Q1 2024 inTEST Corp Earnings Call

Operator: Ladies and gentlemen, greetings and welcome to the inTest Corporation first quarter 2024 financial conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shawn Southard, Director of Investor Relations. Please go ahead.

Ladies and gentlemen, greetings and welcome to the Intest Corporation first quarter 'twenty 'twenty full financial conference call.

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

Brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star and needle on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Sean Sadat Investor Relations. Please go ahead.

Shawn Southard: Good afternoon, everyone. We certainly appreciate your interest in inTest Corporation and thank you for sharing your time with us today. Joining me on our call are Nick Grant, our President and Chief Executive Officer, and Duncan Gilmour, our Chief Financial Officer and Treasurer. You should have the earnings release, which crossed the wires today after the market, as well as the slides that will accompany our conversation today. If not, you can find these documents in the Investor Relations section of our website, inTest.com. Please turn to slide two, and I'll review the safe harbors.

Unknown Executive: Good afternoon, everyone. We certainly appreciate your interest in Intest Corporation and thank you for sharing your time with us today.

Joining me on our call are Nick Grant, our President and Chief Executive Officer, and Duncan Gilmore, Our Chief Financial Officer and Treasurer.

Speaker Change: You should have the earnings release, which crossed the wires today aftermarket as well as the slides that will accompany our conversation today.

Speaker Change: If not you can find these documents on the Investor Relations section of our website Intest dotcom.

Speaker Change: Please turn to slide two and I'll review, the Safe Harbor statement.

Shawn Southard: During this call, management may make some forward-looking statements about our current plans, beliefs, and expectations. These statements apply to future events that are subject to risks, uncertainties, and 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 in other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at scc.gov.

Speaker Change: During this call management may make some forward looking statements about our current plans beliefs and expectations. These statements apply to future events that are subject to risks uncertainties and other factors that could cause actual results to differ materially from what is stated here today.

Shawn Southard: Also, management will refer to 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. You can find reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides. Now, please turn to slide three, and I'll turn the call over to Nick. Okay?

Speaker Change: These risks uncertainties and other factors are provided in the earnings release as well as in other documents filed by the company with the Securities and Exchange Commission.

Speaker Change: These documents can be found on our website or at SEC Gov.

Speaker Change: Also management will refer to some non-GAAP financial measures.

Speaker Change: We believe these will be useful in evaluating our performance.

Speaker Change: You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.

Speaker Change: You can find reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides.

Now please turn to slide three and I'll turn the call over to Nick Nick.

Richard N. Grant: Thank you, Shawn, and good afternoon, everyone. Thanks for joining us for our first quarter 2024 earnings call. The quarter came in about where we had expected, and I'd like to thank the entire inTest team for making it happen in a relatively tough environment. Revenue of nearly $30 million was somewhat higher than expected, while gross margin of $43.8 was lower, primarily driven by the timing of the acquisition of alfamation. The company's operating expenses came in slightly lower than expected.

Nick: Thank you, Sean and good afternoon, everyone.

Richard N. Grant: EPS was 5 cents, and it was $0.10 on an adjusted basis. AlphaMation, which we owned for about two and a half weeks during the quarter, contributed $1.4 million of the $1.9 million revenue increase over the fourth quarter of last year. However, given the timing of the acquisition and having revenue and costs misaligned for a short stub period, they were a drag on our gross margin. In a normalized quarter, we would expect their typical margins to be similar to ours.

Nick Nick: Thanks for joining us for our first quarter 2024 earnings call.

The quarter came in about where we had expected and I'd like to thank the entire intest team for making it happen and they are relatively tough environment.

Nick Nick: Revenue of nearly $30 million was somewhat higher than expected well gross margin of 43.8 was lower primarily driven by the timing of the acquisition of acclimation.

Nick Nick: With operating expenses coming in slightly lower than expected E.

Nick Nick: E. P. S was five cents.

Nick Nick: And was 10 cents on an adjusted basis.

Nick Nick: Al formation, which we owned for about two and a half weeks in the quarter contributed $1 4 million of the $1 9 million revenue increase for the over the fourth quarter of last year.

Nick Nick: However, given the timing of the acquisition and having revenue in cost missile wind and a short stub period. They were a drag on our gross margin.

In a normalized quarter, we would expect our typical margins to be similar to ours.

Richard N. Grant: We continue to execute our five-point strategy, which focuses our growth efforts in diversified markets and drives our strategic thinking. These efforts are helping as we manage through the tough semiconductor cycle. In fact, while they can be lumpy in their own rights, defense, aero, and industrial remain solid markets for us in the quarter. The addition of affirmation, which provides us a meaningful position in the electronics and infotainment test space for the automotive industry, will provide further diversification.

Nick Nick: We continue to execute our five point strategy, which focuses our growth efforts in diversified markets and drives our strategic thinking.

Nick Nick: These efforts are helping as we manage through the toughest semiconductor cycle.

Nick Nick: In fact, while they can be lumpy in their own rights defense Aero and industrial remained solid markets for us in the quarter.

Nick Nick: The addition of inflammation, which provides us a meaningful position in the electronics infotainment test space for the automotive industry.

Nick Nick: We'll provide further diversification.

