inTest Corporation

Ladies and gentlemen, greetings and welcome to the Intesh Corporation 3rd Quarter 2024 Financial Results 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 Sauta. Investor Relations, please go ahead.

Good morning, 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 release that went out this morning, as well as 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 as I review the safe harbor statement. During this call, management may make some forward-looking statements about our current plan, beliefs, and expectations. These statements apply to future events that are subject to risks, uncertainties, and other factors that could cause actual results to 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, as covered on slide three, management will refer to some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, 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 four. Nick, I'll turn the call over to you.

Thank you, Sean, and good morning, everyone. Thanks for joining us for our third quarter 2024 earnings call. First, I would like to thank the entire in-test team for their continued efforts executing on our strategy. We are adding new customers, we continue to optimize our channels to market, and we are driving innovation to differentiate our solutions. These efforts are helping offset some of the softness in a few of our key end markets. We are managing well through the current semiconductor cycle and benefiting more on our diversified markets, including automotive, life sciences, and consumer electronics, where our positions were strengthened by the acquisition of Alpha Nation. The integration continues to progress well as the teams are focused on driving product and technology synergies, leveraging our supply chain to improve cost and performance, as well as exploiting opportunities across the broader customer base. A highlight in the quarter was achieving gross margin of 46.3% on revenue of $30 million. which was impacted by $2 million in shipments being delayed into the fourth quarter. During the third quarter, acclimation contributed $5.4 million in revenue, and sales to our diversified markets showed strength, while semi-revenue demonstrated improving trends in the back-end. In fact, sequential growth in back-end semi outpaced the decline in front-end. The 570 basis points expansion in gross margin compared with Q2, was driven by favorable product mix, improved volume from higher margin back-end semi, and cost actions taken to adjust to market conditions. Our businesses have been aligning their cost structure with current market conditions through headcount reductions, less discretionary spending, and insourcing activities. Since the beginning of 2024, headcount in our base businesses has been reduced by 10%. Product mix and our cost management efforts are reflected in our sequential improvement and operating margin expanding 60 basis points and adjusted EBITDA margin improving 180 basis points. Turning to slide five, I'll review orders and backlog. Orders have modestly improved through the year and the quarter. Orders in Q3 were $28 million, including $3.9 million from affirmations. Stronger demand in auto, EV, defense aerospace, industrial, and other markets outweighed the weakness in semi. Encouragingly, for the third consecutive quarter, back-end semi orders were up sequentially, showing further signs of coming out of the trough. This improvement helped to offset the current pause we're experiencing in front-end semi. Backlog has improved over the prior year period and was up $5 million, recognizing the $14.7 million contribution from the acquisition of Alphamation, which had an elevated backlog at closing. As mentioned in the past, Alphamation's orders can be lumpy as timing of their large multi-system projects can vary quarter to quarter. Compared with the trailing quarter, backlog declined as we worked down Alphamation's backlog. 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 six, as Nick noted, revenue for the third quarter was 30 million, including 5.4 million from alphamation. The 0.7 million decrease compared with Q3 2023 was driven by a 7.1 million sales decline in semi that was partially offset by 4.5 million of growth in auto EV, primarily from inflammation, and improved sales in industrial and other markets. Sequentially, third quarter revenue decreased 3.7 million as approximately 2 million in shipments were delayed into the fourth quarter. As we communicated last quarter was going to be the case, revenue from alphanation was down compared with an unusually strong second quarter. Meanwhile, semi-industrial and other markets demonstrated improving trends. Moving to slide seven, gross margin of 46.3% for the quarter expanded 570 basis points sequentially, driven by favorable product mix with improved volume and high margin back-end semi-solutions and cost actions as Nick noted. On a year-over-year comparison, gross margin was nominally unchanged on lower revenue. On a trailing 12 months basis, our gross profit was 53.3 million, or 43.7% of sales. The decline reflects the weakness in higher margin semi-sales. As you can see on slide eight, compared with the prior year, our operating expenses were up 1.5 million, reflecting the inclusion of Alphamation's operating expenses as partially offset by cost reductions and corporate development costs. Sequentially, operating expenses were essentially flat. Turning to slide nine, you can see our bottom line and adjusted EBITDA results. For the quarter, net earnings were 495,000 or 4 cents per diluted share. Adjusted net earnings were 1.2 million or 10 cents per diluted share. Adjusted EPS reflects adding back tax-affected acquired intangible amortization. On an after-tax basis, our acquired intangible amortization amounted to approximately $721,000 or about $0.06 per diluted share in the third quarter. Adjusted EBITDA for Q3 was $2.4 million, representing an 8.1% adjusted EBITDA margin. Slide 10 shows our capital structure and cash flow. During the quarter, we generated 4.2 million of operating cash. Capital expenditures in the third quarter were approximately 500,000, and the resultant free cash flow was 3.7 million. We ended the quarter with total debt of 16.1 million. This reflects a total debt leverage ratio of 1.8x. During the quarter, we repaid approximately $5.3 million of debt and repurchased approximately 141,000 shares at an average price of $7.38 for a total investment of $1 million. Cash and equivalents at the end of the third quarter were $18 million, down $2 million from the trailing quarter, reflecting net debt repayments and repurchase shares. We continue to have 30 million available with our delayed draw term loan and an incremental 10 million available under our revolver. Turning to slide 11, as we review our outlook for 2024, we have tightened our full year outlook and now expect 2024 revenue to range from 128 to 131 million. Gross margin for 2024 is expected to be approximately 42 to 43%. with expected operating expenses of approximately 53 million. This includes intangible asset amortization expense of approximately 3.3 million or 2.7 million on a tax-adjusted basis. Our expected effective tax rate remains at about 17 to 19%. The implied fourth quarter results from the tightened guidance implies revenue of 34 to 37 million with gross margins of approximately 42%. Operating expenses, including amortization, are expected to be approximately 13.5 million. Total intangible asset amortization is expected to be approximately 900,000 and approximately 700,000 after tax, or about 6 cents per share. Based on the midpoint of our revenue guidance range, we are expecting EPS and adjusted EPS for the fourth quarter to be approximately $0.08 and $0.14 respectively. As a reminder, we simply adjust for tax-affected amortization expense. We still expect our capital expenditures in 2024 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 12, I will now turn the call back over to Nick.

