Q3 2022 inTest Corp Earnings Call
Good day and welcome to the Intest Corporation third quarter, 'twenty 2022 financial results Conference call.
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Now I'd like to turn the conference over to Shawn saw their Investor Relations. Please go ahead.
Thank you good morning, everyone. We appreciate your time today and your interest in Intest Corporation.
Here with me are Nick Grant, our president and CEO , and Dunkin' Gilmore, our Chief financial Officer and Treasurer.
You should have a copy of the third quarter 2022 financial results, which we released earlier this morning if.
If not you can access the release as well as the slides that will accompany our conversation on our website at IR 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'll 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 the earnings release as well as other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at SEC Gov.
During today's call. We will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance you should 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 please turn to slide three and I'll turn it over to Nick to begin neck.
Thank you, Sean and good morning, everyone.
Thanks for joining us for our third quarter 2022 earnings call.
We delivered another solid quarter that we believe demonstrates strong execution of our five point strategy as we focus on growing in our target markets delivering quality engineered solutions and leveraging our expanding sales force.
The entire Intest team has been working hard and staying focused and I want to thank everyone for their perseverance.
And our third quarter revenue grew 46% year over year to another record level of $30 8 million.
Organically revenue grew at an impressive 23% year over year.
We believe our strong results are indicative of the success of our five point strategy that directs our efforts in our markets as well as keeps us on track and well focused.
In fact, our focus is enabling us to make some excellent inroads as we increase our customer base drive innovation deepen relationships with existing customers and expand our geographic reach.
Demand remains strong for our innovative solutions in the front end of the semi market specifically in silicon carbide crystal growth applications.
Sales to this market more than doubled over the prior year.
The significant growth in demand for our induction heating solutions used in silicon carbide Crystal growth reflects the advantages of our technology and this application combined with the rapid expansion of silicon carbide as a more efficient and powerful semiconductor material.
We continue to make positive inroads and backend semi as well with our test and thermal solutions.
Backend semi sales were up 17% versus a year ago and up 23% sequentially.
As a reminder, our test solutions in this space, primarily serve analog and mixed signal semiconductor production, where demand has remained elevated.
Our exposure is minimal and the memory and microprocessor space, which some companies are reporting is currently at overcapacity.
We continue to make excellent inroads in the EV market, both with our organic and acquired businesses.
Likewise, we have expanded our presence in defense and life Sciences, with our acquisitions and as a whole are benefiting from the strength in these markets.
Of note, we surpassed our previous backlog record with $47 9 million in backlog at the end of the quarter.
With that let me turn it over to Duncan to review the financials in more detail Duncan.
Duncan over to you.
Thank you Nick.
Starting on slide four revenue for the third quarter 2020 to 30.8 million up 46% or $9 6 million versus the same period last year and at the top end of our guidance range of $29 million to $31 million.
This revenue growth of $9.6 million comprised $4 8 million from the acquisitions made in the fourth quarter last year and $4 8 million from legacy Intest operations, representing 23% organic revenue growth.
Both legacy operations and acquisitions contributed to grow nearly all our target markets.
Our acquisitions were the main contributor to growth in the security Auto E D Life Sciences, and defense markets and this broadening contribution is indicative of the companys strategy to diversify and expand revenues with new customers and from new markets. As Nick mentioned, we are also benefiting from secular trends in the segments of the.
The semiconductor industry that we serve.
Supply chain and logistics challenges were similar to recent quarters and we estimate this impacted Q3 2022 revenue negatively by approximately $1 million.
Our teams continue to address these challenges admirably and have demonstrated great tenacity and ingenuity in order to continue to meet customer expectations.
Moving to slide five.
Gross margins of 45, 2% in the quarter tightened from the prior year and trailing periods, reflecting changes in product and channel mix. We also continue to manage the operational inefficiencies and material cost headwinds created by the ongoing supply chain challenges the strengthening U S. Dollar has also had an impact.
On margin.
