Q3 2020 inTest Corp Earnings Call

[music].

Welcome to Intest Corporation, Twentytwenty third quarter financial results Conference call.

At this time all participants are in a listen only mode.

They should come down.

The question outside the <unk> session.

At that time, if you have a question you wouldn't need to press star one on your phone.

As a reminder, this conference is being recorded today.

A replay will be accessible W. W. W. Josh test Dot com.

I will now turn the call over to Intests Investor Relations.

Laura Guerrant.

Please go ahead.

Thank you Marguerite I. Thank you for joining us for Intelsat, 2023rd quarter Financial results conference call with US today on net Gran <unk>, President and CEO, and he'll wake and Treasurer and Chief Financial Officer, Nick will briefly review the quarter's highlights as well as current business trends. He will then review.

Intests detailed financial results for the quarter and discuss guidance for the 2024th quarter. Well then have time for any questions. If you've not yet received a copy of todays release. It can be obtained on into its website www dot intest dot com.

In addition to our press release, we have to shoot supplemental information in advance of this call, which can be downloaded from our website on the Investor Relations page just mentioned.

Elemental information its offer to provide shareholders and analysts with additional time in detail.

That's inevitable in advance of the quarterly results conference call before we begin the formal remarks, the companys attorneys advise that this topic. This call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act to fly to 95.

These statements do not convey historical information, but relate to predicted or potential future events that are based on management's truck station.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

The factors mentioned in our press release, such risks and uncertainties include but are not limited to.

The impact of the cope with my team and I think on our business liquidity financial condition and results of operations, including as a result of the golfing public health requirements in response to the pandemic [laughter] government mandated facility closures availability of employees supply chain and distribution interruption customers' inability.

A refusal to accept product deliveries and the sufficiency of our current level of working capital to address our cash requirements.

Indications of a change in the market cycles of the semi market or other markets, we serve including a consultant to cope with my team had done that.

Changes in business conditions, and general economic conditions, both domestically and globally changes in the demand for semiconductors generally almost it was multiple COVID-19 pandemic.

South of our strategy to diversify our business by entering markets outside the semi market.

Our ability to successfully consolidate our Airbus operations without any impact on.

Customer shipment.

The possibility of future acquisitions or dispositions.

Full integration of any acquired operations.

Our ability to borrow funds are raised capital to finance potential acquisitions changes in the rates and timing of capital expenditures for customers, including as a result of the COVID-19 pandemic [laughter] product development programs increases in raw material and fabrication costs associated with our products and other risk factors.

That's all from time to time in our Securities and Exchange Commission filings, including but not limited to our annual report on form 10-K for the year ended December 31st 2019, and quarterly reports on form 10-Q for the quarter ended March 31st 2020, and the quarter ended June Thirtyth 2020, and.

<unk> quarterly reports on form 10-Q.

Any forward looking statement made by Intest. During 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 in this press release.

Or this conference call to reflect events or circumstances. After the date hereof or to reflect the occurrence of anticipated.

[noise] or upon anticipated events.

During today's call, we will make reference to non-GAAP financial measures we.

We have provided additional information concerning these non-GAAP measures, including a reconciliation to the directly comparable GAAP measure you know a press release, which is posted on the investor page of our website lastly, we will be participating in the following virtual investor conferences in December LD micro.

Okay, but then on the CEO summit and with that let me now turn the call over to Nick Brown. Please go ahead Nick.

Thank you Laura and welcome everyone. Thanks for joining us for the third quarter 2020 financial results Conference call.

First of all I hope all of you and your families are hoping things sales.

Hi, I'm, particularly pleased to be speaking with you all today as this is my first financial results call as interim CEO I'd like to thank the entire interesting embracing me into the organization in August and for delivering solid Q3 performance.

Before we go into the detail of our normal quarterly results review I'd like to provide you a brief update on our response to cope with my team and how we're managing through it.

We continue to closely monitor all regions in which we operate to be sure that we are fully compliant recommended local and National Guard.

Safety protocols implemented across the organization are being followed and have proven to be effective at protecting our employees, while allowing us to support our global customer base.