Thanks, Duncan.

While we have limited visibility beyond the fourth quarter, we believe we are seeing signs of stability in our targeted industries. The order pipeline has increased, reflecting some gradual improvement with back-end semi-demand and larger automotive projects. We believe once we are past the elections and moving into the new year, CapEx projects will likely increase across a number of industries. The front-end semi-market which for us serves silicon carbide and gallium nitride applications, is currently paused. While the longer-term picture for these power semiconductor materials is encouraging, there is a need for the market to improve efficiencies with existing production lines, consume existing inventory, and adapt to the changes in EV demand. We are especially excited about the evolving gallium nitride opportunity as that technology delivers higher efficiency and many high-power applications. We continue to optimize our go-to-market by adding or upgrading channel partners that can drive higher sales, while expanding our geographic coverage throughout the U.S. and around the world. In Southeast Asia, our new Malaysia facility is coming along nicely, and we're already seeing the benefits from the engineers we have hired. In fact, our Environmental Technologies Division has recently received their first order for a new product that was designed by their team in Penang. This modified thermal test solution was something that was on our new product roadmap for some time, but until now, we did not have the bandwidth to complete it. It's great to see the team members making an impact in their first few months of being on board. I look forward to many more future successes from the team. As noted in our five-point strategy, innovation is one of the keys to our success. In our electronic test division, our automated manipulator with our IntelliDoc solution was recently installed at a key customer in Europe as an integrated solution that we expect could lead to many future opportunities. In addition, our automated manipulator has been coupled with the latest test technology and is in the test phase at a large intelligent computing company, and initial feedback is very positive. It's our know-how and expertise that differentiates us and opens up these types of competitive displacement opportunities. Our process technologies EcoHeat 2 induction heating system is being leveraged in next-gen solutions for a number of key customers. With its industry-leading internal control and power delivery system, which, by the way, leverages silicon carbide technology, our EcoHeat 2 can lower system operating costs, provide increased uptime, and has built-in performance diagnostics for asset health monitoring. Despite the headwinds we are experiencing in some of our key markets, we are not sitting still. We are driving innovation. We are constantly working to optimize our go-to-market approach. We are capturing price for our value-added solutions, and we continue to evaluate acquisitions that can complement or enhance our existing technologies. In short, we are executing on our strategy. With that, operator, let's open the line 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 1 on a telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would 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. The first question is from the line of Jason Smith with Lake Street. Please go ahead.

