InTEST : Q2 2023 Conference Call Transcript

inTEST Corporation

Second Quarter 2023 Teleconference Call and Webcast
August 4, 2023	NYSE American: INTT

Operator: Greetings and welcome to the inTEST Corporation Second Quarter 2023 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Shawn Southard, Investor Relations for inTEST Corporation. Please go ahead.

Shawn Southard: Thank you. Good morning, everyone. We appreciate your interest and thank you for sharing your time with inTEST Corporation.

Here with me are Nick Grant, our President and CEO, and Duncan Gilmour, our Chief Financial Officer and Treasurer.

You should have a copy of the Second Quarter 2023 Financial Results, which we released earlier this morning. If not, you can access the release, as well as the slides that will accompany our conversation, on our website at intest.com/investor -relations. After our presentation, we will open the lines for Q&A.

Please turn to Slide 2 and I will review the Safe Harbor statement. You should be aware that we may make some forward-looking statements during the formal discussions, as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as 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.

During today's call, we will also discuss some non -GAAP financial measures. We believe these will be useful in evaluating our performance. You should no t consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non -GAAP measures with comparable GAAP measures in the tables that accompany today 's release and slides.

With that, please turn to Slide 3, and I will turn the call over to Nick.

Nick Grant: Thank you, Shawn, and good morning, everyone. Thanks for joining us for our second quarter 2023 earnings call.

Once again, the inTEST team has delivered strong results through execution of our 5 - Point Strategy for Growth. I want to take a moment to recognize our team members and thank them for their commitment and dedication to our strategy and their hard work delivering to plan.

Their outstanding performance allowed us to achieve record revenue of $32.6 million for the second quarter. This growth reflects strength in a number of our markets. Our thermal test solutions had some nice wins in the defense/aerospace market. Sales of our analog, mixed-signal backend semi test solutions remained robust. We also continued to have strong shipments of our frontend semi-induction heating solutions for silicon carbide and epitaxy crystal growth.

I believe these results are a reflection of our success diversifying into new target markets, capturing additional market share through go -to-market and innovation investments, and the broader market opportunity we gained with the acquisitions made in 2021.

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inTEST Corporation

Second Quarter 2023 Teleconference Call and Webcast
August 4, 2023	NYSE American: INTT

We are delivering on our efforts to expand our presence globally. For example, our Environmental Technologies division was recently in Japan for the Automotive Engineering Exposition promoting our Thermal solutions. While a competitive market, our participation informs us of new ideas on product development, value added engineering requirements and opens up new opportunities.

The division also landed a new customer in Guadalajara, Mexico, for several Thermostream precision temperature systems in the quarter. This is an example of our efforts to further penetrate the market in Latin America where medical device manufacturers have a good presence.

Innovation of course is a key element of our growth, and our Electronic Test division had a number of wins for its new SuperSet high voltage/high current interface and new LSL automated manipulator. These wins helped to keep sales robust to the backend semi space even as others have reported experiencing moderating capital equipment sales.

Our Process Technologies division continues to win new customers that create opportunities for further growth. For example, we announced earlier in the quarter the win at a utility industry customer which is replacing its natural gas preheating system with our environmentally preferred electric induction heating systems to preheat metal in preparation for welding. Our systems provide a green solution and improve quality and throughput. This initial win is for systems to be used in multiple production lines in our customer's operation and has the potential to expand into additional facilities. We are seeing more opportunities for this application of our induction heating systems as companies embrace greener factories.

As we are growing, we are demonstrating our strengthening earnings power as well. Our 10% increase in sales versus a year ago contributed to our 11% growth in gross profit, 23% increase in operating income, and 32% growth in net earnings.

We believe these results demonstrate our operating leverage potential as we scale the organization.

As for new business booked in the June quarter, we saw strong demand in our defense/aerospace, industrial, and security markets with second quarter orders of $31 million, up 2% sequentially. And we ended the quarter with a backlog of approximately $45 million. The slight decline both year-over-year and quarter-over-quarter, we believe, is a reflection of the supply chain returning to more normal trends. Customers are no longer ordering far in advance of their needs with improving lead times.

And before I turn it over to Duncan, I'll just comment that I'm pleased with the success of our recently completed $20 million At -The-Market equity offering. The just over $19 million raised enhances our balance sheet and provides us with additional capital to support our organic and inorganic growth ambitions.