I think our customers and employees alike are increasingly more confident with business and a coke world.

Weve been allowed to return to some of our customers facilities on a limited basis and this has resulted in service revenue is picking up in the third quarter a.

The change from what we saw in the second quarter were service revenue decline given the limited ability and travel restrictions.

For the third quarter service revenues exceeded 1.6 million, a 22% increase sequentially.

And it appears that we're returning to pre code.

I'd like to extend my appreciation to the entire incest organization for how well they have responded to the pandemic. Obviously, we're not out of the woods yet with case is rising globally, but I'm extremely proud of the resiliency the entire team has displayed.

Now, let's move on to the discussion of our financial performance for the third quarter.

In general, we're seeing improving conditions in those markets, we serve which is reflected in our quarterly results.

Our solid third quarter financial results were in line with our expectations, resulting in continued revenue and profitability growth and while COVID-19 related challenges do continue to impact our overall operating environment order flow has continued to strengthen with a continuation of the uptick in orders that we experienced last quarter and it did.

We are pleased to see good order activity from new customers as well.

In Q3 consolidated bookings up 14.4 billion increased 4% sequentially and were evenly split between multi market and semi markets.

Holistically a diverse set of end applications are driving our business growth confirming our diversification strategy.

Third quarter multi market bookings increased 8% to 7.2 million well semi bookings for the same period were 7.2 million consistent with those reported in Q2.

Q3, consolidated revenues of 14.4 million increased 9% sequentially and that were at the high end of our guidance largely fueled by thermal related component semi market as well as the Mil Aero markets.

As a percentage of overall revenue semi comprised 51% and multi markets worked 49%.

Semi revenues for the third quarter increased 8% sequentially to 7.4 million and Q3 multi market revenues increased 10% to 7 million.

Now, let's turn to performance of our two operating business segments, along with customer highlights.

This is actually my favorite part because I love to talk about customers and to customers. As this is where I learned the most about the products and their applications and it allows me to identify areas, where we can better serve them in the future.

Our thermal segment consists of our gambro and like you got businesses, while our other segment your math is where the founding business of the company reside.

Thermal was responsible for all multi market revenue as well as some have been test revenue from semiconductor front end manufacturing and back end test.

Dms customers are all semiconductor related.

So let's talk about that we're making in roads across multiple industries and verticals.

In Q3 thermal bookings of 11 million increased 5% compared to Q2.

And thermal net revenues for the quarter up 10.7 million were up 13% over the second quarter.

Now, let me share some details or recent successes our thermal semi business continues to be strong. This year, both front end and back end a strategic account placed additional orders for CVD applications in the quarter, there was a difficult quarter over quarter improvement in our semi lab business largely driven by a rebound in Europe.

When we received the sizable COVID-19 related Thermostream order for mass production from a new customer in Europe.

Now shifting to multi market, where we are focused on unique applications and different growth markets and verticals outside of semi.

We continue to penetrate the market, which is emerging as an important new market for us and its benefiting from continued investments.

During the quarter, we received a sizable order from an integrator with considerable expertise in automotive you'd be industry as well as the orders from a large domestic automotive manufacturer and we received our first order from a start up he be truck manufacturer.

Our Emerald business also launched you go eat compacts theory in Q3 I'm happy to report that we received our first order from a company that specializes in steel metal fabrication in Canada, and the unit will ship in Q4.

And yes, we are seeing increased customer adoption of our chiller products fueling organic growth.

In fact, chiller bookings the revenue both exceeded $1 million in the quarter for the first time in the company's history.

Thermal bookings driven by cannabis extraction chillers for multiple customers three of whom are new this quarter and revenue was driven by Mil Aero chiller shipments booked in 2020 in late Q4 2019.

Now, let me turn to the EMA segment, which predominantly serves production test for analog and mixed signal semiconductor applications.

And the first half of the year, we saw in order flow resurgence after hitting the bottom of the cycle for off in Q4 of last year Q.

Q3 E N booking the 3.4 million were roughly flat sequentially and M. S. Revenues of 3.7 million were marginally down 2%. However, we were successful in securing new customers during the quarter and broadening our geographic reach.