Richard N. Grant: Importantly, we continue to generate cash from operations, and even after the affirmation acquisition, where we used about $19 million, we ended the quarter with $27 million in cash. We believe this is adequate financial flexibility to keep advancing our transformation strategy. Turning to slide four, I'll review the orders and backlog. As we have been communicating since last November, the first half of 2024 is expected to be weaker than the second half of the year.

Nick Nick: Importantly, we continue to generate cash from operations and even after the affirmation acquisition, where we used about 19 million, we ended the quarter with $27 million in cash.

Nick Nick: We believe this has adequate financial flexibility to keep advancing our transformation strategy.

Nick Nick: Turning to slide four our view the orders and backlog.

Nick Nick: As we have been communicating since last November the first half of 2024 was expected to be weaker than the second half of the year.

Richard N. Grant: However, we had a measurable change in order trends at the very end of the quarter, and that has now impacted our outlook for the year. Specifically, we had about 5 million orders we had anticipated that were either delayed or reduced in size from expected levels. Encouragingly, back-end SEMI was up sequentially, showing signs of stabilization, which we had noted on our year-end call. This helped to partially offset a notable decline in front-end orders in the first quarter.

Nick Nick: However, we had a measurable change in order trends at the very end of the quarter and that is now impacted our outlook for the year.

Nick Nick: Specifically, we we had about $5 million in orders, we had anticipated that were either delayed or reduced in size from expected levels.

Nick Nick: Encouragingly backend semi was up sequentially showing signs of stabilization, which we had noted on our year end call.

Nick Nick: This helped to partially offset a notable decline in front end orders in the first quarter.

Richard N. Grant: One bright spot to note is our backlog is at a record 56 million units at quarter end. The boost is directly the result of the acquisition, with AlphaMation contributing $22.8 million in backlog. You may recall that we had reported their backlog at about 13 million euros when we acquired them. However, their accounting for revenue was based on a percentage of completion methodology. After the acquisition, we concluded that, under U.S. GAAP, point-in-time revenue recognition is more appropriate. As a result of this change, the acquired backlog increased to $22.4 million.

Nick Nick: One bright spot is our backlog is at a record 56 million at quarter end.

Nick Nick: The boost is directly the result of the acquisition with affirmation contributing $22 8 million in backlog.

Nick Nick: You may recall that we had reported their backlog at about 13 million euros, when we acquired them.

Nick Nick: However, there are accounting for revenue was based on the percentage of completion methodology.

Nick Nick: After the acquisition, we have concluded that under U S. GAAP point in time revenue recognition is more appropriate.

Nick Nick: As a result of this change acquired backlog increased to $22 4 million.

Richard N. Grant: Keep in mind that the accounting treatment is related to the timing of revenue recognition and does not impact our previous statements regarding Alfamation's annual revenue. While it's in its early days, the integration of Alfamation is progressing as planned. In fact, we have already jointly participated in trade shows and numerous customer interactions. We are really excited about AlphaMation joining the inTest team and all that we could do together to further our strategy. With that, I will turn it over to Duncan to review the financials and outlook in more detail. Duncan, it is over to you.

Keep in mind that the accounting treatment is related to the timing of revenue recognition and does not impact our previous statements regarding al formations annual revenue.

Nick Nick: While it's in its early days the integration of affirmation is progressing as planned and in fact, we have already jointly participated in trade shows and numerous customer.

Nick Nick: Interactions we.

Nick Nick: We are really excited about affirmation, joining the intestine and all that we could do together to further our strategy.

Nick Nick: With that let me turn it over to Duncan to review the financials and outlook in more detail.

Duncan: Duncan over to you.

Duncan: Thank you Nick.

Duncan Gilmour: Starting on slide 5, revenue for the first quarter was 29.8 million, including 1.4 million from Alfamation, which was acquired with only 19 days or two and a half weeks remaining in the quarter. The 2.1 million decline compared with Q1 2023 was driven by a 2.7 million decline in SEMI, partially offset by growth in the industrial and defense aerospace market. Sequentially, first quarter revenue increased $1.9 million, with semi-revenue up 39% off of the exceptionally low fourth quarter, while defense aerospace was up 34%. Revenue from Alpha Nation was primarily in the auto EV market, which helped offset a decline in that market within the organic business sector. Moving to slide 6.

Duncan: Starting on slide five revenue for the first quarter was $29 8 million, including $1 4 million from Alpha nation, which is applied with only 19 days or two and a half weeks remaining in the quarter.

Duncan: The $2 1 million decline compared with Q1 2023 was driven by a $2 7 million decline in semi partially offset by growth in the industrial and defense aerospace markets.

Duncan: Sequentially first quarter revenue increased $1 9 million with semi revenue up 39% off of the exceptionally low fourth quarter, well defense aerospace was up 34%.

Duncan: Revenue from Alpha Nation was primarily in auto EV, which helped offset a decline in that market within the organic businesses.

Duncan: Moving to slide six gross margin of 43, 8% for the quarter contracted 80 basis points sequentially, driven by a 100 basis point negative impact from the stub period for Alpha Nation. This is just the result of a timing mismatch on recognition of revenue and expenses given the short owner.

Duncan Gilmour: Gross margin of 43.8% for the quarter contracted 80 basis points sequentially, driven by a 100 basis point negative impact from the stub period for alfamation. This is just the result of a timing mismatch on recognition of revenue and expenses given the short ownership time frame in Q1. On a year-over-year comparison, gross margin contraction was a result of lower volume in product, as well as the aforementioned impact from the acquisition.

