Q2 2021 inTest Corp Earnings Call
Welcome to Intest Corporation's 2021 second quarter of financial results Conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session at that time. If you have a question you will need to press star 1 on your phone.
As a reminder, this conference is being recorded today.
A replay will be accessible at www dot intest dotcom on.
I'll now turn the call over to Intest Investor relation relations consultant Laura Guerrant. Please go ahead ma'am.
Thank you operator, and thank you for joining us for into 2021 second quarter financial results conference call with US today on the grants and test the president and CEO and Dunkin' Gilmore Treasurer, and Chief Financial Officer, Nick will briefly review the quarter's highlights as well as current.
As this trend Duncan will then review Intest detailed financial results for the quarter and discuss guidance for the 2021 third quarter. We'll then have time for any questions.
A copy of today's press release can be obtained on Intest website, Www Dot Intest Dot Com. In addition to our press release, we have issued supplemental information, which can be downloaded from our website on the investors page of just mentioned the <unk>.
Implemented the information is offered to provide shareholders and analysts with additional information and detail for analyzing our results in advance of the quarterly results conference call.
Before we begin the formal remarks. Please note that this conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of $19.95.
Statements do not convey historical information, but relate to predicted or potential future events that are based upon management's current expectations. These.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.
Moving to the factors mentioned in our press release, such risks and uncertainties include but are not limited to the risk factors set forth from time to time in our Securities and Exchange Commission filings, including but not limited to our annual report on form 10-K for the year ended December 31.2020.
Any forward looking statement made by US in this conference call is based only on information currently available to us and speaks to circumstances only as of the date on which you just made we undertake no obligation to update the information on this call to reflect events or circumstances. After the date hereof or to reflect the occurrence.
The anticipated or unanticipated events.
During today's call, we will refer to non-GAAP financial measures. We have provided additional information concerning these non-GAAP financial measures, including a reconciliation to the directly comparable GAAP financial measure in our press release as well as in the supplemental information on the slide presentation for this call the release supplement.
All information on slide presentation are posted on the investors page of our website.
And lastly, we will be participating in the following conferences during the third quarter. The Colliers 2021 Institutional conference September 9th and Lake Street <unk> fifth annual best ideas growth Conference September 14th through the 15th.
In addition, we will be hosting our first analyst day in November we are targeting November 16th or 17th likely in New York City, We will have more details on the event shortly and with that let me now turn the call over to Nic Graham. Please go ahead Nick.
Thanks, Laura and welcome everyone.
Pleased you're joining us for our second quarter of 2021 financial results Conference call.
I'd like to start by welcoming our new CFO Dunkin' Gilmore for today's call.
Many of you will have an opportunity to meet Duncan at the upcoming conferences, Laura mentioned as well as at our analyst event, which we are planning for November.
We are delighted to have Duncan on board.
Shifting out of the quarters performance.
Strong demand for our innovative tests and process technology solutions across a diverse set of end applications resulted in financial results for the second quarter, which exceeded our guidance.
Our growth was predominantly fueled by broad end market demand in the semiconductor industry across both of our segments, along with increasing demand for our products outside of semi as our industrial markets continue to strengthen.
Once again I'm pleased with the progress, we're making to capture growth within semi while investing for growth in developing vertical growth markets and segments outside of semiconductor market, which over time will serve to lessen our dependency on the cyclical industry.
Finally, I want to thank the entire intest team for delivering a truly solid quarter.
Let's look first at bookings and backlog.
Our consolidated Q2 bookings of $25.1 million.
The comparable to the bookings level, we reported in Q1, which was a near record quarter for us.
Second quarter bookings continued to be fueled by the semi markets with semi bookings of $16.5 million slightly down versus Q1, and accounting for 66% of our consolidated bookings.
Our EMS segment once again had solid orders and backend test and our thermal segment was also buoyed by semi strength in front end and lab applications.
Q2, multimarket bookings of $8.6 million made up 34% of of the overall bookings driven by the industrial and automotive markets as well as returning strength in defense Aero. This.
This represents a 6% increase compared to Q1 multimarket bookings.