There are some really exciting developments around automation going on in the industry and which intest is taking a leading role by leveraging our technology and creating new solutions and products. One such example, with the transition to automated test cell solutions, we're making significant inroads via our automated manipulators and our intelligence.

King systems.

The intelligent test cell that results from the combination of these two systems is highly compelling for customers. We are developing a presence in this market and we are pleased with our customer adoption and market traction to date.

With these innovative solutions, we are poised to achieve deeper penetration in our current customer base and drive growth across the industry at new accounts.

Now some highlights some E.M. asked in the third quarter.

CMS completed the installation of two automated manipulators to a medical device company, who has recognized the value of backend test automation and what combining the manipulator with Darren Teladoc can do to optimize backend wafer test in.

In fact, the customer created a before and after video showing the advantages of the intelligent test cell and supported their future capital budget request.

Due to the success of the systems. We've received word that the capital has been approved to purchase additional systems.

Additionally, you M.S. shipped and installed and the initial system consisting of a manipulator and docking solution for a solid state disk drive and memory application, which should lead to additional follow on orders and 2021 from this customer.

Sure a couple things I want to highlight about the success first the memory space is not a market that we traditionally play in and provides an opportunity for further diversification within the semi space for us.

Second this is an example of how we're making early investments in customers production tool sets and multiple areas and are participating in their next gen. Teller <unk> next generation technology programs to better position us for the future.

It's really great to see the effort being made to get designed in early and to drive adoption.

We will continue to diversify in this space and expect that the new products being designed in and adopted during this year will lead to additional traction going forward.

Now lets shift gears from the business performance and let me share with you all some of my initial impressions since taking the helmet the company.

As you know I officially started on August 24th and since then I've been immersed in all aspects of the organization.

I've learned a tremendous amount in a short period of time, and I decided to really like what I'm seeing and hearing I.

I've spent a fair amount of time talking with customers and the overwhelming feedback things I guess or are centered around responsiveness flexibility deep expertise high quality and overall reliability of our products.

I had one customer explain a recent situation where they had a customer had a manufacturing test cell go down one evening and then after contacting US our teams worked through the evening to assess the situation implement a solution and had them back up and running and less than 14 hours.

He went on to say such a failure doesn't happen often but when it does.

Knows you can count on in test.

Another customer described insights as a true solution provider and use this as a key business partner and look forward strategy.

I also spoke with a few of our larger channel partners and it's very clear that they value our product lines.

A couple of them told me out at some point in the past they had lost the Intest product line and tried carrying competitive lines, which simply did not compare.

I can hear in their voices their commitment and test on all positive feedback across the board and I can't wait until I can physically start visiting customers and seeing channel partners further strengthen relationships.

Now shifting to my observations of the operating businesses within that test as you can imagine this is an area where I've been spending a lot of time working with the teams learning the products and applications reviewing the R&D projects and simply understanding the challenges the businesses are facing.

Collectively I would describe the business is it being customer focused high quality engineering organizations, which pride themselves on delivering innovative solutions, where other would be competitors simply cannot.

Well they all play in very large markets. They generally focused on high end niche segments, where they can leverage their deep application expertise to differentiate themselves and commands superior pricing and drive better margins.

Across all of the businesses I've seen strong commitments to succeed at high levels of employee engagement, which has been truly fantastic.

Now I'd like to speak a bit about product development efforts, and what I'm seeing and sensing.

Because in tests reputation is providing solutions that others can't many of our so our shipments are highly designed custom systems and solutions, which are largely configured for unique customer needs.

These are important and we deliver them extremely well.

However, I believe we could benefit more from.

More standard products through product.

Product that can be produced in common production flows providing more scalability and standard product platforms.

The good news is we already have some of these today, notably the most most of Ambrose revenues come from their easy heat and eat go he platforms as well as those from our Thermostream products. In night. Yes. These are really successful product platforms and several of our industry standards within their markets, especially for precision cooling in automd.

Stick testing in semiconductors user.

These are products that scaled very well with production, where we offer based models with few options.

