Q4 2021 inTest Corp Earnings Call
Greetings and welcome to the Intest Corporation fourth quarter and full year 2021 financial results call.
This time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the call over to Deborah Pawlowski of Investor Relations. Thank you you may begin.
Thanks, and good morning, everyone. We certainly appreciate your time today, joining me for Intest fourth quarter and full year 2021 financial results Conference call are Nick Grant, our president and CEO and dumping Gilmore, our chief financial Officer and Treasurer.
You should have a copy of the fourth quarter 2021 financial results, which we released this morning before the market opened if not you can access the release as well as the slides that will accompany our conversation today at our website www dot Intest dot com. After our formal presentation, we will be opening the line for Q&A.
If you'll turn to slide two in the deck.
I will first 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 and uncertainties and other factors are provided in earnings release as well as with other documents filed with 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 not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.
We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and in the slides.
With that if you'll turn to slide three I will turn it over to Nick to begin Nick.
Thank you Deb and good morning, everyone.
For joining us this morning for our earnings report.
Before we begin I would like to acknowledge the world events that are occurring and extend our thoughts and prayers for everyone that has been impacted by this conflict.
We ended 2021 strong with continued solid execution on our five point strategy.
I'm pleased with our progress around driving growth diversifying our markets and customer base and ensuring we have the right talent to achieve our goals.
I want to thank the entire Intest organization for their dedication and outstanding performance they were out of challenging but transformational year for the company.
We had exceptional revenue growth of 50% to $22 4 million in our fourth quarter compared with the prior year period.
For the year revenue finished up nearly 60% to 85 million, which is the highest this company has achieved in over two decades.
While quarter to quarter, there can be variances within our target markets. We believe that our very strong results for the quarter and the year validate our diversification and growth strategies.
We have instituted more discipline and accountability around sales marketing and customer relationships.
We also are adding the resources needed and investing in additional more calm activities to effectively drive greater awareness of our offerings.
Our efforts to go deeper into accounts and widen our customer base are paying off.
For the quarter and the year, we had robust demand for our precision technologies with particular strength in both front end and back end of the semiconductor industry.
Our strategy is enabling us to capture greater market share as we strengthen our customer relationships develop new products and reignite relationships with former customers.
We also are strengthening our position in the very front end of the semiconductor manufacturing process with our induction heating technology, which is used for crystal growth processes.
We believe that our diversification efforts around targeted growth markets are working well.
This is demonstrated by the strong sales of our leading test and process solutions to the automotive industry, including electric vehicles.
In fact, we saw our bookings more than triple and sales more than double in the automotive electric vehicle industry in 2021.
Our diversification efforts were enhanced by the three acquisitions, which added $1 5 million in revenue in the quarter, primarily in security and life Sciences.
There were a few factors that impacted gross margin some of which we expect to see improve.
We of course are not immune to the supply chain constraints and inflationary pressures everyone is facing.
While these challenges are currently not improving we do expect some relief as pricing actions began to flow through.
Long with anticipated supply chain improvements in the latter half of the year.
The change in product mix was another reason for the margin contraction.
This was mostly due to the significant volume earlier in the year, we had for backend semi cap equipment, specifically custom manipulators docking systems and test interfaces.
That moderated this industry investments shifted focus towards front end fab expansions.
Our custom engineered solutions and this backend space generally tend to command our highest margins don't.
Duncan will talk further regarding our margins and the atypical costs impacting the quarter.
We made some tremendous progress expanding our portfolio of solutions with the three acquisitions in the quarter that further diversifies, our offerings and expands our solutions to better serve our target markets.
On the third quarter call. We discussed the October acquisitions of Z Sciences, and video G imaging solutions.
In December we acquired <unk>, Inc, and its affiliates.
If you'll turn to slide four this provides a brief overview of actually a logic and their automated test equipment.
<unk> provides differentiated flying probe knowhow and solutions to the electronic circuit test markets.
Of specific interest to US is the early position. The company has gained in electric vehicle battery testing applications.
