $6 million or 107% year over year. As to guidance, as noted in our earnings release, we expect that net revenues for the quarter ended March 31st, 2021 will be in the range of $18.5 million to $19.5 million, and that our GAAP financial results will range from net earnings of 18 cents to 22 cents per diluted share. And we currently expect that our first quarter gross margin will range from 49% to 51%. On a non-GAAP basis, we expect our adjusted net earnings per diluted share will range from 21 cents to 25 cents per diluted share. Our guidance is predicated on business trends we are currently seeing, as well as our expectations for the balance of the quarter. Operator, that concludes our formal remarks.

We can now take questions. Thank you.

If you would like to ask a question on the call today, please press star 1 on your telephone keypad. That's star 1 to ask a question. If you would like to remove yourself from the queue, it's star 2.

We will pause for one moment to assemble the queue. And we can now take our first question from Jason Smith from Lake Street.

Please go ahead.

Hey, guys. Thanks for taking my questions. Just curious if you are seeing any component or supply constraints out there. And I guess relatedly, can you remind us what sort of capacity you guys can handle from a revenue standpoint with all the recent changes?

Yeah. Hi, Jason. Excellent question. from a supply constraints, you know, we're working diligently and started to in, in Q4, as we saw the orders, uh, start to increase there to, uh, to ensure we were, we had a pipeline, um, of material available for us. And, um, so far I'd say we've, uh, we've done a good job as a group to, to ensure this. Now, it certainly is a lot more focused and effort given the, uh, the growth we're seeing here, but so far we've been able to, to, uh, to meet demand here from our supply side. And, um, The second part of your question was relative to capacity. As you know, we did a manufacturing consolidation in Q4, and we've got that up and running right at the end of the year. So that was our objective, to be able to have a more streamlined operation heading into 2021, and very pleased to have that executed in line with our plans there. From a capacity perspective, I believe we've got the footprint we need, and we'll be looking to potentially add some additional testing capability or capacity, if you will. But outside of that, we've got the capacity to support our growth for years to come, we believe.

Okay. That's really helpful. And then, obviously, a really strong Q1 outlook. Are you at all concerned about potential pull-ins into Q1? and not looking for full year guidance by any means, but just curious how you're thinking about the split this year, just because there tends to be some differing views out there, especially in the semispace, on if this is going to be more of a first half or second half weighted type year.

Yeah, I can tell you, as we've communicated, that obviously the first half is looking very strong. And, you know, Unfortunately, we don't have a whole lot of visibility on Q3 in the second half right now, but I believe there's strong underlying trends in this industry around the automotive technology advancements and buildup on the capacity side, the 5G mobility PC buildup, and the Internet of Things or the connected world will continue to drive this into So it's tough to say, but clearly Q1 and the first half will be strong quarters for us.

Okay, perfect. And then just the last one from me, and I'll jump back into Q. Hugh, a really nice expected step up in gross margin here in Q1. I assume a lot of that's a function of higher revenue, but how should we think about gross margin trending the remainder of 2021?

Jason, yes, you're correct about that. The improvement in the revenues is driving the improvement in the margin. As Nick said, we don't know where the second half of the year is heading at this point, but we would tend to believe that it could be reasonably strong based upon the trends that we're seeing. For the first half, we expect the margin to be in the ranges that we've guided today for Q1. In the second half, we'll have to see where revenues go, but we're optimistic that we will be able to hold the 50% or better margins.

Okay. Thanks a lot, guys. Hey, thanks, Jason.

We can now take our next question from Peter Wright from Interact. Please go ahead.

Great. Congratulations, guys, on a wonderful quarter outlook and plan that you shared. Nick, two questions for you. Wonderful. Two questions for you, Nick. My first one is, I understand visibility is somewhat limited beyond the first half of the year, but if you could help us understand what would have to happen with what you see for a book-to-bill ratio to remain above one through the course of 2021, and where do you see kind of the potential of that occurring? The second question I have is related to your plan, which was very detailed. Thank you very much. I'll just focus on one part, which is your innovation component. And two questions there. One part that really stuck out to me is the idea around standardization. And my question there is kind of what is the key economic metric that you're focused on? To prove that out, is it more of a skew reduction or across learning a product across technology across different markets? Where is the opportunity in standardization? And I guess also taking a step back on kind of how you think of innovation. How should we think of the lowest hanging fruit and biggest opportunities there? Is it better, faster, cheaper products for existing customers, adjacent products to existing customers, new customers in the same markets, new markets? I know it's a little bit of all the above, but what sticks out to you as the lowest hanging fruit most immediately?