With that, let me turn it over to Duncan to review the financials in more detail . Duncan, over to you.

Duncan Gilmour: Thank you, Nick.

Starting on Slide 4, as Nick noted, revenue for the second quarter was a record $32.6 million, up 10.1%, versus the same period last year and at the upper end of our Q2 guidance range of $31 to $33 million.

The $3.0 million year-over-year revenue growth reflects strong demand for induction heating solutions in front-end semi, traditional testing applications in back -end semi,

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inTEST Corporation

Second Quarter 2023 Teleconference Call and Webcast
August 4, 2023	NYSE American: INTT

thermal test chambers and flying probe test systems in the defense/aerospace industr y, and industrial grade image capture technology in the security industry, as well as a variety of our solutions in other markets.

Moving to Slide 5, gross margin of 46.2% in the quarter, increased 40 basis points compared with the prior-year period driven by better product mix and improved pricing. Compared with the trailing quarter, gross margin declined, primarily due to an especially favorable product mix in the first quarter.

Our trailing twelve-month gross profit of $59 million grew $5.6 million reflective of success at scaling the business. The trailing twelve -month gross margin of 46.2% is in line with our outlook for full year gross margin of approximately 46%.

As you can see on Slide 6, our operating expenses as a percent of sales improved by 70 basis points to 35.9%, as compared with the prior -year period.

On a dollar basis, operating expenses increased $866,000 as a result of annual merit increases and continued investments in engineering, sales, and marketing.

Turning to Slide 7, you can see our bottom line and Adjusted EBITDA results. We had net earnings of $2.8 million or $0.24 per diluted share for the second quarter which is up from $2.1 million or $0.20 per diluted share in Q2 2022.

Adjusted EBITDA was $4.8 million, up from $4.2 million last year, and adjusted EBITDA margin expanded 50 basis points to 14.7%.

On an adjusted basis, non-GAAP EPS was $0.28 per diluted share compared with $0.25 per diluted share in the second quarter of 2022. Adjusted EPS reflects adding back tax - effected acquired intangible amortization.

On an after-tax basis, acquired intangible amortization amounted to $434,000 in the second quarter. We expect after tax intangible amortization for the third quarter to be similar.

Slide 8 shows our capital structure and cash flow. We raised $19.2 million in net proceeds from an At-The-Market equity offering during the quarter. This increases our share count, such that our weighted average diluted common shares outstanding will be approximately 12.4 million for Q3 2023.

We also generated $2.9 million in cash from operations in the quarter. Given our modest capital requirements to grow the business, free cash flow was $2.5 million, or about 89% of net earnings.

Cash and equivalents at the end of the second quarter were $37.4 million, up $22 million from the trailing quarter reflecting the $2.9 million from operations and $19.2 million from the offering. As Nick indicated, our capital priorities remain focused on organic and acquired growth.

We have $30 million available with our delayed draw term loan and $10 million available under our untapped revolver. Our current leverage ratio is below 1 at just 0.73 giving us considerable flexibility. As we have done in prior quarters, we repaid $1 million of debt, bringing total debt down to $14.1 million. Note that repayment of debt does not increase funding available under the terms of our term -loan facility.

Turning to Slide 9, our second quarter orders of $31.4 million were up 2% sequentially on the strength in orders from security, defense/aerospace, automotive/EV, industrial and other markets. Specifically, for EVs, orders were strong for our chillers for testing and

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inTEST Corporation

Second Quarter 2023 Teleconference Call and Webcast
August 4, 2023	NYSE American: INTT

production of high-powered traction inverters. For the industrial market, orders were strong for our induction heating solutions as companies seek out more environmentally friendly solutions for their production needs.

Order levels in 2023 have become more normalized given improvements in the supply chain and the resulting reduction of lead times.

Backlog at June 30, 2023, was $44.6 million, 3.1% lower than the prior year and down 2.5% compared with the trailing quarter.

Approximately 45% of the backlog is expected to ship beyond the third quarter of 2023. Turning to Slide 10 we'll review our updated outlook for 2023.

Coming off a strong second quarter, we remain excited about the remainder of 2023. We believe we're on track to achieve high single -digit to low-double digit organic growth and reach our full year revenue target.

For the third quarter of 2023, we expect revenue and gross margin to be similar to the second quarter.

