Q3 2024 inTEST Corp Earnings Call
Ladies and gentlemen, greetings and welcome to the Index Corporation third quarter 2020, full financial results Conference call.
Speaker Change: At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
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Speaker Change: As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Sean Silva Investor Relations. Please go ahead.
Sean Silva: Good morning, everyone. We certainly appreciate your interest in Intest Corporation and thank you for sharing your time with us today.
Sean Silva: Joining me on our call are Nick Grant, our President and Chief Executive Officer, and Duncan Gilmore, Our Chief Financial Officer, and Treasurer, you shouldn't have the earnings release that went out this morning, as well as slides that will accompany our conversation today.
You can find these documents on the Investor Relations section of our website Intest Dot com.
Sean Silva: Please turn to slide two as I review, the Safe Harbor statement.
Sean Silva: 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.
Sean Silva: 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.
Sean Silva: These documents can be found on our website or at SEC Gov.
Also as covered on slide three management will refer to some non-GAAP financial measures.
Sean Silva: We believe these will be useful in evaluating our performance. However, 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.
Speaker Change: Now please turn to slide four Nick.
Speaker Change: Nick I'll turn the call over to you.
Nick Grant: Thank you Sean and good morning, everyone. Thanks for joining us for our third quarter 2024 earnings call.
Nick Grant: First I would like to thank the entire <unk> team for their continued efforts executing on our strategy.
Nick Grant: We're adding new customers, we continue to optimize our channels to market and we are driving innovation to differentiate our solutions.
Nick Grant: These efforts are helping offset some of the softness in a few of our key end markets.
Nick Grant: We are managing well through the current semiconductor cycle and benefiting more on our diversified markets, including automotive life Sciences, and consumer electronics, where positions were strengthened by the acquisition of Alpha nation.
Nick Grant: The integration continues to progress well as the teams are focused on driving product and technology synergies leveraging our supply chain to improve cost and performance as.
Nick Grant: As well as exploring opportunities across the broader customer base.
Nick Grant: A highlight in the quarter was achieving gross margin of 46, 3% on revenue of $30 million, which was impacted by $2 million in shipments being delayed into the fourth quarter.
Nick Grant: During the third quarter acclamation contributed $5 4 million in revenue.
Nick Grant: And same store diversified market showed strength, while semi revenue demonstrated improving trends in the backend.
Nick Grant: In fact sequential growth and backend semi outpaced the decline in front of it.
Nick Grant: The 570 basis points expansion in gross margin compared with Q2 was driven by favorable product mix improved volume from higher margin back in sandy and cost actions taken to adjust to market conditions.
Nick Grant: Our businesses have been aligning their cost structure with current market conditions through head count reductions less discretionary spending and in sourcing activities.
Nick Grant: Since the beginning of 2020 for head count in our base businesses has been reduced by 10%.
Nick Grant: Product mix and our cost management efforts are reflected in our sequential improvement in operating margin expanding 60 basis points and adjusted EBIT margin, improving 180 basis points.
Nick Grant: Turning to slide five I'll review orders in backlog.
Nick Grant: Orders have modestly improved through the year and the quarter orders in Q3 were 28 million, including $3 9 million from our formation strong.
Nick Grant: Stronger demand in auto EV defense aerospace industrial and other markets outweighed the weakness in semi.
Nick Grant: Encouragingly for the third consecutive quarter backend semi orders were up sequentially showing further signs of coming out of the trough. This improvement helped to offset the current path we're experiencing in front end semi.
Nick Grant: Backlog has improved over the prior year period, and was up $5 million recognizing the $14 7 million contribution from the acquisition of application, which had an elevated backlog at closing.
Nick Grant: As mentioned in the past Alpha missions orders can be lumpy as timing of their large multi system projects can vary quarter to quarter.
Nick Grant: Compared with the trailing quarter backlog declined as we worked down applications backlog.
Nick Grant: With that let me turn it over to Duncan to review the financials and outlook in more detail.
Speaker Change: Duncan over to you.
