inTest Corporation

Greetings and welcome to the Intest Corporation first quarter 2024 financial conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sean Sutter, Investor Relations. Please go ahead.

Good afternoon, everyone. We certainly appreciate your interest in Intest Corporation, and thank you for sharing your time with us today. Joining me on our call are Nick Grant, our President and Chief Executive Officer, and Duncan Gilmore, our Chief Financial Officer and Treasurer. You should have the earnings released, which crossed the wires today after market. as well as the slides that will accompany our conversation today. If not, you can find these documents on the investor relations section of our website, intest.com. Please turn to slide two, and I'll review the safe harbor statement. During this call, management may make some forward-looking statements about our current plans, beliefs, and expectations. These statements apply to future events that are subject to risks, uncertainties, and other factors that could cause actual results that differ materially from what is stated here today. These risks, uncertainties, and other factors are provided in the earnings release as well as in other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. Also, management will refer to some non-GAAP financial measures. We believe these 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. You can find reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides. Now, please turn to slide three, and I'll turn the call over to Nick.

Nick? Thank you, Sean, and good afternoon, everyone.

Thanks for joining us for our first quarter 2024 earnings call. The quarter came in about where we had expected, and I'd like to thank the entire Intest team for making it happen in a relatively tough environment. Revenue of nearly $30 million was somewhat higher than expected, while gross margin of $43.8 was lower, primarily driven by the timing of the acquisition of Alphamation. With operating expenses coming in slightly lower than expected, EPS was $0.05, and was $0.10 on an adjusted basis. AlphaMation, which we owned for about two and a half weeks in the quarter, contributed $1.4 million of the $1.9 million revenue increase over the fourth quarter of last year. However, given the timing of the acquisition and having revenue and costs misaligned in a short stub period, they were a drag on our gross margin. In a normalized quarter, we would expect their typical margins to be similar to ours. We continue to execute our five-point strategy, which focuses our growth efforts in diversified markets and drives our strategic thinking. These efforts are helping as we manage through the tough semiconductor cycle. In fact, while they can be lumpy in their own rights, defense aero and industrial remain solid markets for us in the quarter. The addition of Alphamation, which provides us a meaningful position in the electronics and infotainment test space for the automotive industry, will provide further diversification. Importantly, we continue to generate cash from operations, and even after the Alphamation acquisition where we used about $19 million, we ended the quarter with $27 million in cash. We believe this is adequate financial flexibility to keep advancing our transformation strategy. Turning to slide four, I'll review the orders and backlog. As we have been communicating since last November, the first half of 2024 was expected to be weaker than the second half of the year. However, we had a measurable change in order trends at the very end of the quarter, and that has now impacted our outlook for the year. Specifically, we had about 5 million orders we had anticipated that were either delayed or reduced in size from expected levels. Encouragingly, back-end semi was up sequentially, showing signs of stabilization, which we had noted on our year-end call. This helped to partially offset a notable decline in front-end orders in the first quarter. One bright spot to note is our backlog is at a record 56 million at quarter-end. The boost is directly the result of the acquisition with Alphamation contributing 22.8 million in backlog. You may recall that we had reported their backlog at about 13 million euros when we acquired them. However, their accounting for revenue was based on the percentage of completion methodology. After the acquisition, we have concluded that under U.S. GAAP, point-in-time revenue recognition is more appropriate. As a result of this change, acquired backlog increased to 22.4 million. Keep in mind that the accounting treatment is related to the timing of revenue recognition and does not impact our previous statements regarding AlphaMation's annual revenue. While it's in its early days, the integration of AlphaMation is progressing as planned. In fact, we have already jointly participated in trade shows and numerous customer interactions. We are really excited about Affirmation joining the in-test team and all that we could do together to further our strategy. With that, let me turn it over to Duncan to review the financials and outlook in more detail.

Duncan, over to you. Thank you, Nick.