These products expand our portfolio of solutions for electric vehicle Oems and battery manufacturers.
With the addition of this differentiated automated test equipment, we are creating an electronic test platform that goes beyond the semiconductor market with deeper penetration in automotive defense Aerospace and life science markets.
With that let.
Let me turn it over to Duncan to review the financials in more detail.
Duncan over to you.
Thank you Nick.
Starting on slide five we provide some detail regarding our top line revenue for the fourth quarter was $22 4 million.
The 50% increase over the same period last year and just below the top end of our guidance multi market revenue grew 35% from the third quarter fueled by strength in the automotive market, while our semi business remains near recent highs even as it pulled back from record levels in the second quarter of 2020.
One as.
As Nick noted our investments in innovations the sales and marketing discipline being instilled throughout the organization are drive to accountability and the increased sophistication of our operating processes have all resulted in a larger share of customer wallet and new customers.
This has been especially true with a renewed emphasis in the semi market. There's also provided significant tailwind advantages.
In addition, our successful acquisition strategy enabled market expansion and contributed about $1.5 million in revenue in the quarter and for the year.
Moving to slide six our fourth quarter gross margin of 46, 3% compares with 49, 2% in the third quarter of 2021, and 45, 2% a year ago.
The contraction in sequential margin, despite higher volume reflected less favorable product mix lower absorption of fixed manufacturing costs due to production inefficiencies the lagged effect of price increases and the timing of acquisitions within the quarter.
As Nick noted our backend semi business is the most lucrative and a broad product portfolio earlier in the year, we benefited from the unusual spike in product demand the measurable spike in demand for the year was a combination of strong end market through a new leadership and focus for the business Thats reignited our customer relationships.
As to production inefficiencies in the lagged effect of price increases we continue to actively manage the ongoing challenges of supply chain constraints and are continuously playing catch up on inflation as regular rollouts of pricing actions have tended to lag and backlog.
The timing of acquisitions refers to the impact of our acquisitions closing towards the tail end of the quarter when slowdowns during the November and December holiday periods brought on overhead costs without proportionate revenue. Obviously, we expect that this corrects itself going forward more consistent quarterly performance.
Year over year, the 110 basis point expansion in gross margin was due to positive volume product mix and production efficiencies gained from the consolidation the backend semi business into our New Jersey operations.
Slide seven details our operating expenses and expectations for the first quarter operating expenses were $10 1 million in the fourth quarter and included approximately $1 6 million in total atypical acquisition financing expenses.
150000, and incremental operating expenses related to acquisitions and 200000 of additional intangible amortization expense.
Total intangible amortization expense in the quarter was $522000.
The $2 2 million increase related to the trailing third quarter included a $1 3 million and sequentially incremental costs related to atypical financing and acquisition expenses and the aforementioned incremental operating and intangible amortization expenses approximately 950.
I was in total.
Existing total business operating expenses were relatively flat quarter over quarter.
For 2022, we expect quarterly operating expenses to range from $10 5 million to $11 2 million increasing through the year. This includes our current quarterly estimate of about 650000.
Of total intangible amortization expense.
The increase in operating expenses reflects a full quarter of incremental operating costs related to all acquired businesses.
You can see our bottom line and adjusted EBITDA results on slide eight we had net earnings of $287000 of three cents per diluted share for the fourth quarter, which compares with net earnings of $2 2 million or 20 cents per diluted share for the third quarter.
On an adjusted basis EPS was seven cents per share I'll remind you that this includes the negative impact of approximately $1 6 million of atypical costs in the quarter, which after tax amounts to approximately 14 cents per diluted share.
The effective tax rate in 2021 was around 13% we benefit from tax credits related to export sales.
Adjusted EBITDA was $1 4 million for the fourth quarter up measurably from the prior year period of stronger volume and operational efficiencies compared with the trailing third quarter. Adjusted EBITDA declined primarily due to the contraction in gross margin already discussed as well as the atypical cost items that we do.
Just out.