Duncan Gilmore: Thank you Nick.
Duncan Gilmore: <unk> on slide six as Nick noted revenue for the third quarter was 13 million, including $5 4 million from Alpha nation.
Duncan Gilmore: The point 7 million decrease compared with Q3 2023 was driven by a 7.1 million sales decline in semi that was partially offset by $4 5 million of growth and also E V primarily from al formation.
Duncan Gilmore: And improved sales in industrial and other markets.
Duncan Gilmore: Sequentially third quarter revenue decreased $3 7 million is approximately 2 million in shipments were delayed into the fourth quarter.
Duncan Gilmore: As we communicated last quarter was going to be the case revenue from Alpha nation was down compared with an unusually strong second quarter.
Duncan Gilmore: Meanwhile, semi industrial and other markets demonstrated improving trends.
Moving to slide seven.
Duncan Gilmore: Gross margin of 46, 3% for the quarter expanded 570 basis points sequentially, driven by favorable product mix with improved volume and higher margin backend semi solutions and cost actions as Nick noted.
On a year over year comparison gross margin was nominally unchanged on lower revenue.
Duncan Gilmore: On a trailing 12 months basis, our gross profit was $53 3 million or 43, 7% of sales.
Duncan Gilmore: The decline reflects the weakness in higher margin semi sales.
Duncan Gilmore: As you can see on slide eight compared with the prior year. Our operating expenses were up 1.5 million, reflecting the inclusion of Alpha nations operating expenses as partially offset by cost reductions and corporate development costs.
Duncan Gilmore: Sequentially operating expenses were essentially flat.
Duncan Gilmore: Turning to slide nine you can see our bottom line and adjusted EBITDA results for.
Duncan Gilmore: For the quarter Nate's earnings were 495000 or four cents per diluted share adjusted.
Adjusted net earnings were $1 2 million or 10 cents per diluted share.
Duncan Gilmore: Adjusted EPS reflects adding back tax effected acquired intangible amortization.
Duncan Gilmore: On an after tax basis, our acquired intangible amortization amounted to approximately 721000 or about six cents per diluted share in the third quarter.
Adjusted EBITDA for Q3 was $2 4 million, representing an 8.1% adjusted EBITDA margin.
Duncan Gilmore: Slide 10 shows our capital structure and cash flow.
Duncan Gilmore: During the quarter, we generated $4 2 million of operating cash capital expenditures in the third quarter were approximately 500000 and the resultant free cash flow was $3 7 million.
Duncan Gilmore: We ended the quarter with total debt of $16 1 million. This reflects a total debt leverage ratio of 1.8 X <unk>.
Duncan Gilmore: During the call what's out we repaid approximately $5 3 million of debt and repurchased approximately 141000 shares at an average price of $7 38 for a total investment of $1 million.
Cash and equivalents at the end of the third quarter were $18 million down 2 million from the trailing quarter, reflecting net debt repayment and repurchase shares.
Duncan Gilmore: We continue to have 30 million available with our delayed draw term loan and an incremental 10 million available under our revolver.
Duncan Gilmore: Turning to slide 11, as we review our outlook for 2024.
Duncan Gilmore: We have tightened our full year outlook and now expect 'twenty 'twenty for revenue to range from 128 to 131 million gross margin for 2024 is expected to be approximately 42% to 43% with expected operating expenses of approximately $53 million. This.
Duncan Gilmore: Includes intangible asset amortization expense of approximately $3 3 million or $2 7 million on a tax adjusted basis.
Duncan Gilmore: The expected effective tax rate remains at about 17% to 19%.
Duncan Gilmore: The implied fourth quarter results from the tightened guidance implies revenue of 34 to 37 million with gross margins of approximately 42%.
Duncan Gilmore: Operating expenses, including amortization are expected to be approximately $13 5 million.
Duncan Gilmore: Total intangible asset amortization is expected to be approximately 900000, and approximately 700000 after tax or about six cents per share.