Leverage comments sub assemblies, which drives lower cost.

Clearly, there's an opportunity for Ikea than E.M.S. do more platforming and standardizing like these products across our broader portfolio.

Likewise, there's an opportunity for all the businesses to focus on more scalable opportunities rather than one off as we read you quote request abhi.

Obviously shifting more to this model is something that will take time.

I'm, a big believer in pursuing customer driven solutions that can be applied broadly and leveraged standard products and components.

Experiences. This is a key revenue growing a business and driving expanding margins.

I expect you'll be hearing more about our efforts in these areas in future quarters.

As I mentioned it doesn't happen overnight, but we are starting to address these processes now.

So let me move onto the business challenges.

Well clearly the biggest challenge for us has been delivering sustainable growth.

It would be easy to blame this on the cyclical nature of the semi 80, 80 industry, which accounts for about half of our sales and while this is a clear obstacle to stability. There are many other contributing factors that I'm uncovering.

One of them is that our businesses are primarily U.S. centric and by that I mean were manufacturing in the U.S. to serve.

Customers on a global scale.

While this allows better utilization of our U.S. factory. It makes it difficult to be successful today in the international markets, especially when facing local competitors and rising shipping and logistic cost.

Likewise I'm.

Seeing what I believe are global front end gaps that can we can work to address.

Gaps in such areas as sales coverage key account management and service.

All of which it was dressed well can drive sustainable top line improvement and that adds nicely to the bottom line.

Addressing these will require some adjustments and investments in our organization and that always takes time, but I'm very focused on prioritizing investments in those areas that can generate a near term impact.

To help fund these investments we've initiated some cost reduction activities in Q3, which were described in the recently published a case that included Rightsizing, Our New Jersey, E.M.S. operation and consolidation of our California manufacturing into New Jersey.

What I like about these actions that they not only provide cost reductions through footprint optimization, but they also allow us to better serve customers through streamlined operations.

As a result of these actions, we'll be taking some onetime charges in Q4 associated with lease impairments restructuring and facility improvements, which you will provide more details on shortly.

These operational upgrades that we're taking will position us for improving growth and profitability in 2021 and beyond.

Finally, I know many of you are waiting to hear more on the forward strategy of the company now that there's a new CEO.

I'm pleased to inform you that last month that kicked off a three day strategic planning exercise with my senior staff to start to the point, where we're going and how we're going to get there over the next couple of months, we'll be fine tuning our plans and developing the initiatives to drive the business forward over the next five years.

Today I tried to share with you some of my early perspectives and I look forward to sharing more of the outcomes of these strategic discussions with you when we report our fourth quarter financial results early next year.

So to summarize I want to send a huge thank you to the entire insects team for welcoming me into the organization and for delivering a truly solid quarter.

From this level of execution, we can build a foundation for positive change.

I'm excited to be here and I see real opportunities for all of US I'll now turn it over to you Regan our CFO to walk you through the details of our most recent quarters performance you over to you.

Thanks, Nick our third quarter gross margin of 45% came in just below our guidance range and was down from 46% gross margin, we reported for the second quarter, reflecting a higher level of component material costs [noise].

Which grew from 33.0% in Q2.

Just 34.8% in Q3.

The increase in component material costs was driven largely by product mix from higher shipments of chiller products, which Nick discussed earlier exceeding the million dollar Mark this quarter.

The increase in component material costs was partially offset by a more favorable absorption of our fixed production costs due to higher revenue levels, while the third quarter of manufacturing costs increased $56000 or 2% [noise] do.

Due primarily to increased salary and benefit costs. They declined as a percentage of revenues from 18% in the second quarter to 17% in the third quarter.

Selling expense decreased by 1% sequentially to $1.7 million for the third quarter, primarily driven by lower salary and benefit costs engineering and product development expense increased 8% sequentially to $1.3 million, primarily as a result of higher levels of spending on product development materials and increased patent legal cost.

Yes.

General and administrative expense increased 3% sequentially to $3 million, driven primarily by nonrecurring costs related to our recent CEO transition, which totaled $248000 in the third quarter. This amount is net of a reversal of $117000 in previously accrued stock based compensation.