We believe our current business mix will continue to deliver gross margins in the mid 40% range, which is consistent with our long term plan to deliver 20% segment operating margins.
As you can see on slide six our operating expenses were relatively consistent with our trailing second quarter. The $2 9 million increase over the prior year periods, primarily reflects incorporating the acquisitions, which added approximately $2 4 million in incremental expenses.
We have also made investments this year in sales marketing and engineering as we execute our strategy to drive growth.
Pre tax intangible asset amortization was down $170000 from the second quarter.
As a percent of revenue operating expenses declined 220 basis points from the prior year period.
Demonstrating the operating leverage gained with higher sales volume.
Turning to slide seven you can see our bottom line and adjusted EBITDA results. We had GAAP net earnings of $2 5 million or 23 cents per diluted share for the third quarter.
On an adjusted basis non-GAAP EPS was <unk> 28 per share compared with 25 cents per share in the second quarter.
Adjusted EPS reflects I think back tax effected acquired intangible amortization.
On an after tax basis acquired intangible amortization amounted to $492000 in the third quarter, we expect.
Expect after tax intangible amortization for the fourth quarter to decline to $465000.
The reported effective tax rate for the quarter was 16, 9% our effective tax rate for the balance of the year is expected to be in the 16% to 17% range.
Adjusted EBITDA, which excludes stock based compensation was $4 $5 million, a nice improvement over both the prior year and trailing quarters.
Slide eight shows our capital structure and cash flow.
We recently announced during the quarter, we expanded our term loan facility by $25 $5 million and ended the quarter with $30 million available under this facility.
We also have 10 million available under our working capital revolver.
We believe we are effectively leveraging the balance sheet to achieve our goals and have the financial flexibility to continue executing on our five point strategy for growth.
Our current liquidity stands at approximately $52 million.
Cash cash equivalents and short term investments at the end of the third quarter were $12 4 million.
Currency impacted our cash balances with foreign currency exchange rates, reducing cash by about half a million dollars. We have $1 1 million in restricted cash relates to a prepayment on a customer order as we did in the prior two quarters, we repaid $1 million of debt, bringing it down to $17 2 million each.
Even with our augmented line of credit our objective is to maintain a total debt to adjusted EBITDA ratio under two five X.
We generated $1 4 million in cash from operations in the quarter, although for the nine month period, we have used $3 7 million to support our growth primarily in working capital requirements with inventory build and the timing of receipts.
Capital expenditures during the nine months were $1 million up from about $600000 in the first nine months of 2021.
Given the timing of projects and purchases, we expect capex to be about $1 5 million for the year.
With that if you'll turn to slide nine I will now turn the call back over to Nick.
Thanks Duncan.
Orders for the quarter were up 55% to $32 7 million over last year's third quarter as overall demand for our products and solutions remains strong and.
In fact this is the fourth quarter in a row that we've had a book to bill ratio over one.
Year over year demand was strong across nearly all of our end markets, especially in semi defense security and life Sciences.
Orders for the semi market were up 44% year over year to $19 2 million nearly half of the increase over last year was related to silicon carbide and other front end applications.
Backend orders remained strong achieving 27% year over year growth as.
As I mentioned earlier, we are especially encouraged with the benefit of the secular trends and the particular segments of the semiconductor industry in which our technologies are applied.
Demand for our products from the defense and space industries has been strengthening where we have broadened our exposure to both of these industries with our acquisitions.
Defense Aerospace orders were up 66% sequentially.
Security also had strength in the quarter and is a relatively new market that we gained through the acquisition of image and data capture technologies.
As to our record backlog, we expect to convert approximately 55% of sales in the fourth quarter, which represents about 80% of our expectations for the quarter.
That leaves over $20 million of backlog that we expect to convert in 2023.
Historically, only about 20% of our backlog extended beyond the current quarter.
The longer term backlog represents customers securing our production capacity in rapidly growing markets, such as silicon carbide Crystal production.
Let's look at the fourth quarter expectations on slide 10.