Duncan: Chip timeframe in Q1.

On a year over year comparison gross margin contraction was a result of lower volume and product mix as well as the aforementioned impact from the acquisition.

Duncan Gilmour: Our trailing 12 months gross profit of 55 million, or 45.4% of sales, is in line with our updated outlook for this year of gross margin between 44 and 46%. As you can see on slide seven, our operating expenses were up 1.1 million versus the prior year, driven by higher corporate development expenses. Incremental operating expenses incurred with the acquisition and higher professional fees. As a percent of sales, OPEX increased 610 basis points to 42.2%.

Duncan: Our trailing 12 months gross profit of 55 million or 45, 4% of sales is in line with our updated outlook for this year of gross margin between 44 and 46%.

Duncan: As you can see on slide seven our operating expenses were up 1.1 million versus the prior year driven by higher corporate development expenses.

Duncan: Incremental operating expenses inherited with the acquisition and higher professional fees.

Duncan: As a percent of sales Opex increased 610 basis points to 42, 2%.

Duncan Gilmour: Turning to slide 8, you can see our bottom line and adjusted EBITDA results. For the quarter, net earnings were $662,000, or 5 cents per diluted share. Adjusted net earnings were $1.2 million or $0.10 per diluted share. Adjusted EPS reflects adding back tax-affected acquired intangible amortization. On an after-tax basis, the required intangible amortization amounted to approximately $500,000 or about five cents per diluted share in the first quarter.

Duncan: Turning to slide eight you can see our bottom line and adjusted EBITDA results.

Duncan: For the quarter net earnings were 662000 or five cents per diluted share.

Duncan: Adjusted net earnings were $1 2 million or 10 cents per diluted share.

Duncan: Adjusted EPS reflects adding back tax effected acquired intangible amortization on an after tax basis, our acquired intangible amortization amounted to approximately 500000 or about five cents per diluted share in the first quarter.

Duncan Gilmour: Adjusted EBITDA for Q1 was $1.8 million, representing a 6.1% adjusted EBITDA margin. Slide 9 shows our capital structure and cash flow. We had a solid quarter of cash generation, adding $2.1 million from operations. Capital expenditures in the first quarter were £300,000, unchanged from the prior year period. Given our modest capital requirements to grow the organic business, free cash flow was $1.8 million.

Adjusted EBITDA for Q1 was $1 8 million, representing a six 1% adjusted EBITDA margin.

Duncan: Slide nine shows our capital structure and cash flow.

Duncan: We had a solid quarter of cash generation, adding $2 1 million from operations.

Duncan: Capital expenditures in the first quarter were 300000 unchanged from the prior year period.

Duncan: Given our modest capital requirements to grow the organic business free cash flow was $1.8 million.

Duncan Gilmour: Cash equivalents at the end of the first quarter were $27.3 million, down $18 million from the trailing quarter, reflecting the use of approximately $19 million for the acquisition of Alfamation. Borrowings increased in the quarter due to the £9 million in debt we assumed from the acquisition. We ended the quarter with total debt of $20.4 million, which we believe is very manageable and reflects a total debt leverage ratio of 1.6x. During the quarter, we repaid approximately one million dollars of debt.

Duncan: Cash equivalents at the end of the first quarter were $27 3 million.

Duncan: $18 million from the trailing quarter, reflecting the use of approximately $19 million for the acquisition of affirmation.

Duncan: Borrowings increased in the quarter due to the $9 million in debt, we assumed from the acquisition.

Duncan: We ended the quarter with total debt of $20 4 million, which we believe is very manageable and reflects a total debt leverage ratio of 1.6 X.

During the quarter, we repaid approximately $1 million of debt.

Duncan Gilmour: We continue to have $30 million available with our delayed draw term loan and an incremental $10 million available under our revolver. As announced on Friday, we extended the maturity date on these facilities by four years to May 2031, and the drawdown period was extended two years to May 2026.

Duncan: We continue to have 30 million available with our delayed draw term loan and an incremental 10 million available under our revolver as announced on Friday, we extended the maturity date on these facilities by four years to May 2031, and the drawdown period was extended two years to May 2026.

Duncan: <unk>.

Duncan Gilmour: Turn to slide 10 as we review our outlook for 2024. For the second quarter, we are expecting revenue to be between 34 and 36 million, with a gross margin of approximately 44 to 45 percent. Second quarter operating expenses, including amortization, are expected to be in the range of $14.5 to $15 million. This range reflects the incremental operating costs gained from the acquisition of Alfamation and higher total intangible asset amortization. After tax, this is expected to be approximately 1.2 million, or about 10 cents per share.

Duncan: Turning to slide 10, as we review our outlook for 2024.

Duncan: For the second quarter, we are expecting revenue to be between 34, and 36 million with gross margin of approximately 44% to 45% second.

Duncan: Second quarter operating expenses, including amortization are expected to be in the range of $14 $5 million to $15 million.

Duncan: This range reflects the incremental operating costs gained from the acquisition of affirmation and higher total intangible asset amortization.

Duncan: After tax this is expected to be approximately $1 2 million or about 10 cents per share.

Duncan Gilmour: We are expecting EPS for the second quarter to be between breakeven and six cents per diluted share, while adjusted EPS should be approximately 10 cents to 16 cents per diluted share. As a reminder, we simply adjust for tax-affected amortization expenses. For our full year outlook, with the addition of alfamation and the recent order trends Nick discussed, we now expect 2024 revenue to range from $140 to $150 million. Gross margin for 2024 is expected to be approximately 44 to 46%, with expected operating expenses of roughly 56 to 58 million.