And then I have one follow-up for you. Excellent questions there, Peter. Thanks a lot there. As we said, the visibility, we do see the first half being relatively strong. And beyond that, we really don't have a whole lot in the second half. But what I can tell you is that we are making investments now, as I highlighted in the communications there, to help us diversify even further and position us for growth in other markets. So as things in the second half start changing, improving in other areas, we could either supplement or mitigate any potential slowdown in that. So we're going to do what we can to keep 2021 being really a breakout year for us. And then the second piece on innovation, and thanks for the questions there as well. As I said, this is an area that I really have a passion for. And clearly, standardization is one One area that I started discussing on the calls last year and one area that is really low-hanging fruit for us, if you will, the company operates in the past largely as an engineer to order different customers, different solutions, what have you. So we're basically looking and leveraging our knowledge and know-how to say, how do we build these into platforms that will drive better costs, more efficiency, streamlined operations and better applicability across multiple customers versus individual customers. So it is looking at what we're doing now, what's in the pipeline, how can we build this platforming portfolio, if you will. And as for the targeted areas, it is really all of the above that you commented. You know, how do we make sure we've got the, you know, the lower end better that best position there as well, going after new markets as we design these platforms, which markets can we target and go into? So it really is right now looking across the broad spectrum.

Wonderful. And, and Hugh, one follow-up, if we, if we look out the couple of years to kind of what the target model would look like on sales doubling from current rates, a hundred to 120 ish million, What would the margins look like there? And maybe if you can help us understand what the drivers are. So a couple of positive ones, you know, the standardization and the service model getting layered in there. The offsets may be in the short term, the global expansion and the increased expense on talent. What metrics are most important to you and kind of the margin and cash metrics on the target model?

Good question, Peter. You know, clearly as we drive further growth in the businesses, you know, we would expect the gross margin to continue to improve as we drive further utilization of our fixed cost space as revenues grow. You know, I think You know, as the company grows both organically and inorganically, what we don't know yet is what the composition of our margin will look like on newly acquired products. But, you know, clearly we're looking at strong technologies that have strong margins associated with them, similar to the products that we have in our portfolio today. So we would hope that we would continue to be able to support a strong margin and growth ultimately in the margin in the long term. One thing I want to emphasize is Nick's desire to grow the business does mean that we will be making investments in the future, and that is critically important for sustained growth over time. So investors may see that we will see some trends up in the R&D line, the selling line as we make investments on feet on the street, and additional engineering staff to further drive innovation, which is clearly – at the heart of everything that we are doing here at Intest. So I think we look forward to speaking to a longer-term model later in the year as we build out our strategic plan and talk to the marketplace. But I'm optimistic that we're going to see strong results from the company. But it is important to note that we will be making investments for the future. So hopefully that responded to your question, Peter.

Wonderful. Congratulations again. Thank you. Thanks. We can now take our next question from Dick Ryan from Colliers. Please go ahead. Thank you.

So Nick, a question, a couple questions around the sunny side. You talked about breaking into the memory side of the market, can you put some perspectives around that? Is this a result of bringing some new technology to the market or just internalizing getting a little better strategy to expand the market opportunities? And in addition to that, if you could kind of talk about what that could do to the served market on the EMS side.

Sure. So the memory penetration there is really working with a customer and working more so on their R&D side of things as they're designing their next memory solution in the marketplace there, which is how we want to get in and open the door for us. And we've been making some really good inroads on that side. for the R&D space. And I believe, you know, as we look at this space, because memory is very much, you know, high volume, you know, dedicated lines once it's in place, you know, our opportunity really is more on that development piece there with multiple customers and we've made inroads in one. So, you know, I think, I believe it's an area that will, you know, provide us further diversification in the semi-market there, but, you know, isn't going to be, you know, a production-type solution, more of a development R&D-type solution that we're presenting there. I hope that answered that piece of it.

Yeah, yeah, exactly. Now, on the front end with Ambril, what have you seen from them wrapping up 2020 and the kind of outlook going into 21?