Duncan Gilmore: Based on the midpoint of our revenue guidance range, we had expected EPS and adjusted EPS for the fourth quarter to be approximately eight cents and 14th cents respectively. As a reminder, we simply adjust for tax effected amortization expense.
Duncan Gilmore: We still expect our capital expenditures in 2020 for it to run between 1% to 2% of sales.
Duncan Gilmore: 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'll turn to slide 12, I will now turn the call back over to Nick.
Nick Grant: Thanks Duncan.
Nick Grant: While we have limited visibility beyond the fourth quarter. We believe we are seeing signs of stability in our targeted industries.
Nick Grant: The order pipeline has increased reflecting some gradual improvement with backend semi demand and larger automotive projects.
Nick Grant: We believe once we are past the elections and moving into the new year Capex projects will likely increase across a number of industries.
Nick Grant: The front end semi market, which for us are silicon carbide and gallium nitride applications is currently paused.
While the longer term picture for these power semiconductor materials is encouraging there is a need for the market to improve efficiencies with existing production lines consume existing inventory and adapt to the changes in EV demand.
Nick Grant: We are especially excited about the evolving gallium nitride opportunity is that technology delivers higher efficiency in many high power applications.
Nick Grant: We continue to optimize our go to market by adding or upgrading channel partners that can drive higher sales, while expanding our geographic coverage throughout the U S and around the world.
Nick Grant: In Southeast Asia, our new Malaysia facility is coming along nicely and we're already seeing the benefits from the engineers we have hired.
Nick Grant: In fact, our environmental Technologies Division has recently received their first order for a new product that was designed by their team in Penang.
Nick Grant: This modified thermal test solution was something that was on our new product roadmap for some time, but until now we did not have the bandwidth to complete it.
Nick Grant: It's great to see the team members, making an impact in their first few months of being on board.
Nick Grant: Look forward to many more future successes from the team.
Nick Grant: As noted in our five point strategy innovation is one of the keys to our success.
Nick Grant: And our electronic test division, our automated manipulator with our <unk> solution was recently installed at a key customer in Europe as an integrated solution that we expect could lead to many future opportunities.
Nick Grant: In addition, our automated manipulator has been coupled with the latest test technology and is in the test phase at a large intelligent computing company.
Nick Grant: And the initial feedback is very positive.
Nick Grant: It's our know how and expertise that differentiates us and opens up these type of competitive displacement opportunities.
Our process technologies Eco heat two induction heating system is being leveraged in Nextgen solutions for a number of key customers with its industry, leading internal control and power delivery system, which by the way he leverages silicon carbide technology, our eco heat too can lower system.
Nick Grant: Operating costs for <unk>.
Nick Grant: Five increased uptime and have built in performance diagnostics for asset health monitoring.
Nick Grant: Despite the headwinds we are experiencing in some of our key markets. We are not sitting still we are driving innovation. We are constantly working to optimize our go to market approach. We are capturing price for our value added solutions and we continue to evaluate acquisitions that can complement or enhance.
Nick Grant: Our existing technologies.
Nick Grant: In short we are executing on our strategy.
Nick Grant: With that operator, let's open the line for questions.
Nick Grant: Thank you.
Speaker Change: Ladies and gentlemen, we will now be conducting a question and answer session.
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Speaker Change: Ladies and gentlemen, we will wait for the moment, while we poll for questions.
Speaker Change: The first question is from the line of Jason Smith with Lake Street. Please go ahead.
Jason Smith: Hey, guys. Thanks for taking my questions I just wanted to start on the order push outs you highlighted curious if those are concentrated at a couple of customers or if it is just more broad based and then I guess relatedly what end market is that related to.
Yeah.
Speaker Change: Yeah, Good morning, Jason So.
Speaker Change: Roughly $2 million that we referenced and pushed out from Q3 to Q4 really were shipment.
Delays that didnt reach the customer by the end of Q3 and basically arrived in early Q4 out there so.
Speaker Change: So that's roughly the $2 million that we referenced there with that said you know we have seen customers push out art that front end semi we continue to work with customers in that space on on shipments.