Beginning with the third quarter, we began reporting adjusted EBITDA, which removes the impact of stock based compensation stock based compensation is a noncash expense and as such does not impact our liquidity. Accordingly, we believe our adjusted EBITDA is a better performance measure to assess the strength of our cash generation then EBITA alone.
More detail on the calculation of adjusted EBITDA can be found under non-GAAP financial measures in our earnings release.
Let's turn to slide nine for our capital structure and cash flow as previously announced in October we executed a new five year credit agreement, which included a 25 million non revolving delayed draw term loan a $10 million revolving credit facility.
During the fourth quarter, we used $25 million under the term loan facility to finance our acquisitions.
The end of the year, we had 21 million drawn on the term loan and have no balance outstanding on the revolver.
We believe we are better leveraging our balance sheet than we had historically I'd have plenty of financial flexibility to continue executing on our five point strategy for growth.
Cash and cash equivalents increased by $10 9 million in 2021 to $21 2 million, we continue to demonstrate our strong cash generation capabilities and generated $10 8 million of cash from operations for the year.
Capital expenditures during the fourth quarter of a $417000 up from 114000 in the third quarter, but the year Capex was approximately 1 million and included investments in capacity expansion as well as maintenance for.
For 2022, we expect capital expenditures to be around 1% to 2% of annual revenue. However, depending upon changes in market demand or manufacturing and sales strategies, we may make purchases our investments as we deem necessary and appropriate with that.
I will turn the call back over to Nick.
Thanks Duncan.
Slide 10 highlights our orders and backlog performance.
Overall demand for our products and solutions remains robust with orders for the quarter and year, reaching record levels.
While we will always welcome market tailwind our objective is to execute our five point strategy to grow faster than our served markets.
We continued to extend our reach in targeted growth markets, while deepening customer relationships across these industries.
Orders for the fourth quarter increased 73% over a year ago to 35 million, surpassing our previous high.
This primarily was due to demand for our technologies and semi outpacing the market growth and include a large front in order that will ship throughout 2022.
Additionally, we reached record orders for the year of approximately $102 million driven by strong demand across markets, especially semi electric vehicles and life Sciences, along with some uplift on the acquired businesses.
Our backlog at quarter end was also at record levels at $34 1 million.
Approximately 65% of which is expected to convert to sales in the first quarter.
Please turn to slide 11, and I will provide our 2022 outlook and first quarter expectations.
We had a strong year of progress with our five point strategy and are expecting to continue to drive growth as we diversify our markets and expand our customer base.
Our recent acquisitions added to our product offerings and technical expertise and extended our customer base into adjacent high growth markets.
Integration efforts are well underway across all three businesses.
We are issuing full year guidance for 2020 two.
We expect revenue to be in the range of 110 million to $115 million.
With gross margins ranging throughout the year between 46% and 49%.
We also expect interest expense to run approximately 150000 per quarter.
Our effective tax rate is anticipated to be between 15% to 17% for the year.
For the first quarter of 2022, we expect revenue to be in the range of $23 million to $25 million.
As we continue to work through supply chain and logistics challenges.
We expect GAAP EPS to be in the range of four cents to nine cents per diluted share and adjusted non-GAAP EPS in the range of 10 to 15 cents per diluted share.
Our guidance is based on our current views with respect to operating and market conditions and customer forecast, 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.
It also assumes supply chain challenges remain unchanged for the first half of the year and began to modestly improve in the second half.
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 and the slides.
Let me now hit the key takeaways on slide 12.
We expect to grow organically through innovative product sales channel enhancements and marketing prowess. We believe our efforts combined with a robust pipeline of new customer opportunities.
Can provide further differentiation for our business and drive growth and profitability over the long term.
Also our M&A funnel development is ongoing and we continue to be focused on programmatic acquisitions being a key element of our five point strategy.
Our team continues to identify acquisition targets that we believe will bring differentiated and innovative technologies provide complementary capabilities or enabled deeper or broader reach within our target markets and geographies.
We made excellent progress in the first year of transforming and test with our five point strategy.