Duncan: We are expecting EPS for the second quarter to be between breakeven to six cents per diluted share while adjusted EPS should be approximately 10 cents to <unk> 16 cents per diluted share as a reminder, we simply adjust for tax effected amortization expense.

Duncan: For our full year outlook with the addition of Alpha nation and our recent order trends Nick discussed we now expect 2020 for revenue to range from $140 million to $150 million.

Duncan: Gross margin for 'twenty 'twenty four is expected to be approximately 44% to 46% with expected operating expenses of roughly $56 million to $58 million.

Duncan Gilmour: This includes tax-adjusted intangible asset amortization expense of approximately $4.1 million. Our expected effective tax rate is now projected to be about 17 to 19 percent. For capital expenditures in 2024, we expect to run between one to two percent of sales. As usual, our guidance does not include the potential impact from any non-operating expenses such as corporate development that may occur from time to time, nor does it include the potential impact from any additional acquisitions we may make. With that, if you will turn to slide 11, I will now turn the call back over to you.

Duncan: This includes tax adjusted intangible asset amortization expense of approximately $4 1 million.

Duncan: I would have expected effective tax rate is now projected to be about 17% to 19%.

Duncan: For capital expenditures in 2024, we expect to run between 1% to 2% of sales.

Duncan: As usual our guidance does not include the potential impact from any nonoperating expenses, such as corporate development that may occur from time to time, nor does it include the potential impact from any additional acquisitions, we may make with that if you'll turn to slide 11, I will now turn the call back over to Nick.

Nick Nick: Thanks Duncan.

Richard N. Grant: In a tough macro environment, our team is keeping their heads down and executing our plan. We have been up against some heavy headwinds in the semi market, which is about half of total sales, but less than it had been historically.

Nick Nick: In a tough macro environment, our team is keeping their heads down and executing our plan we have been up against some heavy headwinds in the semi market, which is about half of total sales, but less than it had this been historically.

Nick Nick: Our latest acquisition will help to further advance market diversification.

Richard N. Grant: Our latest acquisition will help to further advance market diversification. Nonetheless, we like our position in the semi-market, which, over the long run, has exciting megatrends to drive growth as we leverage our know-how and innovative solutions. We continue to innovate by providing more automated technologies and through responsive solutions-oriented service, we are gaining additional traction within our existing customers while also capturing new ones. Our diversified markets are serving us well, but it's the team's effort to expand our reach and leverage unique solutions across more channels and markets that are enabling inroads with new customers and channel partners.

Nick Nick: Nonetheless, we like our position in the semi market, which over the long run has exciting mega trends to drive growth as we leverage our knowhow and innovative solutions.

Nick Nick: We continue to innovate by providing more automated technologies and through responsive solutions oriented service, we are gaining additional traction within our existing customers, while also capturing new ones.

Nick Nick: Our diversified markets are serving us well, but it's the team's effort to expand our reach and leverage unique solutions across more channels and markets that are enabling inroads with new customers and channel partners.

Richard N. Grant: Underpinning our five-point strategy is the accountability and discipline required to execute well. Our teams are consistently evaluating market position, pricing, competition, opportunities, and the talent within, as well as across our channel partners, to drive growth. We are encouraged by our progress and excited about our future. With that, Operator, we can open the lines for questions.

Nick Nick: Underpinning our five point strategy is the accountability and discipline required to execute well.

Nick Nick: Our teams are consistently evaluating market position pricing competition opportunities and the talent within <unk> as well as across our channel partners to drive growth.

We are encouraged with our progress and excited about our future.

Speaker Change: With that operator, we can open the lines for questions.

Speaker Change: Thank you Les.

Operator: Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you'd 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 start button. Ladies and gentlemen, we will wait for a moment while we poll you for questions. Our first question is from the line of Jaeson Schmidt with Lake Street Capital. Please go ahead.

Ladies and gentlemen, we will now be conducting a question and answer session.

Speaker Change: If you would like to ask a question. Please press star and one on your telephone keypad.

Speaker Change: A confirmation tone will indicate your line is in the question queue.

Speaker Change: Press Star two if you'd like to remove your question from the queue.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: Ladies and gentlemen, we will.

For a moment, while we poll for questions.

Speaker Change: Our first question is from the line of Jason Smith with Lake Street Capital. Please go ahead.

Jaeson Allen Min Schmidt: Hey guys, thanks for taking my questions. I just want to start with the orders that shifted towards the quarter and curious if you expect to recognize those delayed orders later this year. And then regarding the orders that were reduced in size, is this a permanent reduction or do you think there's potential to recoup that full order later?

Jason Smith: Hey, guys. Thanks for taking my questions just wanted to start with the orders that shifted towards quarter and curious if you expect to recognize those delayed orders later this year and then regarding the orders that were reduced in size is this a permanent reduction or do you think there's potential to recoup that.

Jason Smith: Full order later.

Richard N. Grant: Yeah, hi, Jaeson. So the orders that were delayed really did just that kind of shift to the right. We do see them kind of moving more into Q3, Q4 later part of the year, based on what our customers are telling us. As for the reduction in size, that is really end-user demand-driven, and that is for the balance of the year. And in fact, we booked the reduced-size orders primarily in the second quarter here to get that particular customer through the balance of the year. So that's going to be reflected here in Q2, but it was expected in Q1 and just did not materialize.