Starting on slide five, revenue for the first quarter was $29.8 million. including 1.4 million from Alphamation, which was acquired with only 19 days or two and a half weeks remaining in the quarter. The 2.1 million decline compared with Q1 2023 was driven by a 2.7 million decline in Semi, partially offset by growth in the industrial and defense aerospace markets. Sequentially, first quarter revenue increased 1.9 million with Semi revenue up 39%, off of the exceptionally low fourth quarter, while defense aerospace was up 34%. Revenue from alpha-mation was primarily in auto EV, which helped offset a decline in that market within the organic businesses. Moving to slide six, gross margin of 43.8% for the quarter contracted 80 basis points sequentially, driven by a 100 basis point negative impact from the stub period for alpha-mation. This is just the result of a timing mismatch on recognition of revenue and expenses given the short ownership timeframe in Q1. On a year-over-year comparison, gross margin contraction was a result of lower volume and product mix, as well as the aforementioned impact from the acquisition. Our trailing 12 months gross profit of 55 million, or 45.4% of sales, is in line with our updated outlook for this year of gross margin between 44% and 46%. As you can see on slide 7, our operating expenses were up 1.1 million versus the prior year, driven by higher corporate development expenses, incremental operating expenses inherited with the acquisition, and higher professional fees. As a percent of sales, OPEX increased 610 basis points to 42.2%. Turning to slide eight, you can see our bottom line and adjusted EBITDA results. For the quarter, net earnings were $662,000 or $0.05 per diluted share. Adjusted net earnings were $1.2 million or $0.10 per diluted share. Adjusted EPS reflects adding back tax-affected acquired intangible amortization. On an after-tax basis, our required intangible amortization amounted to approximately 500,000 or about 5 cents per diluted share in the first quarter. Adjusted EBITDA for Q1 was 1.8 million, representing a 6.1% adjusted EBITDA margin. Slide 9 shows our capital structure and cash flow. We had a solid quarter of cash generation, adding 2.1 million from operations. Capital expenditures in the first quarter were $300,000 unchanged from the prior year period. Given our modest capital requirements to grow the organic business, free cash flow was $1.8 million. Cash equivalents at the end of the first quarter were $27.3 million, down $18 million from the trailing quarter, reflecting the use of approximately $19 million for the acquisition of AlphaMation. Borrowings increased in the quarter due to the $9 million in debt we assumed from the acquisition. We ended the quarter with total debt of $20.4 million, which we believe is very manageable and reflects a total debt leverage ratio of 1.6x. During the quarter, we repaid approximately $1 million of debt. We continue to have $30 million available with our delayed draw term loan and an incremental $10 million available under our revolver. As announced on Friday, we extended the maturity date on these facilities by four years to May 2031, and the drawdown period was extended two years to May 2026. Turn to slide 10 as we review our outlook for 2024. For the second quarter, we are expecting revenue to be between 34 and 36 million, with gross margin of approximately 44 to 45%. Second quarter operating expenses, including amortization, are expected to be in the range of $14.5 to $15 million. This range reflects the incremental operating costs gained from the acquisition of AlphaMation and higher total intangible asset amortization. After tax, this is expected to be approximately $1.2 million, or about $0.10 per share. We are expecting EPS for the second quarter to be between breakeven to $0.06 per diluted share, while adjusted EPS should be approximately $0.10 to $0.16 per diluted share. As a reminder, we simply adjust for tax-affected amortization expense. For our full-year outlook with the addition of alphamation and the recent order trends Nick discussed, We now expect 2024 revenue to range from 140 to 150 million. Gross margin for 2024 is expected to be approximately 44 to 46%, with expected operating expenses of roughly 56 to 58 million. This includes tax-adjusted intangible asset amortization expense of approximately 4.1 million. Our expected effective tax rate is now projected to be about 17% to 19%. For capital expenditures in 2024, we expect to run between 1% to 2% of sales. As usual, our guidance does not include the potential impact from any non-operating expenses such as corporate development that may occur from time to time, nor does it include the potential impact from any additional acquisitions we may make. With that, if you will turn to slide 11, I will now turn the call back over to Nick.

Thanks, Duncan.

In a tough macro environment, our team is keeping their heads down and executing our plan. We have been up against some heavy headwinds in the semi-market, which is about half of total sales, but less than it had been historically. Our latest acquisition will help the further advance market diversification. Nonetheless, We like our position in the semi-market, which over the long run has exciting megatrends to drive growth as we leverage our know-how and innovative solutions. We continue to innovate by providing more automated technologies, and through responsive solutions-oriented service, we are gaining additional traction within our existing customers while also capturing new ones. Our diversified markets are serving us well, but it's the team's effort to expand our reach and leverage unique solutions across more channels and markets that are enabling inroads with new customers and channel partners. Underpinning our five-point strategy is the accountability and discipline required to execute well. Our teams are consistently evaluating market position, pricing, competition, opportunities, and the talent within as well as across our channel partners to drive growth. We are encouraged with our progress and excited about our future.

With that, operator, we can open the lines for questions. Thank you.

Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from the line of Jason Schmidt with Lake Street Capital. Please go ahead.

Hey, guys. Thanks for taking my questions. Just want to start with the orders that shifted towards quarter end. I'm curious if you expect to recognize those delayed orders later this year. And then regarding the orders that were reduced in size, is this a permanent reduction, or do you think there's potential to recoup that full order later?