Yeah, no, Ambrose is, you know, wrapping up 2020, I would say they had a number of big opportunities that actually slipped into 2021 here, but the momentum with that business is good. And 2021 has really just taken off. And, you know, as new budgets became in place, uh for a lot of customers as this capacity build out on the semi side of things continue customers really going all in on on some product expansions and and our further penetration efforts with integrators to to position ourselves across multiple end users you know we're we're making really strong inroads at ambril there and really pleased with the uh the progress um as we ended 2020 but uh more so with what we're seeing here in 2021.

Okay. When you look at your Q1 guidance and maybe commentary for the first half, how do you see the top-line mix between multi-market and semi? It was kind of in Q4 was 49-51, but how does that shift going into the first half?

Yeah, obviously SEMI being so hot right now is going to be a much, well, a larger piece of our mix going forward. And then, as I mentioned, just with the AMBREL, it's not only on the EMS side of things, but also in CBD, you know, front-end applications at AMBREL. And then we continue to see that SEMI strengthening in our back-end test at ITS. So SEMI order's We're, I believe, roughly two-thirds, one-third from a bookings perspective relative to multi-market in Q4, and that's going to drive revenue in Q1. But as I mentioned, you know, Ambrose also making inroads in a number of other areas, and Q1 multi-market bookings are looking extremely strong as well. So I would expect STEMI to be a bigger piece of our Q1 mix. Hugh, any comments there?

Consistent with you, Nick, I think it's going to look a lot like it did this quarter from a bookings perspective where multi-market was only about 37% of total bookings. I think you'll see semi-dominant in Q1 revenues at between 55% and 60%.

One last one for me. What was the level of EV revenue in 2020? You can ballpark that.

Sure, Dick. EV revenue for us in 2020, bear with me one moment. As I spoke to that, EV revenue for us in 2020 was about 1.35 million, approximately.

Yeah, as I mentioned, you know, AMBRA really started developing solutions in this space in 2018. And so we really do believe we're at the early, early stages and talking with a lot of the right players and getting in, you know, in with them and committed to them. So expect to grow for us.

Okay, great. Thank you and congratulations on the strong outlook and the nice strategy going forward, Nick.

Hey, thanks, Dick. Thanks a lot.

We can now take our next question from Arne Urshner from Urshner Capsule Markets. Please go ahead.

Hi, good morning. And first of all, congratulations on a very thorough review. But I do have a number of questions, and I apologize. I'm somewhat new to your story. The $600,000 of benefit you're hoping to get in 2021 from the restructuring, what will be the breakdown of that between gross margin and SG&A, please?

Hi, Arne.

Thanks for the question. Your interest and your enthusiasm here, and we're very happy with where we finished. But I'll let you address that.

Thanks, Nick. Arnie, we would expect the bulk of that, the bulk of the savings are related to the savings that will be created by the reduction in lease costs. And those costs had been, because it was a manufacturing facility, were included in our COGS numbers. So you'll see the bulk of it above the line, but there is some of it below the line as a result of reduced staffing levels as a result of the elimination of the California operation.

Okay. My second question is a very simple or general one. Obviously, your outlook for Q1 is very favorable. And Q4 was pretty good. Can you just remind me or educate me on the seasonality, if any, in your business?

Yeah, I'll let Hugh comment on that one as well, since he's been around quite a bit longer than I have.

Thanks, Nick. Yes, our business, the seasonality historically over the last several years has been where Qs 2 and 3 will be our peaks. of demand, and Qs 1 and 4 will be our troughs of demand. But that changes, and clearly this is a year where that's not following suit because, you know, you can see the strong demand we had in Q4 leading into Q1. I can tell you we look forward to reporting Q1 results, and demand has been very strong in Q1. So that curve can move, and clearly as we enter 2021, it is as a result of significant pent-up automotive demand that's really driving a lot of the semi business that we see at this time. But, you know, I would expect you'll see in another several years that it could go back to the middle of the year. But that's what we've seen historically.

A few more quick questions. The earnings guidance you are providing versus the street expectations going into Q1 into the current quarter. were roughly 10 times the number that the street had. What changed so fast that the street just didn't catch this enormous change? And I guess the broader question many of the other analysts ask are how sustainable is it?

