Q3 2023 inTEST Corp Earnings Call
Greetings and welcome to the Intest Corporation third quarter 2023 financial results at this time, all participants are in a listen only mode.
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.
Please note. This conference is being recorded I'll now turn the conference over to your host Sean started with Investor Relations you may begin.
Thank you good morning, everyone. We appreciate your interest and thank you for sharing your time with Intest Corporation.
Here with me are Nick Grant, our President and CEO and don't think Gil Moore, our Chief Financial Officer and Treasurer.
You should have a copy of the third quarter of 2023 financial results, which we released earlier. This morning, if not you can access the release as well as the slides that will accompany our conversation on our website at Intest Dot Com Slash Investor Hyphen relations.
After our presentation, we will open the lines for Q&A.
Please turn to slide two and 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 uncertainties and other factors I provided in the earnings release as well as in other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at SEC Gov.
During today's call. We will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance you should not consider the presentation of this additional information.
In isolation or as a substitute for results prepared in accordance with GAAP.
We have provided reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides.
With that please turn to slide three and I'll turn the call over to Nick.
Thank you, Sean and good morning, everyone.
For joining us for our third quarter 2023 earnings call.
The <unk> team has delivered another quarter of strong results by executing well on our five point strategy for growth.
I want to thank and recognize our team members for their commitment to our strategy dedication to executing that plan and our hard work delivering nice results their exceptional performance allowed us to reach another record for quarterly revenue achieving $32 7 million in the third quarter. This growth reflects strength in a number of our mark.
That's our environmental technologies Division saw strong shipments to the defense aerospace market in the quarter versus the prior year.
Sales remained robust for our induction heating solutions for front end semi mainly supporting silicon carbide crystal growth and wafer epitaxy applications.
While we saw solid shipments to the auto EV across all three divisions.
I believe our focus to grow our market share through geographic expansion market diversification product development and deeper customer reach is reflected in this quarter's results.
Our efforts in these areas are ongoing as they are key elements of our five point strategy.
As an example of our strategy and progress let me point to the investments for growth and improved productivity. We have made within the businesses we acquired in 2021.
Our recently announced new facilities supporting <unk> design development and manufacturing of electronic circuit, and EV battery test systems will position us well going forward.
We believe this consolidation from three buildings to one will drive better collaboration enhanced customer service and improve operational efficiencies.
Another example is the progress we're making regarding new products at videography.
Since the beginning of the year, we have launched over a half a dozen new cameras, including their scale X platform, which is the first of its kind zoom black camera with embedded edge AI capabilities.
It's important to note that this is a step change for this business as prior to us owning them. They would have very few new product launches within any given year.
Beyond sales growth. We also delivered profitability. According to plan as we remain focused on capturing operational and financial efficiencies and delivering the leverage potential of our operations, our 6% increase in sales in the quarter versus a year ago added 10% growth in gross profit.
An 18% growth in net earnings.
We believe this validates our operating leverage potential as we continue to scale the organization.
I'm extremely pleased with the progress we've made in improving working capital efficiency in the quarter cash generated from operations was strong as we continued to reduce inventory to align with demand and supply chain improvements Duncan.
Duncan will give you more details on the balance sheet, shortly but before I turn it over to him. Let me comment on bookings, which has impacted our outlook for the remainder of the year.
In the quarter, we experienced a shift in customer demand, causing what we believe will be some near term headwinds not.
Not dissimilar to what you have probably heard from others in our space.
Over the last couple of quarters, we have provided color regarding the shift in our customers' buying behavior towards more normalized patterns of smaller more frequent orders in a just in time fashion versus the larger blanket orders that were more common when supply chains were severely constrained.
In addition, we've talked about capex projects, requiring more internal customer approvals before P. OS are being released.
In Q3, this behavior was amplified resulting in a shift in demand as a number of our customers slowed purchase decisions and delayed projects.
We believe this was driven by worsening macroeconomic conditions and sustained higher interest rates compared.
Compared with the trailing second quarter orders were down 15% as the slowdown was especially apparent in the semi and industrial markets.
On an encouraging note some of the delayed projects from Q3 have already been booked in the fourth quarter, but in general we expect some of our markets will continue to see this cautious spending over the next couple of quarters.
With that let me turn it over to Duncan to review the financials and outlook in more detail.
Duncan over to you.
Thank you Nick starting on slide four as Nick noted revenue for the third quarter was a record $32 7 million up 6% versus the same period last year and in line with our guidance the $1 9 million year over year revenue growth reflected strong sales across most market.
And technology offerings semi revenue was up 3% to $19 8 million. This increase was driven by front end induction heating solutions for silicon carbide crystal growth and wafer epitaxy applications defense Aerospace revenue increased 77% to $3 4 million.