Jason Smith: Yeah, Jason So if the orders that were delayed are really did just that kind of shift to the right. We do see them kind of moving more into Q3 Q4 are later part of the year based on what our customers tell us as far as the reduction in size.

Jason Smith: That is really the end users' demand driven and that is for the balance of the year and in fact, we booked.

Jason Smith: Reduced size orders, primarily in the second quarter here to get that.

That particular customer through the balance of the year. So yeah. That's that's gonna be reflected here in Q2, but was expected in Q1 and just did not materialize.

Richard N. Grant: Got it, that's helpful. And then it sounds like the integration with Elfamation continues to progress as planned, but just curious if there's anything that has surprised you, whether good or bad, now that you've had a little more time with the acquisition.

Speaker Change: Got it that's helpful and then it sounds like the integration with automation continues to progress to plan, but just curious if there's anything that has surprised you whether good or bad now that you've had a little more time with the acquisition.

Richard N. Grant: Yeah, no, all positive so far. I mentioned in my pre-remarks that, you know, we had a trade show, the Apex show, and they jointly showed with our Archaeologic group up in Canada there, and really, really good activity, good interactions between the two businesses and the teams there. And customer calls have gone fantastic with them. You know, being part of a larger U.S. company gives some credibility to their pursuits and some projects. So, all positive from that sense. Duncan, anything from your side that you come across?

Speaker Change: Yeah, no all positive so far I've mentioned in the remarks that we you know we had a trade show the apex show and they they jointly district showed with.

Speaker Change: Our <unk> group up in Canada, there and really really good activity good interactions between the two businesses and the teams there and customer calls have gone fantastic with them.

Speaker Change: Now that being part of a larger U S company gives.

Dunkin: Some credibility to other pursuits of some projects. So all positive from that sense Dunkin' anything from your side that come across.

Dunkin: No I mean, all good so far I mean, Nick alluded to revenue recognition, but that wasn't a complete surprise just something that as we get under the Hood gave us more visibility into final determination. So.

Duncan Gilmour: I mean, all good so far. Nick alluded to, you know, revenue recognition, but that wasn't a complete surprise, just something that, as we got under the hood, gave us more visibility into final determination. So, nothing surprising so far.

Dunkin: Nothing.

Dunkin: Nothing surprising so far.

Richard N. Grant: Okay, no, that's great to hear. And then just the last one for me, and I'll hop back into queue. You noted some headwinds from Elfamation regarding gross margins. Just curious if you could quantify the impact here in Q1.

Speaker Change: Okay, No that's great to hear and then just the last one for me and I'll hop back into queue. You noted some headwinds from El formation regarding gross margins. Just curious if you could quantify the impact here in Q1.

Unknown Speaker: Yeah, I mean, it was 100 basis points of impact. So, literally just a case of relatively thin revenue versus the costs that had to be brought into the stub period based upon the number of business days versus the number of actual days and things like that. But 100 basis points of impact on the margin there. Okay, great. Thanks a lot, guys.

Speaker Change: Yeah, I mean, it was 100 basis points of impact so.

Speaker Change: And literally just the case of relatively thin revenue versus the cost that had to be brought into the stub period based upon number of business days versus number of actual days and things like that.

Speaker Change: About 100 basis points of impact on the on the margin there.

Speaker Change: Okay, great. Thanks, a lot guys.

Speaker Change: Thanks, Jason.

Speaker Change: Okay.

Speaker Change: Thank you.

Edward Randolph Jackson: Our next question comes from the line of Ted Jackson with Northland Securities. Please go ahead.

Speaker Change: Our next question comes from the line of Ted Jackson with Northland Securities. Please go ahead.

Edward Randolph Jackson: Hi, thanks for taking my questions. I wanted to start with the front-end semi-market and just simply put its real open-ended is some discussion or color around, you know. What does it mean with regard to silicon carbide? You know, what's driving it when you talk to your customers? I mean, you kind of mentioned in the press release a little bit about, you know, almost it sounded like a capacity overbuild. Is that or am I reading that correctly?

Edward Randolph Jackson: Hi, Thanks for taking my questions.

I wanted to start with the front end semi market just simply put it's real open ended as some discussion or <unk>.

Edward Randolph Jackson: Color around.

Edward Randolph Jackson: No.

Edward Randolph Jackson: What does it mean with regards to silicon carbide.

Edward Randolph Jackson: Whats driving it when you talk to your customers. I mean is if you you kind of mentioned in the press release, a little bit about almost it sounded like a capacity overbuild.

Edward Randolph Jackson: Is that is that what I am I reading that correctly and you know kind of the the.

Edward Randolph Jackson: And, you know, kind of the view you get from your customers about when that market kind of normalizes out, just really kind of sort of at the macro level, the front end 70s would I'd love to hear more color about. Then I'll follow up with another. Yeah.

Edward Randolph Jackson: The view you get from your customers to win that market kind of normalizes out just really kind of sort of at the macro level. The upfront incentives, we would love to hear more color about that and I'll follow up with another.

Yeah, Hey, Ted and I'm on the front end semi as you know we we.