Yeah. Hi, Jason. The orders that were delayed really did just that kind of shift to the right. We do see them kind of moving more into Q3, Q4, later part of the year, based on what our customers are telling us. As for the reduction in size, that is really then users demand-driven, and that is for the balance of the year. And, in fact, we've booked – that they reduced size orders primarily in the second quarter here to get that particular customer through the balance of the year. So, you know, that's going to be reflected here in Q2, but was expected in Q1 and just did not materialize.

Got it. That's helpful. And then it sounds like the integration with Elfamation continues to progress the plan. But just curious if there's anything that has surprised you, whether good or bad, now that you've had a little more time with the acquisition.

Yeah, no, all positive so far. I mentioned in the pre-remarks that, you know, we had a trade show, the Apex show, and they jointly showed with our AcuLogic group up in Canada there, and Really good activity, good interactions between the two businesses and the teams there. And customer calls have gone fantastic with them. You know, being part of a larger U.S. company gives some credibility to their pursuits and some projects. So all positive from that sense. Duncan, anything from your side that you come across?

No, I mean, all good so far. I mean, Nick alluded to revenue recognition, but that wasn't a complete surprise, just something that, as we get under the hood, gave us more visibility into final determination. So nothing surprising so far.

OK, no, that's great to hear. And then just the last one from me, and I'll hop back into queue. You noted some headwinds from Elfamation regarding gross margins. Just curious if you could quantify the impact here in Q1.

Yeah, I mean, it was 100 basis points of impact. So, and literally just a case of relatively thin revenue versus the costs that had to be brought into the stub period based upon number of business days versus number of actual days and things like that. But 100 basis points of impact on the margin there.

Okay, great. Thanks a lot, guys. Thanks, Jason. Thank you.

Our next question comes from the line of Ted Jackson with Northland Securities. Please go ahead.

Hi. Thanks for taking my questions. I wanted to start with the front-end semi-market. And just simply put, it's real open-ended. There's some discussion or color around, you know, What does it mean with regards to silicon carbide? You know, what's driving it when you talk to your customers? I mean, you kind of mentioned in the press release a little bit about, you know, almost it sounded like a capacity overbuild. Am I reading that correctly? And, you know, kind of the view you get from your customers to when that market kind of normalizes out, just really kind of sort of at the macro level, the front end semi is what I'd love to hear more color about, and then I'll follow up with another.

Yeah. Hi, Ted. And on the front end semi, as you know, our induction heating solutions are used in the crystal growth, silicon carbide, gallium nitride, as well as in epitaxy applications. And we had seen the crystal growing business or orders, I would say, saw for a number of quarters now as that capacity, as they digest the shipments that had happened out there and that And where we had been seeing relative strength and holding up well was the epitaxy side of things. But then in Q1, that's really where we saw the epitaxy kind of slow. And it's really more project driven for the end users there. Some of the larger projects they were expecting got either delayed, canceled, or rescoped on the number of units that they were going to need. So that really was the reduction in size that we saw. Talking with our customers there, both the integrators and the end users, we really think that really starts picking up in the second half as well as what they're telling us orders they're going to need to start placing for late in the year and really more so into 2025.

That was great color. And then on a more positive discussion, you know, the defense business has been doing well for, you know, quite a period of time. And I wondered if you could provide a little color within that market, you know, what are the applications that are driving it and your outlook for it?

Yeah, no, we serve that space quite across all three departments. divisions, if you will, and some of the applications being, you know, robust testing of electronics used in missiles, missile defense systems, where flying probe testers are testing circuit boards used in various defense systems as well. And so it really is a wide variety applications there. We also do some, you know, I'd say more on the defense aero side of components used in aircraft, some cameras used on planes as well. So it touches a wide variety of applications, nothing particular. But we do see those staying pretty robust for us here and new I'd say designs on the missiles themselves or the components going into the missiles, driving higher testing needs, driving, you know, more upgrades to our products that we've served in the past. So, yeah, we see that will continue for quite some time.

Good. I want to hear that. Then my last question on backlogs. you know, if we take alpha-mation out, you know, backlog was down substantially. And is that drop in backlog purely semi-driven?

Yeah, I mean, a huge portion of that is semi-driven. As you can see from the kind of order activity in semi, relatively low or a low quarter, revenue is still somewhat holding up. You kind of do the maths on that, and you can see kind of backlog dropping there. So semi- certainly the bigger driver, the front-end component, as Nick highlighted in commentary there as well as in Q&A, really being the kind of driver of that sector with respect to kind of that backlog reduction. I think the rest of the markets, you're relatively, you're holding up kind of relatively well, but that's where we see the biggest change.