We accrued an income tax benefit of $25000 in the third quarter, reflecting a negative 6% effective tax rate. This compares to a 13000, our income tax expense accrued in the second quarter, which reflected an effective tax rate of 7%.

We expect that our effective tax rate in the fourth quarter will range between 25 and 26%.

For the third quarter, we reported net earnings of $458000 or four cents per diluted share compared to $170000 or two cents per diluted share for the second quarter. As previously noted included in third quarter results were nonrecurring costs associated with our recent CEO transition and when tax effected.

These costs amounted to two cents per diluted share. Excluding these nonrecurring costs, our third quarter net earnings would have been seven cents per diluted share.

Diluted average shares outstanding for $10.3 million for the third quarter of 2020 and during the quarter. We issued 155110 shares of restricted stock and had forfeitures of 52060 shares of restricted stock and did not repurchase any shares even.

EBITDA was $908000 for the third quarter up from $672000 in the second quarter.

Consolidated headcount at September Thirtyth was 200, an increase of three staff from the level, we had at June Thirtyth.

I'll now turn to our balance sheet cash and cash equivalents grew by $2.1 million sequentially to $9.5 million and cash flow provided by operations was $2.3 million for the third quarter.

Cash at September Thirtyth included $1.4 million in customer deposits, which increased to $722000 sequentially cash today stands at 11.1 million.

We currently expect cash and cash equivalents <unk> decreased by yearend due to working capital demands as opposed to fund tenant improvements for our New Jersey facility, which I will discuss later in this call.

Accounts receivable remained relatively unchanged from the prior quarter and was $9.5 million at September 30 was 61 Dsos down from 65 at June Thirtyth.

Inventories declined <unk> million dollars or 13% sequentially to $6.9 million driven by shipments during the quarter inventory had increased at the end of the second quarter in preparation for shipments that were released early in the third quarter.

Capital expenditures during the third quarter were $330000 up from a $110000 in the second quarter.

Included in the third quarter capital expenditures was $202000 for tenant improvements to our Mount Laurel New Jersey facility, we expect another $202000 in the fourth quarter.

To complete these tenant improvements are.

Our backlog at September Thirtyth was $8.7 million relatively unchanged from June thirtyth.

As to guidance as noted in our earnings release, we expect that net revenues for the quarter ended December 30, Onest 2020 will be in the range of 14 million to $15 million and that our GAAP financial results range from a net loss of negative.

Negative eight cents to a negative three cents per diluted share.

On a GAAP basis, our adjusted net loss per diluted share will range from a negative five cents per diluted share to breakeven results and we currently expect our first fourth quarter gross margin will range from 44% to 45% I.

I will note that our fourth quarter operating results may be subject to increase volatility as a result of the plant consolidation of our Fms manufacturing operations.

As Nick noted earlier in the call, we expect to occur nonrecurring costs in the fourth quarter, which we expect will range from 1.4 million to 1.8 million I will now review. These nonrecurring charges, which are included in our fourth quarter guidance and summarized in our Q3 supplemental information the goal at most of these actions.

As to reduce cost and improve profitability and cash flow.

One of these actions is the restructuring of our Fms segment, which will involve a facility consolidation in connection with this restructure we recently modified to lease in our Mount Laurel, New Jersey facility to reduce the lease square footage by approximately 40% and extend to lease by 10 years.

We plan to move to manufacturing operations for our tester interface products from Fremont, California to Mount Laurel, New Jersey late in the fourth quarter. The consolidation of manufacturing operations will result in the closure of our Fremont facility and the termination of certain employees at that location and is expected to be substantially completed during the fourth quarter.

As a result of this action, we currently expect to incur cash charges for severance and other onetime termination benefits ranging from 50000 to $100000. In addition, we expect to incur cash charges for other costs related to the facility consolidation, including moving costs and production startup costs expected to raise.

From 300000 to $400000 and most of these costs are expected to be incurred in the fourth quarter.