Moving to slide five gross margin 46, 9% in the quarter increased 170 basis points compared with the prior year period, driven by higher volume favorable product mix improved pricing and continued focus on productivity improvements.
Compared with the trailing quarter gross margin increased 70 basis points, primarily due to a favorable product mix.
Our trailing 12 month gross profit of $60 4 million grew 7 million with gross margin at 46, 6% in line with that I look for full year gross margin approximately 46%.
As you can see on slide six our operating expenses were up $1 3 million year over year and increased as a percentage of sales to 36, 9%. The majority of this was driven by an increase in corporate development expense.
Turning to slide seven you can see our bottom line and adjusted EBITDA results. We had net earnings of 3 million or <unk> 24 cents per diluted share, which was up from $2 5 million or 23 cents per diluted share in the prior year period adjusted.
Adjusted EBITDA was $4 6 million, which improved 3% from last year, while adjusted EBITDA margin contracted 50 basis points to 14%.
On an adjusted basis non-GAAP EPS was <unk> 28 cents per diluted share similar to the second quarter of 2022.
Adjusted EPS reflects adding back tax effected intangible asset amortization related to acquisitions, which on an after tax basis amounted to approximately 430000 in the third quarter.
Slide eight shows our capital structure and cash flow as Nick mentioned, we demonstrated strong cash generation from operations of $6 2 million in the quarter.
Capital expenditures in the third quarter were approximately 300000 similar to 2022 third quarter.
Given our modest capital expenditure requirements free cash flow was $5 9 million or about double our net earnings.
Cash and cash equivalents at the end of the third quarter of 2023 were $41 7 million an increase of $4 3 million from June 30 of 2023.
With our 40 million remaining borrowing capacity, we have over $80 million in liquidity, which includes $30 million of availability from our term loan facility and $10 million on our revolving line of credit.
As we have done in prior quarters, we repaid 1 million of debt, bringing total debt down to $13 1 million and our current leverage ratio down to a respectable level of 0.67.
Turning to slide nine our third quarter orders of $26 9 million were down 18% year over year, and 15% sequentially strength in orders from security and automotive EV, partially offset lower demand from the semi industrial defense aerospace and other markets compared to the same quarter last year.
As Nick commented during the quarter orders were notably impacted by a change in customer behavior regarding project timing with a trade towards slowing decision, making on future projects and resultant order delays. It appears that capital spending has slowed somewhat as customers evaluate their internal rates of return given the <unk>.
Higher cost of capital.
Compared with the trailing second quarter, the slowdown was especially apparent in the semi and industrial markets.
Backlog at September 30th 2023 was $38 8 million, 19% lower than the prior year and down 13% compared with the trailing quarter.
Approximately 40% of the backlog is expected to ship beyond the fourth quarter 2023.
Turning to slide 10, we'll review our updated outlook for 2023.
Given the change in customer behavior regarding project timing, we believe it is prudent to moderate our expectations for the fourth quarter rare.
Revenue for the fourth quarter of 2023 is expected to be approximately 28 to 30 million with gross margin of approximately 45%.
Fourth quarter operating expenses, including amortization unexpected to be approximately $11 7 million.
Tangible asset amortization after tax is expected to be approximately 430000.
We expect fourth quarter net interest income to be similar to the third quarter and our effective tax rate is expected to be 16%.
EPS for the fourth quarter should be in the range of eight to 13 cents per diluted share while adjusted EPS should be in the range of 12 to 17 cents per diluted share as a reminder, we simply adjust for tax effected amortization expense.
Based on our results for the nine months of 'twenty 23, and our outlook for the fourth quarter, we're refining our revenue outlook for the full year to approximately $125 million to $127 million, we are maintaining the outlook for our 'twenty to 'twenty three gross margin at approximately 46% with expected full year operating expenses.
<unk> of roughly $47 million.
This includes tax adjusted intangible asset amortization expense of approximately $1 7 million for the purposes of determining adjusted earnings are expected effective tax rate remains approximately 16% to 17%.
Finally, our capital expenditures for 2023 and expect it to continue to run between 1% to 2% of sales as.
As usual our guidance does not include the potential impact from any unusual nonoperating expenses that may occur from time to time.
Looking further ahead, we remain confident star technology offerings in our target markets position us for continued success.
We currently expect next year, we'll have a slower start and then gradually improve as we execute on our growth plans and gain more clarity on the trajectory of projected borrowing costs.
Additionally, we continue to pursue strategic acquisitions and partnerships to extend our reach and expand our portfolio.
With that if you'll turn to slide 11, I will now turn the call back over to Nick.
Thanks Duncan on Slide 11, we would like to highlight the solid progress we are making towards our stated 2025 revenue go up $200 million to $250 million.