Speaker Change: Shipments that they placed orders we've had in our backlog for a while on that so just a calming accommodating them there.
Speaker Change: More so on the front end side.
Gotcha, and then related to the front end semi market I know a high level. There are some kind of longer term tail wins, but just curious how you guys are thinking about when to expect a pick up there or its just visibility to cloud it at this point.
Speaker Change: Yeah, you know what we're hearing from our customers and I'm actually working with a number of them on their next gen.
Speaker Change: Solutions there.
Speaker Change: Is that they are anticipating second.
Speaker Change: Second half of 2025 is when.
Speaker Change: Deliveries additional deliveries would be needed at this stage, obviously that can change, but that's kind of the timeline, we're hearing from them from multiple customers in that space.
Speaker Change: Okay.
Speaker Change: Okay. That's really helpful. And then just the last one for me and I'll jump back into queue. I mean really nice gross margin performance I know you highlighted sort of the headcount reductions and so are you, saying in some just improved they shouldn't sees just curious how much of this could potentially be permanent it have you.
Speaker Change: I mean, when the demand profile picks back up is the story there.
Speaker Change: A new level for gross margin.
Speaker Change: Yeah, I mean, it's tough to break down all the elements, Jason as you know mix certainly the biggest driver of that very strong gross margin, but we also see the benefit of the cost initiatives that Nick highlighted.
I mean, very roughly but it is hard to discern there's probably about a percentage point of benefit from from cost actions and things like that flowing through that number.
Speaker Change: With the majority of the uptake being being the mix factor with the higher backend semi that we highlighted.
Jason: Okay No I appreciate that color. Thanks, a lot guys.
Speaker Change: Thanks, Jason.
Speaker Change: Thank you. The next question is from Ted Jackson with Northland Securities. Please go ahead.
Ted Jackson: Hi, Good morning, I've only got a couple of questions actually a couple of mine were hit just now.
Ted Jackson: First of all just when you made a comment about the head count reduction being down 10% in your base businesses.
Ted Jackson: Can you just define what the base businesses are.
Ted Jackson: Yes.
Speaker Change: Our collective companies outside of affirmation at this stage, they're all part of our base business is now some of those.
Ted Jackson: Five companies.
Ted Jackson: Our not being impacted severely as the other so I would say you know collectively at 10% there, but it's more weighted towards businesses that are seeing the downturn in the front end semi space and and.
Ted Jackson: The more industrial slowdowns that we've seen taken some actions.
Speaker Change: Okay, and then with the reduction like that how do we see that playing through into the financials I mean, we get it now.
Speaker Change: I haven't gone through and we've really dug in to try to put my fourth quarter together again, so maybe I mean I assume we'll see some of this in the fourth quarter does it play out.
Speaker Change: Like almost immediately so it's something that we'll see.
Speaker Change: Additional.
Speaker Change: Impact as we get into the first quarter of 'twenty five colored athletes.
Speaker Change: And just to provide a bit more clarity last quarter, we talked about.
Speaker Change: More specific action of a $1 2 million of annualized benefit around 12, Hey, Kevin I think we referenced which took place towards the end of last quarter are starting to flow through this quarter and an ongoing a little bit of severance for example associated with that you're relatively minor ACH in the total.
Speaker Change: The next referring to is really over the course of the last nine nine months or so as demand has softened and a number of businesses involved as we adjusted direct labor.
Speaker Change: Operational expenses, you'll as we've seen that demand soften it hasn't really been one one auction per se. It's been it's been an activity that's been occurring over the course of the light last nine months and when we when we look back we have reduced head count in the base businesses as we mentioned by that that 10.
Speaker Change: But it's been a gradual process that we've been seeing those benefits.
Speaker Change: Slowly creep through the numbers so to speak we're certainly seeing here in Q3 with the margin being.
Speaker Change: They being strong.
Speaker Change: The impact of that and we'll continue to see that going forward I would reemphasize, though a lot of that margin uptick is driven by what was a favorable mix in Q3 verses very unfavorable mix in Q2 as a comparison.