We intend to try and sublease, our Fremont facility. When we ceased manufacturing operations, there and we expect to record an impairment charge related to the right of use asset for the facility lease and currently expect that the charge will range from 700000 to $800000.

As a result of these actions, we expect to generate annual cost savings of approximately $600000 in Rtms segment.

We also plan to reduce the lease square footage in our Mansfield, Massachusetts facility by 6100 square feet during the fourth quarter. This.

This action is related to a reduction of the administrative footprint caused by the recent CEO transition and the reestablishment of the Mount Laurel, New Jersey office as our corporate headquarters.

We intend to try and sublease the space and expect to record an impairment charge related to the right of use asset for this facility lease and currently expect to the charge will range from 100000 to $200000 as.

As a result of this action, we expect to generate annual savings of approximately $90000 split between corporate and <unk> and the Ts business unit of our thermal segment.

We also plan to incur some other nonrecurring costs during the fourth quarter related to various items, including costs related to the renewal of our shelf registration statement, which expires later this month.

If we were to exclude these nonrecurring charges, which when tax effected ranged from $1 million or 10 cents per diluted share to $1.4 million or 13 cents per diluted share our guidance for the fourth quarter of 2020 would have been for GAAP net earnings per diluted share in the range of two cents to 10 cents per diluted share.

And non-GAAP adjusted net earnings per diluted share in the range of five cents to 13 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. Please press star one on your telephone keypad, we can now take our first question.

From Jason Smith from Lake Street. Please go ahead.

Hey, guys. Thanks for taking my questions I, just wanted to make sure I heard you correctly that turned the order momentum has been sustained here in Q4, so far and just curious if you could sort of comment on what you're seeing from order patterns in October and November.

Yeah, Hi, Jason and thanks for participating this morning.

Order pattern.

Pattern throughout Q3, we saw improving.

Trend.

And likewise in our funnels and our opportunity funnel that we're pursuing and those trends have continued through.

Nope October and into November here as well.

For us so.

Mentioned I believe the.

The the world is dealing with coke good at figuring out how to operate in this cobrand world that we're in and things are improving that across.

Across the board across most of our industries.

Okay. That's helpful. And then you highlighted the TV market in that opportunity just curious if you could comment on why you are seeing so much success and why you guys tend to win designs there.

Yeah, well, we got in early <unk>.

That I can tell you know we partnered with you know the major in the a the b space and from that we develop solutions that that our robust or their their production of their their their motors, there steering columns and various other applications. So you know we've proven that we have.

Got the right products and the ability to deliver the products to meet their growing needs and others across the industry are seeing this as well. So we see this as you know an opportunity to continue to go deeper and new applications as well as the broad across the industry with with new entrance and new key.

Customers in this space I mean, the dynamics in the emerging market or should be positive for years and years to come. So we see this as a key focus area for us.

Okay and the last one for me and I'll jump back into queue are you seeing any component or supply constraints and I guess related Lee with all the moving parts of the facility moves are you expecting any sort of correction in Q4 and is that accounted for within your.

Q4 guidance.

Yeah, no good question as for supply chain challenges than that.

The team's done a great job.

In Q2, when when cobot hits and and all the challenges came Adam no they're barely making sure we had a robust supply of our components to be able to continue to deliver deliver solutions for customers. So right now we arent, having any supply chain challenges and we have baked in the move.

The consolidation into new Jersey in our Q4 guidance.

Okay perfect. Thanks, a lot guys.

Thanks, Jason.

Thank you we can now take our next question from Theodore O'neill from Litchfield Hills Research. Please go ahead.

Thank you and congratulations on a good quarter.

Thanks Neil.

Nick I think you covered no stuff here. This morning that we could spend hours on the phone, but I didnt want to talk ask about the the product development idea here that you'll move to more standard.

Platform, the I know in the semiconductor side of the business.

It's notoriously customized equipment for those customers and I'm wondering how you're thinking about.

So what you can put in place to standardize some of that.

Yeah, No I think we've got really a good start in this area as I had mentioned on air and as you commented. There you can see that I like to dive into the the applications and the customers that you know get as close as I can to this and you know we've we've launched our automated L. S series manipulators.