Even with our tempered Q4 guidance, we expect to have taken in tests from less than $55 million in revenue in 2020 to over $125 million this year.
We will have more than doubled revenue in three years, while also driving strong earnings growth.
In fact, the compound annual growth rate of our sales will be over 30% during this timeframe.
We continue to expect to drive organic growth with our base business in the coming years, and we anticipate future acquisitions will augment that growth, allowing us to reach our 2025 revenue goals.
Our pipeline of acquisition and partnership opportunities remains active and with over $40 million of cash on hand, and a $30 million term loan facility available. We believe we have the sufficient flexibility with our capital structure to execute on our plan.
Slide 12 shows how we expect our revenue growth will translate into strong earnings growth. Our plan remains the same reiterating that our strategy is primarily focused on scaling the company and maintaining our top tier margin profile.
Let me sum up on slide 13.
As we have noted throughout our prepared comments, our five point strategy is delivering results for shareholders. Our engineered solutions enable our customers to improve productivity salt challenging test requirements or create more effective solutions for production of their own portfolio of products our technology segmented.
<unk> structure has generated and focus and we are driving greater collaboration across the company.
That's a good example, a couple of weeks ago, a joint sales call was conducted with teams from our electronic test and environmental technologies divisions, who were working together to solve both test and thermal challenges for a new customer.
Great to see this type of collaboration in action and to be able to leverage our broader portfolio.
Physician interest is a more value added solutions provider.
The <unk> team delivered an outstanding quarter operationally, we continue to unleash the potential of Intest on our journey to becoming a supplier of choice for innovative tests and process technology solutions.
Despite the shift in demand last quarter, we are confident our focus is on the right target markets and applications that create a path to achieve our long term growth aspirations.
We continue our efforts in pursuing acquisition opportunities to enhance our product offerings expand our addressable markets and deepen our presence in targeted industries.
And our balance sheet is in a solid position to support our efforts.
With that operator, let's open the lines for questions.
Yeah.
Thank you and at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your off and there's no question in queue. You May press star two if he would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Jason Smith with Lake Street do you foresee with your question.
Hey, guys. Thanks for taking my questions I just wanted to start on your comments regarding I'm, sorry, slowing customer demand I know you highlighted the industrial and semi markets I'm, sorry, being culprits, but just curious if this is broad based or more concentrated at a few customers with hidden each end market.
<unk>.
Hey, good morning, Jason.
Yeah, I would say that it is across the number of industries in a number of customers that we've kind of seen this this yeah, I'd say delaying of projects.
And.
You kind of highlighted a couple of like you said I mean.
Industrial and semi.
Being noticeably there, but in general that's why we kind of blamed it more on macroeconomic conditions out there its not not something that a customer that they're just they're all kind of just getting more cautious.
Okay. That's fair and then just following up on that I mean, obviously there were some delays in purchasing decisions, but are you seeing order cancellations at all.
No we haven't had any order cancellations at all and.
It's just taking longer to get these through I can tell you we look at our funnels and our funnels are extremely healthy.
Q4 being higher than it was in Q3. So it's just timing wise that are really is dictating the cautiousness if you will.
Okay that makes sense and then just the last one for me and I'll jump back into queue. Following up on your comments on M&A you guys always have a pretty active funnel, but curious if you're seeing valuations starting to come in a bit or if just the number of opportunities are increasing out there.
Okay.
I would say for a number of quarters now we've seen that both you know valuations are becoming more attractive.
We're pretty disciplined on our approach on that with acquisitions here, but aligning better with with our.
Our acquisitions, if you will and.
Opportunities are pretty active out there so were please.
Pleased with where we are with our M&A here.
Okay perfect I appreciate the color guys. Thanks a lot.
Yeah. Thanks, Jason.
Our next question comes from the line of Peter right with <unk>. Please proceed with your question.
Great. Good morning, and thank you for taking my question good job maintaining good operating leverage in a in an increasingly difficult environment.
Thanks, Peter and good morning.
Nick.
First question I had two questions for you and a question for Duncan the the first question for you is if you if you look into the Crystal ball and the conversations you're having with your sales guys. Do you think that the softness that you experienced in <unk>.
Is more.
From the.
Procurement departments being proactively risk off or do you think that they've already experienced kind of a softening in demand that they are reacting to and that question. That's kind of in light of your comment that there's already been some rebooking of the fourth quarter. So I'm looking at kind of the duration risk that you see from your sales force if they have any color on that.
For how long this could last the second question for you is on your new cameras.
Can you share anything about the E S P or how youre looking at kind of the true value proposition, whether it be margin mix or how should we look at at how the new products are creating incremental value.
For Intest, if theres any story there.
And then Duncan.