We've been executing to plan and we have a fairly solid line of sight to the year end at this point.
For the fourth quarter of 2022, we expect revenue to be in the range of $30 million to $32 million.
We expect gross margins for the quarter to be approximately 45%, which is representative of our business mix as well as our expanding channels to market.
Quarterly operating expenses are expected to run between $10 seven to $10 9 million.
These estimated expenses include intangible asset amortization, which is expected to be approximately $560000 pre tax.
We also expect interest expense to run approximately $190000 for the quarter and our effective tax rate to be between 16% to 17% for the year.
Q4, GAAP EPS should be in the range of 20 to 25 cents per diluted share.
While adjusted non-GAAP EPS is anticipated to be approximately 25 to 30 cents per diluted share.
The difference between GAAP and non-GAAP is tax affected intangible asset amortization expense of approximately $465000 in the quarter.
Our fourth quarter guidance implies that our full year revenue will land near the high end of our original guidance for the year of $110 million to $115 million.
Our team's strong execution of our strategy has positioned us to deliver these results despite challenging supply chain headwinds and changing macroeconomic conditions.
Our guidance is based on our current views and assume supply chain challenges remain unchanged from what we have been seeing and are subject to any strategic investments we may choose to make.
Slide 11 highlights our strategic goals for 2025 that we delineated at our Investor day in late March.
Based on our 2022 revenue expectations, we will have doubled the size of the company in the last two years and by executing on our five point strategy. We believe we can achieve this again by 2025.
I should note that acquisitions are a part of our long term strategy and we have an active pipeline of opportunities.
Importantly, we have a strong balance sheet and expanded borrowing capacity that we believe will enable us to execute on our plan.
If youll turn to slide 12.
Given our expectations for top line growth, we believe we can drive earnings and cash generation.
We believe our plan positions us to deliver adjusted EBITDA of approximately 30 plus million by 2025.
And improve earnings power to approximately 20 plus million dollars by 2025.
Let me sum up on slide 13.
As I have noted our five point strategy is delivering results, we have highly engineered solutions that enable our customers to improve productivity or create more effective solutions themselves.
Our growing sales force is reaching more prospects in our new organization with the three business segments has driven greater collaboration across our company. This in turn creates even more sales opportunities.
We believe that we are unlocking the potential of intest through our five point strategy by driving discipline accountability and process improvements throughout the company. These are certainly exciting times for us.
With that operator, let's open the lines for questions.
Thank you well now begin the question and answer session.
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Today's first question comes from Jason Schmidt at Lake Street. Please go ahead.
Hey, guys. Thanks for taking my questions just wanted to start with the backlog number because really impressive how that continues to grow.
Is the end market mix within that backlog fairly similar to your current your revenue composition.
Hey, good morning, Jason and thanks.
So yeah. The backlog mix is very similar to what we delivered in Q3 and Thats why you kind of look at the Q4 forecast and it's it's.
In line.
What we were able to deliver in Q3 Dunkin' any comments that yeah. I would agree. It is generally representative of what you're seeing if anything there might be some slightly long longer term components in the front end semi space, which has been exceptionally strong but for the most part.
Representative of our actual results, yeah, and again the record levels. We're at now it's quite a change from when I joined the company and.
The reliance we were on book ship in a quarter. So it's great to have this this backlog level and visibility looking out a couple of quarters.
Okay got it and then in your prepared remarks, Nick you mentioned, gaining new customers due to your five point strategy. Just wanted to be clear are these customers that you know are simply more engaged with like sort of legacy and test customers that you're prioritizing or just sort of new customers you've been.
Able to gain given the broader product portfolio from the acquisitions.
No that's a great question and you're exactly right.
Expanding our customer base is one of our key strategies and then we're making a number of efforts across all businesses. So it's really a mix there Jason that we are we are.
Penetrating some accounts that were legacy.
Intest accounts that may have shifted away and then coming back to us so we see that across that across.
Across some of the businesses there, but we're also going aggressively after a new new customers new markets and new applications.