As a result of the strong bookings for the company's backlog exceeded $20 million at the end of June a 19% sequential increase.
Looking at revenue in the quarter Q.
Q2 consolidated revenues of $21.8 million continues to be driven by the semi market and exceeded our guidance range, increasing 12% sequentially and 64% year over year.
The operations teams across the company did an outstanding job managing our supply chains, and overcoming resource challenges to support customer demand within the quarter.
As a percentage of overall revenue semi comprised 72% of the net shipments and increased 18% sequentially to $15.7 million, while multi markets made up the balance of 28% of sales in Q2 at $6.1 million essentially flat sequentially.
Turning to net income.
I am pleased to report that net earnings and earnings per share increased both sequentially and year over year with net earnings per share coming in at the high end of our guidance range, while absorbing the CFO transition cost within the quarter.
We reported GAAP net earnings of $2.6 million up compared to $2.2 million in Q1, and 170000 a year ago.
With non-GAAP adjusted net earnings of $2.9 million up compared to $2.5 million in Q1, and 474000 a year ago.
This equates to GAAP net earnings of 24 per diluted share and non-GAAP adjusted net earnings of 27 per diluted share when adjusted for intangible amortization, both of which reflect an increase of <unk> <unk> sequentially and 22 cents versus the same period a year ago.
And our EBITDA for the quarter was $3.5 million Duncan.
Duncan will fill you in on the details around these figures in just a few minutes.
Let's now turn to the quarterly performance of our 2 operating segments, along with some customer highlights starting with MFS.
And Ms. We continue to capture growth from our current customers, while driving installed base diversification by securing new customers and broadening our geographic reach.
The segment's traditional end markets remained strong with automotive consumer electronics and <unk> all driving demand.
Specific to the backend semi extremely strong customer demand continued through Q2 as customers worked to address chip shortages by for during our products to expand and upgrade the production capacities.
Both booking and revenues in the first half of the year represent 1 of the best 6 months period for MFS.
As we communicated last quarter, we shipped more manipulators and the first half of 2021, then were shipped in all of 2019 and 2020 combined.
We see improved precision higher levels of integration and the shift towards automation as the primary reasons for increased adoption of our solutions by new and existing customers.
Q2, EPS bookings remained strong finishing at $10.3 million decreasing 2% sequentially off of a very strong Q1, and essentially tripling on a year over year basis.
<unk> continues to be successful penetrating new accounts and.
In addition, <unk>.
And perhaps more importantly, we are replacing incumbents at targeted accounts.
Lastly, we are seeing our backlog stretch out further over time as our customers adapt to increasing industry lead times.
Q2, EMS revenues of $9.1 million increased 6% sequentially and 138% year over year.
Which once again was a terrific performance actually the highest in a dozen years for this business.
Let me now share with you some specific EMS highlights in the quarter.
The business shipped the prototype interface unit to a global semiconductor manufacturer for use in the development of next generation Ultra high definition automotive radar.
This is an initial shipment that we expect will drive significant production orders in 2022 and 2023.
<unk> also had multiple interface design wins against the competition at a multinational electronics and semiconductor manufacturer, which could drive an additional 500000 of growth per year at this account.
The recurring themes around these wins are reliability performance and flexibility.
On the new products frontier at MFS and the second quarter, we delivered our initial production units of high voltage high current test systems to 1 of the leaders in sub assemblies for EV power management solutions.
Volume orders are expected in either Q4, 2021, or Q1.2022 from this account and they continue to work with a leading manufacturer to standardize the product for more of customers.
In the quarter EMS placed in L. S form an emulator in the applications laboratory of a major <unk> manufacturer.
This is an example of our strategy the team up with complementary test equipment manufacturers to further advance sales of our automated manipulators.
From a new customer perspective, <unk> made good progress penetrating at targeted strategic account in the analog mixed signal market as they received their first order for a docking solution in the quarter it.
It's great to finally get the store open as this account had been a stronghold for their competitors.
A well known maker of communication processing chips also ordered $1.5 million of automation equipment for testing the <unk> power management Ics.
This is the confirmation in a big way of our new success of this marquee customer.