Hey, guys, thanks for taking my questions. I just want to start on the order push outs you highlighted. Curious if those are concentrated at a couple customers or if it is just more broad based. And then I guess relatedly, what end market is that related to?

Yeah, good morning, Jason. So the roughly 2 million that we referenced in push outs from Q3 to Q4 really were shipment delays that didn't reach a customer by the end of Q3 and basically arrived in early Q4 out there. So that's roughly the two million that we've referenced there. With that said, you know, we have seen customers push out. At Front End Semi, we continue to work with customers in that space on shipments that they've placed orders. We've had in our backlog for a while on that. So Just accommodating them there, more so on the front end side.

Gotcha. And then related to the front end semi-market, I know high level there are some kind of longer term tailwinds, but just curious how you guys are thinking about when to expect a pickup there, or is just visibility too clouded at this point?

Yeah, you know, what we're hearing from our customers and actually working with a number of them on their next-gen solutions there is that they're anticipating second half of 2025 is when deliveries, additional deliveries would be needed at this stage. Obviously, that can change, but that's kind of the timeline we're hearing from multiple customers in that space.

Okay, that's really helpful. And then just the last one for me, and I'll jump back into Q. I mean, really nice gross margin performance. I know you highlighted sort of the headcount reductions and insourcing and some just improved efficiencies. Just curious how much of this could potentially be permanent. I mean, when the demand profile picks back up, is this sort of the new level for gross margin performance?

Yeah, I mean, it's tough to break down all the elements, Jason, as you know.

Mix, certainly the biggest driver of that very strong gross margin. But we also see the benefit of the cost initiatives that Nick highlighted. I mean, very roughly, but it is hard to discern. There's probably about a percentage point of benefit from cost actions and things like that flowing through that number, with the majority of the uptick being the mix factor with the higher back-end semi that we highlighted.

Okay, no, I appreciate that caller. Thanks a lot, guys. Thanks, Jason.

Thank you. The next question is from Ted Jackson with Notland Securities. Please go ahead.

Good morning. I've only got a couple of questions. Actually, a couple of mine were hit just now. First of all, just when you made a comment about the headcount reduction being down 10% in your base businesses, can you just define what the base businesses are?

Yeah, it's our collective companies outside of Alphamation at this stage. They're all part of our base businesses. Now, some of those five companies, you know, are not being impacted as severely as the others. So I would say, you know, collectively, the 10% is there, but it's more weighted towards businesses that are seeing the downturn in the front-end semi-space and, you know, the more industrial slowdowns that we've seen taking some actions.

Okay. And then, you know, with a reduction like that, how do we see that playing through into the financials? I mean, we get, I mean, I haven't gone through and really dug and try to put my fourth quarter together again. So maybe, I mean, I assume we'll see some of this in the fourth quarter. Does it play out like almost immediately? Is there something that we'll see an additional impact as we get into the first quarter of 25th?