A few years back and you know been gaining traction I would say at a slow pace relative to market adoption and targeted customer focus, but you know we've got now a enough success with that and our recently launched the intelligent intelligent docking system, where you combine the two together it really provides.

Accuracy that can't be achieved by the manual approaches in the past so customers are seeing the benefits of the improved accuracy as well as reduced footprint, which is extremely beneficial for their [laughter] their facilities on the space required for us. So so yeah. This is.

This is really starting to take off and it's doing more of that type platform, where we've got base based models and as you say notorious for customization and you know we've got to try to have late stage customization and leverage as much components a standard components as possible. There. So yeah Dms team has been challenged.

To look across the broader portfolio and how and develop a.

At approach more applicable in this area.

Okay and and following up on the easy question do you are the the customers in the space is that you have to work with each individual easy maker or is there some integrator that you're that you work with.

Yeah, and many of them work through integrators. So we're in with vote, we I'm trying to get ourselves established with the end users need be makers to you know their R&D teams are arc qualifying the operations and processes than that and so we're we're working very closely with them to get our tools specified and then.

Obviously, a lot of sales go through the integrators that are built and the plants and they operate and the line that their staff listening in that so it's a two prong approach.

Okay. Thanks very much.

Absolutely.

<unk>.

And as a reminder, if you would like to ask a question. Please press star one we can now take our next question from Peter Rice from Internal Act. Please go ahead.

Great. Thank you for taking my question and Nic Congratulations on a strong first quarter showing.

Thanks, Peter My.

Mike My first question for you is where do you see it and you touched on a lot of this but bringing it up.

Where do you see the lowest hanging fruit in kind of the perspective of deeper versus broader so deeper you discussed your service model, obviously, having some some easier comps maybe would co bid, but how much room is there really to improve that business also highlighting kind of the solution provider comment.

Suggesting theres theres a lot more to do with your existing customers, making a bigger maybe if you think of it or help us quantify kind of average customer size or where can go versus maybe broader and one of the things you've suggested was filling some of the sales coverage gaps.

Just helping us understand where were the lowest hanging fruit is and what should be paying attention to most immediately.

And then she was my question for you is your guidance suggests just at the mid point about two cents accretion on similar sales and I'm I'm trying to see if you could help me understand where that might be coming from I'm, assuming not all of it is from the restructuring if there's other things there that are that are already yielding a positive.

Operating.

Performance benefits.

When Paul about them.

Right.

Okay, well, let me first start and then I'll turn it over to you to address your second half of the question. There. So some of some of the low hanging fruit.

I would say that you touched on Sir you know.

Area that I I'm, a big believer in only it.

Secures your your your entrance into the customer, but it drives higher margins for us I mean, it's a key enabler of customer satisfaction. So you know today, we service revenues are roughly 8% to 10% of our total revenue there and.

The opportunity to do more in this area are plentiful.

And with the businesses to better provide the service coverage not only from a if feet on the street perspective, but also in our our offerings on the.

But <unk>.

Warranty agreement or the service agreements and.

Ongoing maintenance and care of the products and how were approaching that so more to come in service as we we finalized our strategic plan there. The other areas you know we've got obviously some gaps from a sales coverage globally that we've got to improve on that I touched on our U.S. centric approach.

And so we're looking at exploring where our biggest market opportunities and where we would benefit by having a presence rather direct or through with a partner and working to fill those gaps and then.

The.

The other areas. There are you know being more competitive in these local markets and that may be areas that we would consider doing some late customization or assembly and.

Regions, where we're not <unk>.

Doing any assembly today, so lot of a lot of areas to focus on and grow up for our business is there as we try to drive more globalization and better serve customers.

Do you want to touch on the the comment and the question relative to.

The the gap that he's important has <unk>.

Happy to do that Nic Peter Yeah, where were we you're correct. We are seeing a slight improvement in operating profitability quarter over quarter, and that's really due primarily to expense stronger expense control across the organization.

A slightly better margin profile, but but just marginally slightly better margin profile. So it really has to do with better expense management across the board.