Locations with technology. So that's that's helping to drive expansion there Duncan anything do you want to I would also say the nice thing that we're seeing is we're seeing new customers across all of our businesses I mean, directionally, you're looking at maybe 25 30, new customers in the quarter, but thats split nicely split across our three.
Operating segments.
Oh, okay.
Got it and then just the last one from me and I'll jump back into queue. Just looking at gross margin it seems to be a slight down shift from kind of your expectations in Q2 and fully recognize there is a ton of dynamics going on can you just help us understand sort of what is the most impactful obviously the supply chain.
Duncan I think you mentioned some of that FX headwinds, but earlier this year there seemed to be some slight headwinds from I'm sorry, the acquisition integration I just wanted to make sure I'm clear that the it's less the acquisition of mortgages, sorry that the macro dynamics out there.
Yeah, I mean, I think there's four main elements Jason.
And I'd rank them in order as product mix is still a big driver, just depending where you know where that kind of falls out.
Secondly, we talked a little bit of a customer mix and what we mean there is just how much we sell a feeling maybe through distribution versus kind of direct you might have noticed our operating expenses were actually a little bit lower than we anticipated and what youre seeing there is some of that channel mix. So we sold a bit more through distribution than expected the flip side of that is the.
Operating expenses were a little bit lower so from a bottom line perspective, you that item is neutral supply chain talked about youll, continuing although the global macro supply chain seems to be moderating we are a bit more localized and the impacts we're seeing really much the same as in prior quarters, So still kind of working through those <unk>.
<unk> sees and then FX is probably the least impactful of those but a real item.
I mean, most of our revenues are actually Youll U S D. But we have enough where we had a small you know maybe 30 basis point impact on margin just from the strong U S dollar.
Okay that makes that makes a lot of sense I appreciate that color.
Thanks, guys.
Jason.
Thank you and our next question today comes from Peter Reilly and interact. Please go ahead.
Great Congratulations on another record quarter, guys and thank you my questions Yeah, no. Thanks Peter.
A couple of questions first question is kind of.
Taken on the back of Jason's question.
Backlog does continue to provide.
Provide you guys with more visibility.
Nick I'm, hoping you could help us understand as you're tracking ahead of kind of your plan. If you look at if I was just linearize kind of the growth expectations of what you guided to on the target model in 2025.
How do you think we get there if you can reflect on kind of cyclicality versus kind of secular growth do you think your business now is diversified as such that you can continue to kind of grow this business.
Year on year.
To hit that target and if so helping us understand kind of what the what that mix is looking within the customer mix is it new geographies as a new product mix is it new markets. What what continues to drive this continual record quarter after quarter numbers out of you guys.
Yeah, No great question, there and.
As you know we are a very different company than we were in the past. So the backlog is really comprised of our efforts and focus on our targeted key markets.
That we believe have these strong secular tailwind as well as the markets that we have the right technology and can bring innovation to create further demand of our products markets like the automotive EV like the silicon carbide like medical cold chain that we acquired.
<unk> brought into our business you know and security is another area with the acquisition. So these are markets that we believe positions us well to drive growth and we're demonstrating that across our our our businesses quarter after quarter here and so you know I really do believe it.
It's the strategy paying off that that's driving this because this is where we wanted to go and that's where the business is heading.
So it does seem when I look at kind of the makeup of the segments that you have its not that this record quarter is driven by everything running Red Hot you've got some businesses that are still ebbing and flowing at just the diversity of your business, it's driving more stable growth more secular growth as opposed to cyclical growth going forward is that a fair takeaway yeah. I know absolutely that is one of our <unk>.
<unk> was the drive diversification and we're having really solid success in that area and that helps to to to the Abbott the ebb and flows if you will by being in the right industries and the right segments of those industries that.
Drive growth for us on that so that diversification is absolutely part of it.
Great and my other question is on gross margins. If you can help us understand.
The impact for the five point strategy. So you get very clearly the one the one that I've got a question on this kind of service and support and kind of your efforts there on monetizing service any update there and then kind of a second part to that gross margin question.