Lastly, <unk> also received their first orders from an OS at in Thailand for the approval $2.50, manipulator and docking solutions.
So to summarize we're seeing solid evidence that our strategy to grow and win new business, while penetrating adjacent verticals is indeed working.
Shifting now to our thermal segment, which includes the Ics on ambarella.
Thermal bookings for the second quarter of $14.8 million were also comparable to Q1 and up 42% year over year.
In the quarter bookings exceeded shipments by $2 million.
This growth was fueled by continued strength in the front end semi and industrial markets as well as automotive and defense Aero and.
In fact, our defense era of bookings in the quarter were up 97% versus Q1.
Q2 revenues for the segment of $12.8 million were up 15% sequentially and 35% year over year.
Diving deeper into the orders are semi lab market continues to be strong with bookings up greater than 20% sequentially from what was a relatively strong Q1.
In the second quarter, they had 10 different backend semi customers each order of over $100000 and they continue working with several semiconductor crystal manufacturers on new applications that could leverage our carbon friendly induction heating solutions.
The automotive electric vehicles segment keeps expanding for our thermal businesses as we continue to receive orders from Oems and the integrator supply in the auto industry during.
During the quarter Ambarella, we received another order from their large existing EV manufacturer, which was just shy of a half of million, bringing their total to approximately 900000 for the first half of the year.
They also continue to work with numerous EV Oems and their sub suppliers to develop induction heating solutions for their applications.
They've already identified over $300000 of new potential opportunities from our targeted marketing campaign that was initiated in the quarter.
<unk> received the new blanket order for approximately $1.5 million in Vermont ex Chillers from a key automotive OEM manufacturer of materials used in catalytic converters.
This represents the largest single order in company history.
<unk> will ship in Q4, 2021, and Q1.2022.
And should lead to more in the longer term as they upgrade additional manufacturing lines over time.
Our service business has recovered from the pandemic driven low of 2020 as customers are now, allowing visitors to the site and our service team members of our back to making in person service calls.
Our thermal business strategies are much like EMS, focusing on new products growth applications and customers.
Relative to the new products Ambrose recently launched eco heat compact series.
And Compaq warheads for under 50 kilowatt of applications have begun production shipments and represent broad offerings at Intest can ship in volume and relatively standard product formats.
These 2 lines cover a large swath of applications and standard become industry standards within their footprint and power ranges.
And they will be expanding the work headline further in the coming months to extend power ranges.
From an <unk> perspective, and a press release earlier. This week, we highlighted the success, we had working with the strategic OEM partner in the cannabis space to develop a chiller solution net incorporates an ultra low <unk> combined with the condensing chiller the precondition solvents in order to drive efficiency increased.
<unk> and lower costs.
Working with <unk> labs, a recognized leader in providing extraction solutions has been a good experience for our team and I'm looking forward to the successful will bring in the months and years ahead.
Now, let me shift the discussion to our vision and strategic plan along with the strategies, we're driving to transform this business.
As I've communicated I plan to spend a portion of each quarterly conference call sharing of particular aspect of these core strategies along with our progress.
On our Q1 call I focused on geographic and market expansion.
Today I wanted to discuss the investments, we're making in talent and culture across the organization.
As I've indicated ensuring the right people are in the right roles and empowering them to deliver results is critical to our success.
Since joining I believe we're making good strides towards building a winning team to drive execution of our strategy.
Among the investments we have made include realigning, our proven and house leaders as well as invigorating our team by bringing in external talent to drive change.
The date, we strengthened our leadership teams in finance sales and R&D for.
Providing intest with a best in class leadership team with industry experience and core commitment to achieving our strategic priorities.
Our most recent appointment as you know is our new CFO Duncan Gilmore Duncan is enhancing our financial discipline and operating efficiencies as he succeeds Hugh Regan, who retired from Intest. After 25 years of service.
Duncan strong financial acumen, and public audit experience combined with proven P&L oversight skills are already having a positive impact on the company.
We strengthened our leadership team with a focus on R&D and product innovation within our EMS segment with the appointment of Joe Mcmanus as Vice President and general manager of that business.