We believe we are well on our way to unlocking the true potential of the company.
We expect our investments in our leadership team sales and marketing strategies operational improvements and acquisitions to ultimately enable us to continue to drive accelerated growth and build shareholder value.
With that operator, let's open the line for questions.
Thank you we will now be conducting a question and answer session.
Like to ask a question. Please press star one on your telephone keypad.
Information tone will indicate your line is in the question queue.
You May press Star two 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, one moment. Please while we poll for your questions.
Our first questions come from the line of Jason Smith with Lake Street. Please proceed with your questions.
Okay.
Hey, guys. Thanks for taking my questions I'm, sorry, if I missed it but just wanted to make sure that I didn't did.
It didn't.
Was there any demand you were unable to ship in Q4, and if so would you mind quantifying that.
Yeah, Hey, Jason how are you great question you know.
Well all of our businesses are seeing constant struggles to.
I get the right parts and you know in a timely manner to the to make the shipments now that said they've done a good job of locating new sources and you know really were able to fill the gap and and drive the the revenue levels that we had anticipated coming into.
We ended the quarter with our guidance, finishing.
Finished near the towards the top of the guidance provided on that so you know I think in general there's absolutely more we could have shipped had we got the parts. How can I don't have a sense really on how much that could have been it's tough to quantify an exact number of certainly the last couple of weeks of the quarter as Nick said tremendous supply chain challenge.
<unk>, which the teams did amazing jobs to kind of overcome and get product out the door to a certain extent.
That's a cost as we've explained with respect to can a margin percentage and you know so.
So I would say, yes, more revenue could have been shipped them you'll had there been zero supply chain constraints as said it is very tough to kind of put an exact number to that.
But we certainly you are seeing the same kind of pressures that I think most market participants are kind of talking about it and seeing them. So fair to say, yes, we could have done more but I really cant put a number on it.
Okay, No that makes total sense and I know you indicated you expected a modest improvement in the supply chain in the second half just curious if that just relates to availability of components or do you expect the inflationary cost the logistics transport et cetera to me.
Moderator as well.
A little bit of both I would say.
Yeah.
Yeah, absolutely, yeah, where we're oh trying to trying to fill our inventory with the components needed and you know if our suppliers are able to deliver will be in a better position in the second half and as you know the pressure for supply frees R. R.
Lessens it should put less pressure on inflation out there.
Okay, and then just the last one for me and I'll jump back into queue. It it sounds like the integration of the acquisitions is going well just curious if you come across any surprises positive or negative now that you've had more time with each of these companies and relatedly how.
As traction with cross selling going.
Yeah, Great question and I'm quite pleased with the integration efforts that.
We've been able to complete so far so I'd say our integration plans are tracking as well as we expected you know it's a.
Sign of a really a thorough due diligence process in and knowing what our what we're actually acquiring out there and what we want to do with it once we acquire it so no big surprises you know you're uncovering things here and there but nothing.
That's the rails, our plans and what we plan to do with these businesses.
Okay perfect I appreciate the color guys. Thanks a lot.
Absolutely.
Thank you. Our next question is come from the line of <expletive> Ryan with Colliers Securities. Please proceed with your questions.
Thanks for taking the questions.
Look I've got a couple on the semi side of the business are roughly 55 million.
In revenues for 'twenty, one how was that split front and the back end do you have a rough.
Breakdown there.
Let's see yes, I do.
I can I can give you a little bit on that I mean, we're talking about low thirties on on backend and kind of low twenties on front end.
Roughly.
Okay I've been trying to do.
Alright, let me just let me just clarify that sorry, sorry, because I'm I pick it up.
So sorry, it's more like mid teens for front ends I'm forgetting that theres a component there that I was thinking into 'twenty. Two so yeah. Let me, let me correct that more like you'll high thirties backend.
And kind of mid teens on front end.
Okay, and then I'm trying to tie that to the order large order you talked about on the front end can you give us a little more color as to the size is it to your typical customers in the front end is it for any other applications.
That ambarella delivering or can you provide any more details on that.