Third quarter operating expenses, including amortization, are expected to be similar to Q2 which was approximately $11.7 million. Intangible asset amortization, after tax , is expected to be approximately $430,000.

We expect third quarter interest expense of approximately $175,000 and our effective tax rate to be between 16% and 17%.

EPS for the third quarter should be in the range of 20 to 24 cents per diluted share, while adjusted EPS should be in the range of 23 to 27 cents per diluted share. As a reminder, we simply adjust for tax-effected amortization expense.

Looking further ahead, we believe demand will remain strong across our technology offerings and markets. Additionally, we continue to pursue strategic acquisitions and partnerships to extend our reach and expand our portfolio.

Based on our results for the first half of 2023, we are updating our revenue outlook for 2023 to approximately $127 to $131 million.

Based on our backlog and forecasts, we are narrowing the range of our gross margin outlook for 2023 to approximately 46% and our expected operating expenses to be $46 to $47 million, raising the low end by $1 million. This includes tax -adjusted intangible asset amortization expense of approximately $1.7 million for determining adjusted earnings. Our expected effective tax rate remains approximately 16% to 17%.

Finally, our capital expenditures for 2023 are expected to continue to run between 1% to 2% of sales.

As usual, our guidance does not include the potential impact from any unusual non - operating expenses that may occur from time to time.

With that, if you will turn to Slide 11, I will now turn the call back over to Nick. Nick Grant: Thanks, Duncan.

On Slide 11 we would like to highlight the solid progress we are making toward our stated 2025 revenue goal of $200 to $250 million. We expect to continue driving high single digit revenue growth with our base business in the coming years and we anticipate future acquisitions will complement our organic growth to reach our 2025 revenue goal.

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inTEST Corporation

Second Quarter 2023 Teleconference Call and Webcast
August 4, 2023	NYSE American: INTT

Our pipeline of acquisition and partnership opportunities remains active, and with the net proceeds from our recent ATM equity offering, we believe we have sufficient flexibility with our capital structure to execute on our plan.

Slide 12 shows how we expect our revenue growth will translate into strong earnings growth. Our plan is to deliver divisional operating income of over $40 million, adjusted EBITDA of over $30 million and improve earnings power to over $20 million in 2025. Our strategy is primarily focused on scaling the company while maintaining our margin profile.

Let me sum up on Slide 13. As I have noted throughout my prepared comments, our 5 - Point Strategy is delivering results for shareholders. Our engineered solutions are in high demand as they enable our customers to improve productivity or create more effective solutions within their own portfolio of products. Our technology -segmented organizational structure has generated focus and we are driving greater collaboration across the Company. As a good example, a few weeks ago I was up at our new Acculogic facility outside of Toronto and I saw one of our Flying Probe Systems preparing to be sh ipped that included three of our Videology Cameras. Providing these types of broader solutions supports our growth plans and enables us to provide more value to our customers. We could not have created this kind of synergistic sale even a year ago.

I'm pleased with what our team has been able to accomplish. We continue to unleash the potential of inTEST on our journey to becoming a supplier of choice for innovative test and process technology solutions. We are driving organic growth while actively p ursuing acquisition opportunities to enhance our product offerings, expand our addressable markets, and deepen our presence in targeted industries .

With that, Operator, let's open the lines for questions.

Question & Answer

Operator: Thank you. At this time, we'll be conducting a question -and-answer session. [Instructions] Our first question comes from the line of Jaeson Schmidt with Lake Street Capital Markets. Please proceed with your question.

Jaeson Schmidt: Hi, guys, thanks for the taking my questions. I just want to start on your commentary regarding the supply chain. It sounds like those pressures continue to ease. And I was just curious, if they had all caused any sort of headwinds in the quarter, any demand you were unable to ship. And I guess relatedly, would you expect the pressures to continue to ease here in the second half of the year?

Duncan Gilmour: No major impact in the quarter, and I would expect these pressures to continue to normalize. Like I said I think the pain and suffering of 12 months ago, 12 months to 18 months ago is kind of behind us.

Nick Grant: Yes. And it's great, Jason, that it's allowing us to kind of free up our engineering resources, our manufacturing engineers to focus more on ne w products, on cost-out initiatives and activities that really will deliver a lot of value rather than requalifying suppliers or new components, et cetera. So, it's good to get back to normalized supply chain.

Jaeson Schmidt: Okay. No, that's good to hear. And then just following up on your

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