Wonderful and then my last follow up if I could is piggybacking on one of the other questions on the on the order pickup if you were to characterize kind of the pickup in bookings do you think that some of it is more of a catch up.

From from a below cope with low or do you see this as fresh demanded and any color there would be helpful.

Yeah, I think it's a it's a combination obviously, we're getting some tailwinds with our current customers as as they.

I'll get more comfortable in the scope of world, but clearly as I tried to highlight.

My.

Commentary there that we're we're focusing on expanding wider into new customers and driving you know more diversification for us an area, where we're not today. So it's a combination that that's going to the fuel that growth for us going forward.

Thank you very much guys congratulations.

Thank you Peter Peter.

Thank you and we can now take our next question from to Cry from Cowen <unk>. Please go ahead.

Well. Thank you say, Nick one of the challenges you mentioned, a you're you're pretty heavy U.S. centric and manufacturing is the implication that you're gonna be off shoring some manufacturing over time and if so how do you get that accomplished is that organic or inorganic or acquisitive.

Yes, and maybe that might tie into question, though.

What do you what's your thoughts on M&A activity here are you pretty focused internally or are there some areas of acquisitions that you might still be looking at.

Yeah. Good question Dick So you know it.

As the CEO, it's my job to ensure we're not missing out on global growth opportunities and we've got to make sure we're positioned properly.

Properly to be successful in that and today I see it very challenging the approach were taking so I do believe we need to have a presence in certain large markets around the globe, where we can further penetrate and better serve customers there and what we're at this point and stage where were the fire.

Turning whether that's organic or inorganic Oh, we would fill those gaps, but well obviously looking at all avenues.

Okay other than that I mean, when you look at.

Acquisition opportunities.

Would it be on the industrial side or on the semi side.

You know I think penalties for both industrial and semi you know I think we've got some some really strong.

Strong products and customer relationships, but we can better serve these customers with a broader portfolios.

And both parts of our our business some a thermal as well as the the Dms segment Sarah.

Okay. Thank you.

Absolutely.

Okay.

Thank you Laura I'll now turn the call over to you to address any questions that were submitted in advance. Thank you.

Thank you Mary [laughter] question came in.

Our role and have associated with cold chain challenges and the delivery of a vaccine for call. It 19, Intest help keep the vaccine at very low temperature, one closer to the point the vaccine delivery. So your thermonics chiller assist the areas that impact can that too.

Yeah, Thanks, Laura and obviously the the vaccine activity it is ever changing had some good news from Pfizer This morning on that but as.

Correctly pointed out ultra cold transportation storage and transportation is critical it looks like for these vaccines and it's an area that were.

We're exploring with our Chillers as you all probably know we do very cold altra cold extremely well and so we're exploring that but it's simply too early to know you know with any clarity you know how player where we play.

Okay. Thanks, very much and the second question that came in is what is your China exposure.

Yeah, So business to date for China is roughly 8% of our of our topline.

And which is down 200 basis points year over year, which which its largely driven we believe too that the terrorists and our approach to this market on how we're trying to do.

The service from a a U.S. perspective.

So.

It's not huge exposure for us, but it is you know 8% of our topline and we believe we can do better there now we did receive like everyone else in the industry notification from the department of Commerce.

For shipments going to ask them I see NFC S. M. E. C. Here in Q4 and that will require us to apply for a license and we are proceeding to do so so we can continue to ship these customers.

Oh I see.

Yes, the comment that I might be enough to meet the our our really account for less than 1% of our business today, so not much risk there.

Okay perfect. So there are no further questions Nick I'll turn the call back over to you for closing remarks.

All right. Thanks, Laura and thank you everyone for your interest in Intest. This morning.

We appreciate you listening in Oh.

If you have further questions don't hesitate to call me, you or Laura and.

We look forward to seeing you all at the and participating on the online virtual conference as Laura mentioned earlier, and Oh look forward to updating you on our progress and when we report our results in the fourth quarter on the fourth quarter. So they stay tune stay healthy and stay safe. Thanks, everyone.

Thank you.

Today's conference. Thank you for your participation, ladies and gentlemen, you may now disconnect.

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