Yeah sure. So what we saw with this is it's an existing customer obviously driving expansion and their capacity to support the front end demand that the world is seeing out there for semi conductor devices and that the the size of the order was roughly 10 million that was placed.
It was really what I would say both to support their capacity, but also to our covered traditional demand that we were seeing with that but just securing supply and getting a getting the pipeline flowing throughout all of 2022. So this these products will will ship throughout 2002.
22, so a bit of you know given the pressures that.
The supply of components and everything they want to make sure we're planning appropriately to support their needs and we appreciate that and having that visibility and and that's so we're very pleased to be able to secure that oh that order in Q4.
That's the largest order you've seen on the front end of that $10 million seems pretty.
Pretty outsized versus what you had expected in the front end.
I believe it is a record order on that front and out there.
I don't have all the details going back you know an ambarella history to be honest with you, but since we've owned the company. It is.
I think it's also important to know it's it's it's an order that's going to deliver over an extended period of time.
So there's an element of you from a supply chain perspective, you know the customer getting ahead of challenges and really kind of placing that order kind of in advance which is a little kind of atypical from what we've seen in the past.
Okay, one more on that on the semi side. It sounds like you got a little bit of a pause on the backend and that's really kind of your gross margin driver those products. That's what how do you see that.
You know that back end market moving through 'twenty two.
Yeah, I mean I can.
Can take you know take that so I would say the backend business has moderated from your record highs in 'twenty 'twenty. One it's still it's still strong and very strong in historic terms you know so that's you know so that's great I mean, we do see in 2022 versus 2021.
You're coming off those highs pretty.
Pretty much in line with what we're seeing out there in the marketplace from from kind of other participants in that kind of backend space.
Yeah.
Okay.
One last one for me Nick you talked about the growth in EV and in auto can you give us just a.
My T V related business, you did in 'twenty, one and and and maybe even on the cannabis side and how that compares to 20.
Sure. So on the automotive EV, we kind of had a little comments in there relative to what we saw this market really provide nice growth for us in 2021 the of the revenue doubled which I've talked about so that's kind of what we are driving around that.
<unk> space and bookings tripled so we were or total automotive EV business was roughly for the almost 5 million and our 2021 bookings were twice that and Ah the EV portion of it from a revenue perspective.
Was.
Roughly just just less than half of that.
From a revenue perspective.
Okay any cannabis related business at the end of the year and what would that amount to for 'twenty. One yeah cannabis was relatively flat for us in 2021 from a revenue perspective.
And.
It is you know we that industry saw a number of things.
Taking place consolidations are you know in the investments, we're I would say hampered in that space, but you know we continue to strengthen our portfolio. We've made great progress penetrating Oems and that a chiller extraction applications out there and.
We expect that that portion will ramp back up for us going going forward here.
Okay. Thank you.
Absolutely <expletive> .
Yeah.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of Peter right with <unk>. Please proceed with your questions.
Great. Thank you for taking my question and congratulations on a great quarter and fantastic Guy.
Hey, Thanks, Peter and good morning to you.
Good morning, Mike My first question is on visibility if I if I look at your backlog the more traditional turns in the in the mid seventies pushed down to 60 65 ish.
How much of that is kind of timing in that $110 million of water and is there is there anything structural that's changing to drive better visibility in your business and the other point that kind of touches on the visibility is Europe .
Your your sales guidance for the full year kind of suggests sequential growth through the year. After you know seven or eight quarters of sequential growth, which is which is typically strong.
What is behind that is it demand is it supply is it new products is it just getting closer to your customer what is it that is keeping you this better visibility.
Well, it's all of the above that you just mentioned there we're driving as you know part of our five point strategic plan innovation, you know expansion in our global reach and front end investments.
That service, so all of that driving a better visibility for us and going back to the order. Obviously, we we got that order in Q4, we haven't shipped any of that so that's in our backlog going in and throughout the year I'm with you.
You know very little or very very little shipping in Q1 and in most of it flowing in the outer quarters out there. So you know that that is giving.