Okay. Thanks, Duncan. And thanks, Nick. I'll step out of line. Thanks, Ted.

Thank you. Ladies and gentlemen, a reminder, if you wish to ask a question, please press star and one. Our next question comes from the line of Peter Wright with Intro Act. Please go ahead.

Hey, guys. Thank you for taking my questions. Nick, my first question is if you could share some color on kind of customers' activity around capacity expansion. Do you think some of the pushouts are more proactive or reactive, or can you tell at this point to kind of what they're seeing there? And separate from kind of the capacity conversations on more of the innovation or tech-type purchases or new customers, Has there been anything to kind of highlight or note there, either accelerating or decelerating? And then the second question I have is more from your guys' perspective as we look at kind of where we're in the cycle. You guys have made some acquisitions and maybe have some costs to cut there, but what is changing maybe in your investment philosophy in your own innovation, in your own development cycle, Is there any cost cuts or harder hurdles to get by, or are you guys full steam ahead? Thank you.

Sure. Hi, Peter, and thanks for the questions there. So relative to capacity expansions and what we're seeing, I would say most of those really have been kind of delayed out there. Customers still have these projects on their roadmaps. They're, you know, in our funnels. And it's just a matter of timing before they, you know, pull the trigger and they're going to need our equipment for those things. So nothing's being, you know, I'd say mothballed or canceled. It's just purely just a delay on getting CapEx spending approvals there. As we relate to new customers, this is something we've been driving across the businesses since I joined, aggressively going after new customers in the markets, going after existing customers and getting more share of their wallets. And that continues throughout. And in fact, you know, we've got an aggressive push to elevate activities in those areas, obviously in these slower times and going after competitive accounts in that. So the teams are laser focused on finding the opportunities and getting them closed out there. But we will continue to add new customers every quarter. And excited about the new customers we brought in with Alphamation and their customer base and trying to, you know, explore the larger portfolio of our solutions across that as well. And then the last question you had, comment, was on what are we doing relative to our investments in R&D. So innovation remains one of our core strategies, and we aren't slowing down in that area. In fact, pushing the teams to do more and try to speed up development around the new products. You know, kind of linked with that in new customers is pretty excited about the number of customers that are qualifying the Scalex new vision camera that we did release last year. It takes time to design in the new cameras, and so we've got a pipeline of opportunities there that should start bearing fruit later in the year. Likewise, the new benchtop thermostream that we launched at our ITS business up in Mansfield, Massachusetts, good excitement there. It was launched at a trade show out in California. They had over, you know, dozens of leads that came back specific around that product. So we're chasing those down. So, yeah, innovation is something we won't throttle back. We believe it's going to create demand going forward for us.

Thank you for that. If I could ask one kind of detail question, maybe more of a survey-ish type question. Duncan, if you look at pricing and cost trends, looking at where we are in the ebbs and flows of the inflation cycle, is anything getting notably more difficult or notably easier out there in managing margin?

It's all relative if you compare to a year and a half, two years ago when certainly things were a lot more volatile from a supply chain, inflationary perspective than The amplitude of that is certainly less, but it's a constant. I mean, the teams are constantly looking at it. We're constantly looking at that price versus cost equation, ensuring the teams are pricing appropriately and managing costs, managing supply chain costs, et cetera, et cetera. So the amplitude is more manageable, but it's an ongoing battle, and it should be.

Wonderful. Thank you very much. Thanks, Peter.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and 1. As there are no further questions, I will now hand the conference over to Nick Grant for his closing comments.

Thank you, Ryan.

Nick Grant.

We appreciate you doing.

I'm sorry. Nick, sorry. I have a question from Peter Wright.

Oh, okay. I just re-polled.

One last one. Any update on the Malaysia facility that is noteworthy there?

Yeah, no, we're moving full steam ahead there. Have been a little delayed with getting the final permits into that site, but we have proceeded with some of the build-out, working with the architects and getting everything ordered. So we expect to have that final permit here any day, and then we'll pull the trigger out there. We have started hiring. We've got a handful of really talented individuals that we've hired on here. They'll be starting in the next couple weeks or a few weeks here. So excited about the progress here. on that site and the team's commitment to embrace it and really help further our position in Southeast Asia.

Great. Thank you so much. Thanks, Peter. Thank you.

Nick, there are no further questions in the queue.

All right. Thanks, Ryan.

We appreciate you joining us today and welcome the opportunity to answer any further questions you may have. On slide 12, you can find the details regarding this call and a list of upcoming events that we will be participating in. I hope to have the chance to meet some of you at the conferences.

Thank you for participating and have a great day.

Thank you. The conference of Intest Corporation has now concluded. Thank you for your participation. You may now disconnect your line.