Richard N. Grant: Yeah, hi, Ted. And on the front end of SEMI, as you know, we make our induction heating solutions are used in crystal growth, silicon carbide, gallium nitride, as well as in epitaxy applications. And we had seen that the crystal growing business or orders, I would say, saw for a number of quarters now as, you know, that capacity as they digested the shipments that have happened out there. And where we had been seeing relative strength and holding up well was the epitaxy side of things.

Speaker Change: Like our induction heating solutions are used in the crystal growth silicon carbide gallium nitride as well as in epitaxy applications and we haven't seen that the crystal growing business. Our orders I would say soft for a number of quarters now as you know the that capacity.

Yeah as they digest the shipments that happened out there in that and where we had been seeing relative strength in whole are holding up well was the epitaxy AR side.

Richard N. Grant: But then in Q1, that's really where we saw the epitaxy kind of slow, and it's really more project-driven for the end users there. Some of the larger projects they were expecting got delayed, canceled, or re-scoped on the number of units that they were going to need for that. So that really was the reduction in size that we saw. Talking with our customers there, both the integrators and the end users, we think that really starts picking up in the second half as well as what they're telling us about orders they're going to need to start placing late in the year and really more so into 2025.

Speaker Change: Side of things, but then in Q1, that's really where we saw the epitaxy kind of slow and it's really more project driven for the end users. There some of the larger projects they were expecting that are either.

Speaker Change: Delayed canceled or research the scope.

On the number of units that they were going to need on that so that really was the reduction in size that we saw talking with our in our our customers there both the the integrators and end users we really think.

Speaker Change: That really starts picking up in the second half as well as what they're telling us orders, they're going to need to start placing for late.

Speaker Change: Late in the year really more so into 2025.

Richard N. Grant: That was great color. And then, on a more positive discussion, you know, the defense business has been doing well for quite some time. And I wondered if you could provide a little color within that market, you know, what are the applications that are driving it, and what is your outlook for it?

Speaker Change: That was great color.

Speaker Change: And then on a more positive discussion the defense business has been doing well for.

Speaker Change: Quite a period of time and I wondered if you could provide a little color within that market.

Speaker Change: What are the applications that are driving it and your outlook for it.

Richard N. Grant: Yeah, no, we serve that space quite across all three divisions, if you will, and some of the applications being, you know, robust testing of electronics used in missiles, missile defense systems, where our flying probe testers are testing circuit boards used in various defense systems as well. And so it really is a wide variety of applications there. We also do some, you know, I'd say more on the defense aero side of components used in aircraft and some some cameras used on on planes as well.

Speaker Change: Yeah, No I mean, we serve that space quite a across all three.

Speaker Change: Divisions, if you will and some of the applications being.

Speaker Change: Robust tests this testing of our electronics used in missiles missile defense systems.

And our flying probe testers are testing circuit boards used in and various defense systems as well.

Speaker Change: And so it really is a wide variety of applications. There. We also do some.

Speaker Change: I'd say more on the defense Aero side of the.

Speaker Change: Components used in aircraft. Some are some cameras used on on on planes as well so it's.

Richard N. Grant: So it touches a wide variety of applications, nothing particular, but we do see those staying pretty robust for us here and new, I'd say, designs on the missiles themselves or the components going into the missiles, driving higher testing needs, driving, you know, more upgrades to our products that we've served in the past. So, yeah, it's, we see that will continue for quite some time.

It touches a wide variety of applications nothing particular, but we do see those staying pretty robust for us here and there and new are new.

Speaker Change: I'd say designs on.

Speaker Change: The the missiles themselves or the components going into the missiles driving higher testing needs driving you know are more upgrades to our products that we served in the past. So yeah. It is we see that will continue for quite some time.

Duncan Gilmour: Good, I want to hear that. Then my last question on backlog. You know, if we take the alfamation out, backlog was down substantially. Is that drop in backlog purely SIDNEY driven?

Speaker Change: Good I want to hear that and then my last question on backlog, if we take off Imation out backlog was down substantially. It is is that drop in backlog purely Sydney driven.

Duncan Gilmour: Yeah, I mean, a huge portion of that is semi-driven, as you can see from the kind of water activity and semi-I think the rest of the markets you're relatively holding up kind of relatively relatively well, but that's where we see you're the biggest change. Okay, thanks.

Speaker Change: Yeah, I mean, a huge portion of that semi driven as.

As you can see from the kind of order activity and Sammy.

Speaker Change: Relatively low or a low quarter revenue still somewhat holding up you kind of do the math on that and you can see kind of backlog dropping there. So sammy certainly the bigger bigger driver the front end component as Nick highlighted.

Speaker Change: And in commentary there as well as in Q&A.

Speaker Change: Being a.

Speaker Change: The driver of that of that sector with respect to kind of that backlog reduction I think the rest of the markets, you're relatively youll holding up kind of relatively relatively well, but that's where we see the biggest change.

Unknown Speaker: Okay. Thanks, Duncan. And thanks, Nick. I'll step out of line.

Speaker Change: Okay. Thanks, Duncan and thanks, Nick I'll step out of line.

Speaker Change: Thanks Ted.

Peter Wright: Thank you. Ladies and gentlemen, a reminder, if you wish to ask a question, please press star and 1. Our next question comes from the line of Peter Wright on Intro Act. Please go ahead.

Speaker Change: Thank you, ladies and gentlemen, a reminder.

Speaker Change: If you wish to ask a question please press star and one.