Joe has extensive experience in driving organic growth of similar companies with the focus on technology and product development and has already added significant strength as we focus on organic growth opportunities.
We have also introduced the new pay for performance compensation plan to reward employees for meeting performance targets.
We did this by changing our annual review from an inflation adjustment process. The 1 that awards increases based on Merit achievement and performance.
In addition, a new performance management software system was implemented in Q1 of this year across the company, which will be the cornerstone for talent development going forward.
In Q2, our shareholders approve the proposed employee stock purchase plan, which allows employees to share in the success of for a company.
We intend to implement the plan in October of this year and.
In addition, the gms have been giving more control to reward and set priorities to drive growth and each regional manager is now incentivized to bring in new accounts, an increase of our customer penetration levels with the focus on growth in targeted segments like EV and cannabis extraction.
On the strong believers that reward and ownership drives motivation and I believe these changes will aid and keeping everyone focused and motivated to meet our targets.
We will end up spending a bit more on compensation on the long run, but I see a disproportionate pay off in the topline growth and customer diversity is the real rewards.
Finally in Q2, we conducted the first ever employee engagement survey across the end test and I was quite pleased with the level of optimism and support for the new vision and forward direction of the company.
The culture is indeed slowly changing.
While Duncan review results and give our guidance for the third quarter in just a moment I would like to share with you my perspective on where we see things midway through the year.
On all accounts of the first half of 2021 has been an exceptional year for the semiconductor industry despite supply chain challenges.
Equipment companies continue to experience substantial demand as global production capacities expand.
As we entered the third quarter, we expect many of our larger customers will be focused on digesting the deliveries, we and others have made to their test floors in the first half.
And therefore expect semi related orders to moderate in the second.
To be clear, we simply see this as the digestion period.
Listen Covid is not going away anytime soon which will continue to drive consumer electronics. The <unk> build out is still in its early stages.
Technology advances are ongoing and we believe the regional infrastructure build outs that have been announced will drive further demand for our products.
There's a lot of positives driving semi demand.
Which we are well positioned to take full advantage of as they happen.
Likewise, we are investing and multimarket growth opportunities like EV cannabis and the medical market.
As a part of our growth plans, we have made investments in sales marketing R&D and service.
Since I joined the company and more of a plant.
In Q3, we're experiencing more travel and are rejoining in person trade shows, which will help drive top line.
I like where the company is today and I like the diversification plans we're executing.
I will now turn it over to Duncan to walk you through the details of our most recent quarter's performance and discuss our guidance for Q3.
<unk> over to you.
Thanks, Nick I'm delighted to be on board and look forward to meeting the investment community as we go forward.
Our second quarter gross margin of 50% came in at the middle of our guidance range and was improved from the gross margin we reported for the first quarter.
Our fixed manufacturing costs of $2.4 million for better absorbed at the higher net revenue levels in the second quarter, representing 11% of net revenues in Q2 compared to 13% in Q1.
Our Q2.2021 component material costs were unchanged from the first quarter of 36, 2%.
Selling expense grew 8% sequentially to $2.6 million in the second quarter, driven by increased commission expense on higher net revenue levels and to a lesser extent by increased salary and benefit costs associated with headcount investments.
Engineering and product development expense increased 3% sequentially to $1.4 million, primarily driven by head count additions associated with growth investments as well as increased spending on product development.
General and administrative expense increased 19% sequentially to $3.8 million for the second quarter restructuring and other charges were $197000 for the second quarter up from 55000 in the first quarter.
Nonrecurring costs were the primary driver of the 750 <unk> total increase.
During the second quarter, we incurred 420 for thousands of nonrecurring costs of which 347000 related to the CFO transition and 77000 were associated with our previously announced manufacturing consolidation of our EMS product segment.
The final integration of our E&S manufacturing operation has taken longer than originally anticipated as the result of the significant increase in the business activity for the segment in the first half of 2021.
During the second quarter, we delayed some integration activities and allocated our resources instead to meet customer demand for shipments of our products. We currently expect to complete the integration of the EMS manufacturing operations in the third quarter and expect to incur additional charges in the range of 50000 to of $100000 although.