Given inflation is high single digits can you help us understand kind of what.
How much your prices have moved this year and kind of any any color on expectations for like for Peter.
So let me let me touch on service and then I'll, let Duncan address some of the pricing questions. There, but the service we are making some good inroads here one of our one of the focus areas we.
We initiated this year was really the driver of Master service agreements across our key accounts and.
Really pleased with the results to date listen within the quarter, we had one of the businesses capture over $1 million of service revenue from Master service agreements.
These are multiyear agreements out there obviously those revenues will be recognized over time on that but really making some progress on that on that front and also challenging the teams to position us better from you know driving that customer satisfaction and having inventory closer to customers.
Et cetera, so I'm thinking that the needle move there, which is great Duncan you want to touch on pricing I mean, as you may have heard inflation is still out there.
The Battle connect continues in terms of Youll, keeping up from a pricing standpoint.
We do look at this pretty closely in terms of understanding our margins and making sure we're not leaking.
In assessing our product and product mix versus you are repricing aggressively and so on and I'd say the team certainly are driving hard to keep up with that another thing I'd highlight.
Is that as I mentioned actually earlier, we do invoice primarily in USD, even to our overseas customers. So that actually gives us a bit of a competitive from a competitive standpoint, and that's kind of challenging from a pricing standpoint, given the strength of the U S. Dollar. So that's something we certainly also have to take into account.
And some of the foreign markets, but it's.
It's still a very dynamic environment their pizza from a pricing standpoint, and we continue to chase that as hard as hard as we can and that will continue.
That's fantastic color. Thank you Duncan one last follow up Duncan for you cash generation very strong across the.
The stack, two places where that caches residing right now through the year, maybe a little more any color on kind of inventory working capital inventory and accounts receivable are you comfortable where those are.
Should I think of free cash flow generation in the in the next maybe.
The period ahead of us.
Yeah, no absolutely. So it was nice to see we did generate $1 4 million cash from operations in the quarter or the investment in working capital moderated in Q3, we still did drive dollars into working capital.
Inventory is where we disproportionately invested.
As I've said, we've continued to have to kind of manage through supply chain challenges, yeah, I would expect our investment in working capital to continue to moderate.
Youll going forward, even though we continue to grow.
So what we saw in Q3, which was positive cash from operations you know I'd expect to see that that kind of dynamic continue as we're able to as I said reduce our investment in working capital, which really as you mentioned has been the main going to drain on cash dollars.
In the first three quarters of the year here.
And I would just add Peter that inventory is in one area that is Dunkin' highlight we've been investing but we are comfortable that we don't see any kind of obsolescence issues or anything like that with the products that we're bringing in house. Given you know it really is to support our backlog and our commitment on lead times to customers.
I should also mention on the receivables side, which you also touched on I mean, we're not seeing any challenges around collections.
Any concerns there either so.
Yes, the money has gone into working capital, but we feel like we feel okay about that.
That's fantastic.
Growth business guys congratulations thanks.
Thanks Peter.
Thank you and as a reminder, ladies and gentlemen, if you'd like to ask a question. Please press Star then one our next question today comes from Robert Morrison with Marshall and asset management. Please go ahead.
Hey, gentlemen, congratulations on another excellent quarter.
Hey, Thanks Robert.
As you guys have.
And started the planning for next year is there any particular businesses or new products or geographies. The things that Peter was talking about in more detail that set us up for our organic revenue growth for 2023.
Yeah, a great question, there you know and we've talked about this in the past as kind of a three horse race between our segments there all three and attractive.
Growth areas are growth markets out there.
Some seeing some really strong success with the the front end silicon carbide I would say our process technologies is positioned extremely well there.
Environmental technologies, making some nice inroads in our life Sciences efforts, there and you know when I look into R. R.
Electronic test.
Our electric vehicle exposure in battery testing areas there really.
Positioning us well, so I do expect all three to a <unk>.