Given us and you know our position that we haven't had in the past if really entering a quarter.
With.
Much more focused on just executing versus having to go out and get those book ship orders. If you will to convert on that so it's our teams are.
I'd say feverishly working on supply chain, making sure we get the components, we need and ensuring we have the they are resources to be able to build the products and it's all about execution. So it's a good position to be in as we are heading here into 2022 and of course, they acquisitions are off.
So part of that Duncan do you want to give maybe I don't know I think you've covered it I mean to your first question on the percentage, yes, obviously, the large order we talked about without delivering over an extended period of time drive some of that percentage. You'll also helps give us a bit more confidence on the revenue side.
The acquisitions coming in as Nick Nick talked about.
Again, you know it gives us a degree of comfort in terms of those aggregate numbers and some confidence there and I would just also say I mean, although the we were talking about the backend semi piece can or moderating a bit coming off these record highs.
The sentiment out there across the semiconductor sector is still you know it is still very strong and youll projections for kind of demand over the medium to longer term are very positive. Both front end and then some additional backend work you'll further down the line likely following on from that so I think all of those.
Factors.
Youll give us.
Youll give us that degree of confidence.
Yeah, and I would just remind everyone you know that.
First time do you see this company maturing, where we're giving a full year guidance you know out there because we do have that confidence where we really are.
<unk> made great progress on our plans executing here, we're seeing the traction and we are we like the way this business is developing.
That's wonderful.
My second question is on the semi side is the demand in the press release, you referred to some new new applications, which I'm I'm.
Thinking kind of as is tech versus capacity if customers are buying either capacity or tech can you can you frame up with us what is driving this record demand.
Right now in kind of context of that how much is capacity, maybe helping us understand where utilization is on the tools in the field.
And how much of it is kind of new application.
Technology buys.
I think it's the adoption of technology. That's been out there you know you think of the Silicon Crystal growth application, that's becoming predominantly more on more on the on the power.
Management side of things and that is the core technology, and that's driving and fueling the growth.
On that front N piece for us on the backend.
Driving innovative new products around our high voltage high current too to support more on that power management modules are you know evaluate testing side of it there. So you know what.
But we're entering new markets, where we're are benefiting from technology adoption. So it's all the right things we should be doing as we go after greater penetration in our targeted spaces.
Very last question for me, if I can squeeze one more in.
If I look at your operating expenses as a percentage of sales, obviously bumped up a little bit in fourth quarter for the reasons that you highlighted the incremental you gave the guide for the year should we expect that that is something that you feel comfortable maintaining in kind of the mid thirties going forward.
I think what we're gonna see pizza or is it just going to bump up a bit in Q1, you know we're investing in the acquisitions.
You got to make sure were getting them on the right path able to deliver what we see as kind of great growth potential over the extended kind of time horizon for those businesses.
As well as investing in the legacy business. So I think we see a little bit of a pop in terms of a percentage. We also we also have a higher revenue expectations for yield Qs two through four if you kind of work through the numbers in terms of Q1 versus the full year and.
We need to gear up a little bit for that so what what we are projecting you'll see is a higher percentage. There in Q1, and then not come in and kind of back down more into that yield range that we've seen in the last few quarters as the business stabilizes at a higher revenue yield.
A level towards the backend of the year.
Phenomenal Guy and call. It. Thank you guys.
Absolutely Thanks Peter.
Thank you there are no further questions at this time I would like to turn the call back over to Nick Grant for any closing comments.
Alright, Thank you Daryl and thanks, everyone for joining us today on the call and for your interest in Intest I would once again like to thank the entire Intest organization for supporting and driving our transformation really great progress this past year, and our long term strategy and more to come.
For our institutional investors and analysts if you've not already done so please RSVP to attend our Investor day.
You should have seen invites we are hosting our first analyst Investor day in a few weeks on March 24th in Philadelphia, We certainly hope you can join us.
Thank you all for the time this morning, and look forward to discussing Q1 results in may.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.
Have a great weekend.