Yeah, and just to provide a bit more clarity, last quarter we talked about a more specific action, about 1.2 million of annualized benefit, around 12 headcount, I think we referenced, which took place towards the end of last quarter, starting to flow through this quarter, and ongoing a little bit of severance, for example, associated with that, relatively minor action. The total headcount that Nick's referring to is really over the course of the last nine months or so as demand has softened in a number of businesses. We've obviously adjusted direct labor, operational expenses. As we've seen that demand soften, it hasn't really been one action per se. It's been activity that's been occurring over the course of the last nine months. And when we look back, we have reduced headcount in the base businesses. as we mentioned by that 10%. But it's been a gradual process and we've been seeing those benefits slowly creep through the numbers, so to speak. We're certainly seeing here in Q3 with the margin being strong, you know, the impact of that, and we'll continue to see that going forward. I would reemphasize, though, a lot of that margin uptake is driven by what was a favorable mix in Q3 versus very unfavorable mix in Q2 as a comparison.

Okay. My next question, just maybe front end's been hit on, but just maybe a little more color around the back end. I mean, you've commented for you know, several months, I guess, at this point that you have seen the back end stabilize and improve and maybe some color in terms of when you look at that business and the, you know, incremental strength that you're seeing in it, is there anything to note in terms of kind of in market that's strengthening or is it a geography, underlying drivers like reshoring? You see, I'm going just anything thematic within that. what's happening in that business that's worth calling out?

You know, nothing in particular I would say worth calling out. It is a gradual improvement. It's not like an L shape taken off, if you will. But we are seeing more and more requests for quotes. Our pipelines are growing. You know, some projects, CapEx projects are a signal to be cut off. I mean, they kicked off here, you know, very soon. So, yeah, we feel pretty good about that back end showing that gradual improvement. Now, you know, on the flip side, the front end is, for us, very anemic right now.

No. Well, you know, hopefully that'll turn around in the near future for you too. Last question, and just more of just kind of a thematic kind of color thing. Just talk a bit about Alphamation and kind of help everyone, including myself, understand it better. You know, it's still a good chunk of your backlog. You're working through it. I know it's a business that has a lot of exposure within the auto industry. world and that what happens within that is tied to new models, model refreshes of cars and stuff. I was wondering if you could maybe provide a little kind of color in terms of where we are in terms of some of the cycles that impact AlphaMation's revenue growth. Is there anything in terms of some model releases You all are excited about and you know me nor is it you kind of get wrong going with this just like is there is there anything to hang a hook to hang a hat on in terms of you know like that's that we should start, we should be thinking about, you know, like a new model refresh or a new design when within a particular vertical or You know, I mean, it could even be getting into, you know, like commercial or heavy equipment as they start automating it and there's more electronics going into it. But just maybe sketch out some themes that drive the growth of that business. And that's it for me.

Yeah, sure. So I'm very excited still, you know, the heavy inflammation part of the intest family here. And the majority of their testers go into automotive testing. the automotive industry kind of doing a little bit of a reshuffling the last couple quarters here as, you know, EV models kind of being slowed and moving more towards the ICE hybrid type vehicles. But for Alphamation, it's agnostic. For them, it's just a matter of, you know, which programs go forward from that. So encouraging is the – the pipeline at Alphamation, really seeing some nice pickup on projects there. And this whole shift around the computing in vehicles, the onboard computing systems, moving more to a centralized computing system versus, you know, these computers within the different infotainment systems, what have you, having one managing the entire car is a design shift, infrastructure shift that is kind of underway across numerous OEMs out there, which is good for us. And, you know, we'll require new testers from around these onboard computing systems, as well as The changes in the electronics that are being managed, you know, will also require testers to monitor them and evaluate quality. So, yeah, there's a lot going on in cars. I think everyone's well aware of that. And new tech, new features. And, you know, so there's a lot of testing opportunities for us. And so we feel very positive about the future for Alphamation.

just timing wise as we pointed on orders can be lumpy okay thanks very much you guys have a great day hey thanks ted thank you a reminder to all participants that you may press star and one to ask questions

Ladies and gentlemen, you may press star and one to ask a question.

As there are no further questions, I would now like to hand the conference over to Nick Grant for closing comments.

Thank you, Zico. We appreciate everyone joining us today and thank you for your time and we welcome the opportunity to answer any further questions you may have. On slide 13, you can find the details regarding the replay of this call and a list of upcoming events we'll be participating in. I hope to have a chance to see some of you at an upcoming conference. Thanks again for participating and have a nice day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.