Speaker Change: Our next question comes from the line of Beta right with intro Act.

Speaker Change: Right.

Peter Wright: Hey guys, thank you for taking my question. Nick, my first question is if you could share some color on the kind of customers' activity around capacity expansion. Do you think some of the pushouts are more proactive or reactive, or can you tell at this point kind of what they're seeing there? And separate from kind of the capacity conversations on more of the innovation or tech type purchases or new customers, has there been anything to kind of highlight or note there, either accelerating or decelerating?

Beta: Hey, guys. Thank you for taking taking my question.

Nick My My first question is if you could share some color on kind of customers' activity around capacity expansion do you think some of the push outs for more proactive or reactive or can you tell at this point.

Beta: To kind of what they are seeing there and separate from kind of the capacity conversations on on more of the innovation or tech type purchases or new customers has there been anything to kind of highlight or note there either accelerating or decelerating.

Peter Wright: And then the second question I have is more from your guys' perspective, as we look at kind of where we're in the cycle. You guys have made some acquisitions and maybe have some costs to cut there, but what is changing maybe in your investment philosophy, in your own innovation, in your own development cycle? Are there any cost cuts or harder hurdles to get by, or are you guys full steam ahead?

Nick Nick: And then the second question I have is more from from your guys' perspective, as we as we look at kind of where we were.

Nick Nick: In the cycle.

Nick Nick: You guys have made some acquisitions and maybe had some cost to cut there but.

What is what is changing maybe in your investment philosophy and in your own innovation in your own development cycle is is there any cost cuts are harder hurdles to get by are you or are you guys are full steam ahead. Thank you.

Richard N. Grant: Sure. Hi Peter.

Speaker Change: Sure Hi, Peter.

Speaker Change: Thanks for the questions there so relative to capacity expansions and what we're seeing I would say most of those are really have been kind of delayed.

Speaker Change: Out there customers still have these projects are on their roadmaps, There's oh you know.

Speaker Change: Our funnels and it's just a matter of timing before they pulled the trigger on they're going to need need our equipment for those things so nothing's been.

Speaker Change: I'd say mothballed or or canceled its just purely just the.

Richard N. Grant: And thanks for the questions there. So relative to capacity expansions and what we're seeing, I would say most of those really have been kind of delayed out there. Customers still have these projects on their roadmaps; they're still, you know, in our funnels. And it's just a matter of timing before they, you know, pull the trigger on whether they're going to need our equipment for those things. So nothing's being, I'd say, mothballed or canceled.

Speaker Change: Delay on getting Capex spending approvals there.

Richard N. Grant: It's just purely just the delay in getting CapEx spending approvals there. As we relate to new customers, this is something we've been driving across the businesses since I joined, aggressively going after new customers in the markets, going after existing customers, and getting more share of their wallets. And that continues throughout

Speaker Change: As we relate to new customers. This is something we've been driving across the businesses since I joined aggressively going after new customers in the markets going after our.

Speaker Change: Existing customers and getting more share of their wallets and that continues throughout and in fact.

Richard N. Grant: And in fact, you know, we've got an aggressive push to elevate activities in those areas, obviously in these slower times and go after competitive accounts in that. So the teams are laser focused on finding the opportunities and getting them closed out there. But we will continue to add new customers every quarter and are excited about the new customers we brought in with Alphamation and their customer base and trying to, you know, explore the larger portfolio of our solutions across that as well.

Speaker Change: We've got a.

Speaker Change: The aggressive push to elevate our activities in those areas obviously slower.

Speaker Change: Slower times and going after competitive accounts and that so.

Speaker Change: The teams are laser focused on finding the opportunities and getting them closed out there, but we will continue to add new customers every quarter.

Speaker Change: I'm excited about the new customers, we brought in with Alpha nation, and their customer base and trying to to.

Speaker Change: Yes.

Speaker Change: For the larger portfolio or a bar solutions across that as well.

Speaker Change: And.

Richard N. Grant: And then the last question you had asked me was on what we are doing relative to our investments in R&D. So innovation remains one of our core strategies, and we aren't slowing down in that area. In fact, pushing the teams to do more and try to speed up development around the new products. You know, kind of linked with that and new customers are pretty excited about the number of customers that are qualifying for the Scalex new vision camera that we did release last year. It takes time to design new cameras.

Speaker Change: And then the last question you had a comment was on what are we doing relative to our investments in R&D. So innovation remains one of our core strategies and we aren't slowing down in that area in fact, pushing the teams to do more.

Speaker Change: And try to speed up the development.

Speaker Change: And around the new products.

Speaker Change: You know kind of linked with that of new customers is pretty excited about the number of customers that are qualifying the scale ex new vision camera that we did.

Speaker Change: Release last year. It takes time to design in the new the new cameras and we know we've got a pipeline of opportunities there that should start start bearing fruit later in the year Likewise, the new bench top thermo stream that we launched at <unk>.

Richard N. Grant: And, you know, we've got a pipeline of opportunities there that should start bearing fruit later in the year. Likewise, the new benchtop thermostream that we launched at our ITS business in Mansfield, Massachusetts. Good excitement there was launched at a trade show out in California and over, you know, dozens of leads that came back specific to that product. So we're chasing those down. So, yeah, innovation is something we won't throttle back on. We believe it's going to create demand going forward for us.

Speaker Change: Our Ics business up in Mansfield, Massachusetts.