On the operating leverage side, I see you're not reacting to the softness yet in holding up operating expenses, where you'd expect them to be in in the fourth quarter.
Can you just remind us at breakeven is still 26 million ish in and what would it take for you maybe to react on that side and then one little follow up for you is do you expect.
Free cash flow to be positive in the fourth quarter and can.
Can you can you give us a target for free cash flow for the year.
That's all.
There's a lot there Peter alright, so let's start with the the demand slowing and we truly believe it is more.
Getting the approvals on these capex projects I mentioned or our funnel activities are strong.
And we've seen a nice increase quarter over quarter. So the opportunities are there projects that they've got identified are there and it's just a matter of you know capex.
Capex budgets are the project is going to meet the internal rate of returns and getting the right signatures that are slowing things. There. We haven't seen you know our funnels decreasing indicating although a broader slowdown in demand or anything like that.
And then relative to the cameras the new cameras.
These cameras asp's are very different from our other more capex type projects and solutions that we have out there. These things are you know $1000 or less in many cases. So it does it does change our our Oh, you know overall ASB, but.
And in General you know.
We're getting a decent margins on these things.
And with some of these redesigns, we've improved margins.
With you know some of our manufacturing abilities and cost components going into this thing with these new redesigned cameras in it so.
Important to note is the you know this industry. This this video.
Video space, it's constantly evolving new new sensors.
You know the components being updated et cetera et cetera. So we think we'll be seeing quite a more frequent product launches out of the out of this business.
Business versus what it had done in the past in order to keep the cameras up to date and are generating the demand for us going forward.
Duncan do you want to tackle the other yes.
So I think you're in the right ballpark pizza in terms of your breakeven.
That $26 7 million set top line, so that makes sense on cash flow really happy with the working capital improvements that you know the business has been driving we're seeing the benefits of that in the quarterly cash flow number for Q3, obviously, we're projecting a slightly softer P&L picture in <unk>.
Q4, but we're continuing our work could I'm working capital efficiency and I would still expect us to be to be positive from a cash perspective, all the way you know, we're not guiding specifically on that number.
Wonderful. Thank you very much if I could ask one last follow up on the video cameras that you have what is the what is driving the new.
New generations that you're producing is it new markets or is it you know improved.
Manufacturing in and margin profile, what is what is what is driving it.
It's all of the above you know, there's the scale X product.
And that I mentioned.
Yeah, it's really a first of its kind applicable across all markets are a lot of markets out there with the edge AI computing capabilities. So it's really <unk>.
Unique end and not targeted at just one particular application some of the others are more specific like R. R. Python inspection cameras.
These are really embedding some upgraded technologies due to improve performance of those cameras.
To help on those particular customers.
Improve their their ability to identify issues and that so it's a combination of cost is also an area that we were you know were.
Driving the team to improve as well so yeah all of the above.
Wonderful great. Thank you guys.
Our next question comes from the line of.
Jackson with Northland Securities. Please proceed with your question.
Thanks, Good morning Duncan.
Good morning, Ted.
I just have one question and you know everything I had on my list got checked off but you know we've got a you know.
A weaker fourth quarter and again you are correct you are not the only company that is seeing this kind of.
You know slowdown cautiousness within their business and plenty of companies have made very similar comments in taking very similar actions with regards to guidance, but my question for you is you know now that we're having this.
No disruption in the business. If you would with regards to the fourth quarter does it impact I know, you're not providing guidance for 'twenty four but I mean does it change you know the seasonality that's typical in the business I mean would we still expect based upon your 'twenty your fourth quarter guidance to see FERC first quarter down sequentially from fourth quarter, That's really my only question.
Yeah.
I mean, I would say I think as we've talked about before we don't really see seasonality per se, obviously, where as many other companies are running into yes, some unfavorable market conditions here, but seasonality isn't I would say something that is overly dramatic with.
Our business.
Well I mean, if I look at it.
The last couple.
A couple of years you know it seems like generally that you know absent acquisitions. The first quarter has not been the stronger of your quarters. So that's all it sounds like you're so no youre not saying that you don't you don't have an answer from me on that.
No I'm, saying, we don't see but seasonality isn't a dynamic we say obviously.
We are impacted by market conditions as every player in the market places.
Okay. That's it for me thank you.
Yeah, no. Thanks Ted.
And it looks like we have reached the end of the question and answer session and I'll now turn the call back over to the President and CEO, Nick Grant for closing remarks.
Thank you Mollie and before we close I want to express my sincere gratitude again to our global team as they continue to deliver outstanding results and.
And finally, we will be participating at the southwest ideas conference in Dallas on November 15th and the CEO Summit in New York on December 12, we hope to connect with some of you at these events.
We appreciate you taking the time to joining us on our call today and for your interest in Intest. Thank you all and have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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