Yeah, excellent question there. And, you know, I would say, you know, last year, SEMI for a lot of folks was pretty strong. But as parts of SEMI was down and others were up, with, you know, automotive really slowing the first part of the year, and then the PC mobility piece kicking up with COVID and people working from home in that. But what it meant overall was with the automotive down and those picking up, the capacity in place was sufficient to support the need for semiconductor devices, chips, et cetera. So what we see now is everything kind of coming back online, automotive research, et cetera, that now that capacity that was in place before is not sufficient. And so there's a build-out on capacity going on right now. That really started for us in Q4 from what we see, our customer base there. And it's continuing strongly into Q1. And our visibility into Q2 is that it will be strong as well. And so we're optimistic that the investments in other areas will also kick in in the second half. And you know, could be a, you know, it could help to offset some slowness in the other, in semi if it does slow down in the second half.

Okay. My final question is you mentioned two buzzwords that Wall Street loves, EV and cannabis. And you mentioned in EV you had a million, 1.3 million of revenue. At what point do you see meaningful or impactful revenue and earnings contributions from these two segments?

Yeah, I think the comment that we highlighted in the message today is it's been doubling since 18, and we, with the activity picking up around ED and cannabis, you know, and it's a similar story there for cannabis, that we also would expect that to just continue to accelerate going forward. So, and really has a runway that will last for quite some time as this market moves, you know, towards these, these growth applications. And so, yeah, it'll just grow for us. Is it going to be 10x next year or something like that? I hope so, but I can't tell you that's the case. We're going to capture everything we can.

Okay. Thank you very much for taking my question. You bet. Thanks, Arne.

Thank you. As a final reminder, if you would like to ask a question, please press star 1. Our next question comes from George Milas from MKH Management. Please go ahead.

Thank you, operator. Good morning, Nick. Good morning, Hugh. Good morning, Laura. I have a couple of questions. The first question relates to EMS. EMS had very strong bookings. And, you know, their bookings are strong. I mean, the strongest we've seen in three or four years, I think since 2017. So I'm trying to see how the mix has changed there within the EMS portfolio. And to what extent has innovation driven the continued success of that business? And I'll just give you my second question right now. It relates to Umbrella. I think Umbrella had a couple... a partnership where NREL's technology was embedded into third-party applications, and I think especially on the SEMI side. And how has that fared, and is that still – are you looking for more such partnerships where you embed your technology in them?

Let me address the first one. The EMS bookings, as we indicated, are strong and continue to be strong. And right now, we expect them to surpass the 2017 rates that we saw out there back during that buildup that occurred during that timeframe. As for the mix, you know, we're seeing the growth across the board on the product lines that we have, although I would say our manipulators are growing probably a little faster than we anticipated. And I believe that's just accelerated adoption of the newer technologies that we have in those products and that. So we are seeing more mix on manipulator side of the EMS business there. And, you know, the second part of your question, I'm sorry, I didn't quite capture it.

Sorry. So it's on the Embraer side. I think that Embraer's technology is being embedded into a number of third-party applications. And I'm trying to see how that's doing and to what extent are you looking to replicate that sort of strategy or those partnerships in the future?

No, absolutely right. Ambrel is laser focused on OEM integrator opportunities where we can sell multiple systems to multiple end users as they set up their equipment and their various sites and all that kind of stuff. versus just the end users. But it's important that we get specced in and qualified by end users. So we're attacking both sides of it. But these third-party integrators and OEMs are very important to Ambril and areas that we're making really good inroads. In fact, later this quarter, well, I believe it's in Q2, apologies for that, that they'll have a an integrator program dedicated to, again, providing some benefits to integrators that will help to make us even more attractive out there. So, it's an area that we're going after strong.

Great. Okay. Thank you very much. Absolutely. Thanks, George.

We have no further questions on the call right now. I would now like to turn the call back to Mr. Grant for any concluding remarks.

All right. Thank you. And thanks, everyone, for the interest and interest. We really appreciate you listening in. If you have any further questions, don't hesitate to reach out to me, you, or Laura. We look forward to updating you on our progress when we report our results for the first quarter in early May. And until then, I wish everyone a safe and healthy

first quarter. Thanks everyone. Thank you.

That concludes today's Intest Corporation 2020 fourth quarter financial results call. You may now