Speaker Change: Excitement there was the launch of.

Speaker Change: Trade show out in California.

Speaker Change: Over you know dozens of leads that came back specific around that product. So we're chasing those down. So yeah innovation is something we won't throttle back we believe it's going to create demand going forward for us.

Peter Wright: Thank you for that. If I could ask one kind of detail question, maybe more of a survey-ish type question, Duncan, if you look at kind of pricing and cost trends, is there, you know, looking at where we are in kind of the ebbs and flows of the inflation cycle, is anything getting notably more difficult or notably easier out there in managing margin?

Speaker Change: Thank you for that and if I could ask one kind of detailed question maybe more of a survey ish type question.

Speaker Change: Duncan.

Speaker Change: If you look at kind of pricing and cost trends is there you know looking at where we are in kind of the ebbs and flows of the inflation cycle is anything getting notably more difficult or notably easier out there and I mean.

Duncan: In managing margin.

Duncan Gilmour: I mean, it's all relative if you compare it to, say, a year and a half, two years ago when things were certainly a lot more volatile from a supply chain and inflationary perspective, then you know, the amplitude of that is certainly less. But it's a constant, I mean, the teams are constantly looking at it, we're constantly looking at that price versus cost equation, ensuring the teams are pricing appropriately and managing costs, managing supply chain costs, etc, etc. So the amplitude is more manageable, but it's an ongoing battle. And it should be so.

Duncan: I mean, it's all relative if you compare to a year and a half two years ago when.

Duncan: Certainly things are a lot more volatile from a supply chain inflationary perspective, then the amplitude of that is certainly less but it's a constant I mean the teams are constantly looking at say, we're constantly looking at that price versus cost equation, ensuring the teams of pricing appropriately and managing costs managing.

Duncan: Ah you're managing supply chain costs etcetera, etcetera. So the amplitude is more manageable, but it's an ongoing battle.

Duncan: Should be.

Unknown Speaker: Wonderful. Thank you very much. Thanks, Peter.

Speaker Change: Wonderful thank you very much.

Speaker Change: Thanks Peter.

Speaker Change: Okay.

Speaker Change: Thank you.

Operator: Ladies and gentlemen, if you wish to ask a question, please press star and 1. As there are no further questions, I would now hand the conference over to Nick Grant for his closing comments.

Speaker Change: Ladies and gentlemen, if you wish to ask a question Please press star and one.

Speaker Change: How is that there are no further questions I would now hand the conference.

Speaker Change: Nick for his closing comments.

Speaker Change: Thank you Ryan it's Nick we appreciate you don't I'm sorry.

Richard N. Grant: We appreciate you doing so.

Operator: I'm sorry, can you repeat that? I have a question from Peter Wright.

Nick Nick: Oh, I'm sorry I.

Nick Nick: I have to be.

Nick Nick: A question from Peter right.

Speaker Change: Oh, okay.

Peter Wright: I just repolled. One last one. Any update on the Malaysian facility that is noteworthy?

Speaker Change: I just report the.

Speaker Change: One last one last one any update on.

Speaker Change: The Malaysia facility that is noteworthy there.

Richard N. Grant: Yeah, no, we're moving full steam ahead there. I have been a little delayed in getting the final permits for that site, but we have proceeded with some of the build-out, you know, working with the architects and getting everything ordered, so we expect to have that final permit here any day, and then we'll pull the trigger out there. We have started hiring. We've got a handful of really talented individuals that we've hired on here.

Speaker Change: Yeah, No. We're are moving full steam ahead there.

Speaker Change: This has been a little delayed with getting the final permit and of that site, but we've have proceeded with the some of the build out.

Speaker Change: Working with the architects and getting everything ordered so we expect to have that final permit here you know any day and then we'll pull the trigger aren't there. We we have started hiring got a handful of.

Richard N. Grant: They'll be starting in the next couple weeks or a few weeks here. So excited about the progress on that site and the team's commitment to embrace it and really help further our position in Southeast Asia. Great, thanks.

Speaker Change: Really talented individuals' that we've we've hired on here there'll be starting in the next couple of weeks or a few weeks here. So excited about the progress.

Speaker Change: On on that site and the team's commitment to to embrace it in and really help further our position in southeast Asia.

Speaker Change: Great. Thank you so much.

Unknown Speaker: Thank you so much.

Speaker Change: Thanks Peter.

Speaker Change: Thank you.

Operator: Nick, there are no further questions in the queue.

Speaker Change: Like there are no further questions in the queue.

Speaker Change: Alright, Thanks, Brian.

Richard N. Grant: We appreciate you joining us today and welcome the opportunity to answer any further questions you may have. On slide 12, you can find the details regarding this call and a list of upcoming events that we will be participating in. I hope to have the chance to meet some of you at the conference. Thank you for participating, and have a great day.

Speaker Change: We appreciate you joining us today and welcome the opportunity to answer any further questions you may have.

Operator: Thank you. The conference of inTest Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.

On Slide 12, you can find the details regarding this call and a list of upcoming events that we will be participating in.

Hope to have the chance to meet some of you at the conferences.

Thank you for participating and have a great day.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: The conference of Intest Corporation has now concluded. Thank you for your participation you may now disconnect your lines.

Speaker Change: Yeah.

Speaker Change: [music].

Speaker Change: Yeah.

Speaker Change: [music].