So the actions to complete the consolidation has been spread out over a longer period than originally planned the total cost to complete the consolidation is currently estimated to be approximately $1.1 million as compared to $1.3 million, which was our estimate of total costs. When we undertook the actions during the fourth quarter of 2020.
In terms of recurring general and administrative costs. The main drivers of increase were higher levels of professional service fees associated with our various strategic initiatives and an increase in stock based compensation expense, reflecting our higher stock price at the time of the issuance of annual awards in March and April.
We accrued income tax expense of $447000 in the second quarter, reflecting a 15% effective tax rate. This compares to 366000 of income tax expense accrued in the first quarter, which reflected an effective tax rate of 14%.
We expect our effective tax rate in 2021 will range from 14% to 16%.
We had net earnings of $2.6 million of 24 cents per diluted share for the second quarter compared to net earnings of $2.2 million or <unk> 21 per diluted share for the first quarter.
As previously noted our second quarter results included for 124000 of nonrecurring charges and when tax affected these costs amounted to 362000 or approximately <unk> <unk> per diluted share.
Our first quarter results included 55000 of nonrecurring charges and when the tax effected these costs the maintenance to less than a penny per diluted share.
We have provided a summary of our non recurring costs by quarter in the supplemental information posted to our website in connection with this call.
Diluted average shares outstanding were $10.8 million for the second quarter of 2021.
During the quarter, we issued 44741 shares of restricted stock and had full features of 18125 shares of restricted stock.
During the second quarter, we saw 45 days on the 835 option shares exercised which raised $285000 in cash proceeds.
EBITDA increased to $3.5 million for the second quarter up from $3 million reported for the first quarter.
Consolidated headcount at June 30 was 222, an increase of 14 staff from the level. We had at March 31, the increase was equally split between thermal and EMS.
I'll now turn to our balance sheet.
Cash and cash equivalents increased by $4.4 million sequentially to $14.6 million.
We generated $4.2 million of cash from operations during the second quarter.
We currently expect cash and cash equivalents to increase throughout the balance of 2021 subject to any strategic investments we may choose to make.
As mentioned in our call last quarter in early April we increased our line of credit with <unk> Bank from 7.5 million to $10 million and changed the facility from a 364 day facility to a committed 3 year facility that will mature on April 9.2024.
In connection with this change the bank imposed a 15 basis point non usage fee.
Thanks receivable declined $655000 of 5% sequentially to $12.8 million at June 30th with 54, DSO down from 62 DSO at March 31.
Inventories grew $490000 or 6% sequentially to $8.7 million, primarily driven by raw material influx to support the increased semi demand we are seeing.
Capital expenditures during the second quarter was $75000 down from 388000 in the first quarter.
<unk> in the first quarter capital expenditures was 236000 to complete the tenants improvements to our most loyal New Jersey facility related to the EMS consolidation.
As Nick noted our backlog at June 30 is $20.4 million up $3.3 million of 19% sequentially with an increasing proportion of stretching beyond the current quarter.
As the guidance as noted in the earnings release, we expect that net revenues for the quarter ended September 32021 will be in the range of 25 million to $21.5 million.
And Thats, our GAAP financial results will range from net earnings of 18.
The 22 cents per.
Per diluted share.
On a non-GAAP basis, we expect our adjusted net earnings per diluted share will range from 21.
The 25.
We currently expect that our third quarter gross margin will range from 49% to 51%.
Our guidance is based on the company's current views with respect to operating and market conditions and customer forecasts, which are subject to change as well as our expectations for the balance of the quarter and are subject to any strategic investments we may choose to make.
Actual results may differ materially as a result of among other things. The factors described under forward looking statements found in the materials that accompany this conference call, including the press release the supplemental information.
On the deck.
Operator that concludes our formal remarks, we can now take questions.
Thank you Sir.
Ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star 1 on your telephone keypad.
For using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach of our equipment again press star 1 to ask the question well pause for just a moment to allow everyone an opportunity to signal for questions.
Yeah.
We will take the first question from Mr. Jason Schmidt from Lake Street. Please go ahead.
Hey, guys. Thanks for taking my questions just wanted to start with the supply chain.
<unk>.
Yeah.