To drive growth for us here going forward.
And but you know as.
There's one.
Ghana Ghana.
Exceed the others this substantially I don't see that right now.
Okay. Thank you would you what inning would you say this silicon carbide capacity build out and I.
I know, you're really pushing hard to grow capacity the major semiconductor.
<unk> are really pushing hard and even will speeds have been some problems. So there's there's it's not simple nor easy do you think is.
In the first or second inning or the fourth inning.
Yeah, Great Great question, and you're right. It's not easy it's is a very controlled environment required to grow. These these are silicon carbide crystals out there, which is why our technology is.
Being preferred out there.
But from what we're hearing from our customers is this is very early innings here.
Some of them are talking about demand.
Continuing to drive capacity expansion through the end of the decade. So yeah.
It feels like we're in the early innings for sure.
Alright, thank you.
Absolutely.
And ladies and gentlemen, our next question comes from Gregory Weaver out Investor Capital. Please go ahead.
Good morning, gentlemen.
Just Duncan on the channel mix you referenced.
What products typically are heavier in the distribution channel.
Yes, so in particular some of our thermal stream products, which are backend semi coming out of our environmental test segment those are heavily skewed towards distribution.
And also some of the.
The North Sciences products.
And one of the new acquisitions and new product lines. There again, that's a very heavy can a distribution kind of business, which we expect to kind of grow.
Over the course of the next few quarters I mean, I think those are the primary.
Yeah, I would add our image capture is also an area that we've been.
Developing that go to market and adding more distribution through for those those cameras and video solutions out there as well so yeah. Those three are the primary.
Product families. If you will that are going through the distribution.
Got you okay, thanks and.
On the auto EV segment, you had a prior couple of quarters, some pretty strong growth and it's backed up some here any.
Color on the volatility there or is it just kind of inventory in the channel at your end customers are.
Yeah, no it's more of yeah, exactly that they've got to get the.
Lines up and running the expansion.
Which relies on a lot of external pieces of equipment on that side of it. So your comment is spot on it is a lumpy kind of a lumpy business, but our activity there.
Remained strong and we are it's just more of a timing.
Got you and then last one here.
So again good good to see more of the Silicon carbide talk here.
You inferred that you're booking out into 2023 at this point for especially the southern car, but.
Maybe give us a little color I mean, the customers concerned about capacity or supply on your end.
Is there any limitation on growth that they're concerned about it.
More so what we're seeing is they want to secure the long lead time items. Some of these things that slipped out you know six months.
For electronic components and other.
<unk>.
Products that are going into our solutions on that so.
We're seeing them placing orders.
To ensure that we get those things in the pipeline and commit to that inventory.
Okay is that the solicitor is that them inbound to you or are you telling them Hey, you better give me more visibility if you want me to buy this stuff.
I'd say, it's a combination they are talking to us about what their plans are and we're telling them that you know then to support them on that debt.
We need to make sure. We've got these this pipeline material flowing in.
The joint discussion in comp.
Decisions being made.
And any kind of generic color on in terms of the diversity of their business. There in terms of the number of end customers that are pulling now and kind of maybe you know reorder activity and such.
Yeah that continues to expand.
And I believe we added three more new customers in the last quarter or at least the last two quarters in that space and.
Yeah. So it.
The investment in this.
Part of the market is in its early stages and will continue to benefit from that.
Great. Thanks, good quarter.
Thanks, a lot Greg.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over for closing remarks.
Thank you Rocco.
In summary, we're making excellent progress with the execution of our five point strategy and I am grateful to the entire intest team for their resiliency and persistence to exceed customer expectations.
It is this dedication that enabled us to deliver our strong first half results.
First I should say nine months results.
You can note on slide 14 that will be presenting at the fly at the southwest ideas conference on November 16th and at the CEO Summit in New York on December 13th.
Perhaps we'll see some of you all there.
We really appreciate you taking the time to join us on our call today and your interest in Intest. Thank you all and stay safe.
Thank you ladies and gentlemen. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.