Speaker Change: Okay.
Speaker Change: My next question, just maybe Friday, they've had on back just maybe a little more color around the back end I mean, you commented for.
Speaker Change: Several months I guess at this point that you have seen the back and stabilize and improve and maybe some color in terms of when you look at that business and the.
Speaker Change: The.
Speaker Change: Incremental strength that youre seeing in it is there anything to note in terms of kind of end market strengthening or is it.
Speaker Change: Geography underlying drivers like re shoring you see them going just anything thematic within.
Speaker Change: What's happening in that business, which we're calling them.
Speaker Change: Oh, you know I I nothing in particular, I would say worth calling out is the gradual improvement its not like it.
Speaker Change: An L shaped, but taken off if you will but we are seeing more and more.
Speaker Change: For quotes our pipelines are growing.
Speaker Change: You know some projects capex projects are signaling to be cut off I mean, they kicked off here.
Speaker Change: Very soon so yeah, we feel pretty good about that back in showings that gradual improvement now.
Speaker Change: On the flip side the front end is a first for us.
Speaker Change: Very anemic right now.
Speaker Change: Yeah.
Speaker Change: No well you know hopefully that will turn around in the near in the near future for you to laugh.
Speaker Change: Last question just more of just kind of a thematic kind of color of thing just talk a bit about alpha nation to kind of help everyone, including myself understand it better.
Speaker Change: It's still a good chunk of your backlog you're working through it I know, it's a business that has a lot of exposure within the auto.
Speaker Change: World and that what happens within that is tied to your kind of new models model refreshes of cars and stuff and I was wondering if you could maybe provide a little kind of color in terms of <unk>.
Speaker Change: Where we are in terms of some of the cycles.
Speaker Change: That impact alpha nation's revenue growth like is there.
Speaker Change: There anything in terms of some model releases that you all are excited about it.
Speaker Change: Or is it.
Speaker Change: You kind of get where I'm going with this just like is there is there anything to hang up.
Speaker Change: I hope to hang our hat on in terms of you know like this that we should start we should be thinking about like a.
Speaker Change: New model refresh or a new design win within a particular vertical or you know I mean, it could even be getting into like commercial heavy equipment as they start automating it and there's more electronics going into it but just maybe just sketch out some themes that drive the growth of that business and that's it for me.
Speaker Change: Yeah sure. So very excited still you know they have affirmation part of the Intest family here.
Speaker Change: The majority of their testers.
Speaker Change: Go into automotive.
Speaker Change: Automotive industry kind of doing a little bit of a reshuffling. The last couple of quarters here as you know evs.
Speaker Change: Models kind of being slowed and moving more towards the IC hybrid type.
Speaker Change: The vehicles and but for affirmation, it's agnostic for them, it's just a matter of which programs go forward.
Speaker Change: On that so.
Speaker Change: Bridging is the the pipelines at Al formation.
Speaker Change: It really seeing some nice pickup on projects, there and and this this whole shift around.
Speaker Change:
Speaker Change: Puting and vehicles.
Speaker Change: On board computing systems, moving more to a centralized computing system versus.
Speaker Change: No.
Speaker Change: These computers within the different.
Speaker Change: Infotainment systems or what have you, having one managing the entire car is there.
Speaker Change: Design ships that are infrastructure shift that.
Speaker Change: Is kind of underway across numerous Oems out there, which is good for us and.
Speaker Change: It will require new testers for around these onboard computing systems as well as.
Speaker Change: The changes in the electronics that are being managed well.
Speaker Change: We'll also require trained testers.
Speaker Change: Testers to monitor them and evaluate quality so yeah.
Speaker Change: There's a lot going on in cars I think everyone's well aware of that and then new check new features.
Speaker Change: And so there's a lot of testing opportunities for us and so we feel very positive about the future for Alf Imation.
Speaker Change: Timing wise as we pointed on orders can be lumpy.
Speaker Change: Okay. Thanks, very much guys have great day.
Hey, Thanks Ted.
Speaker Change: Okay.
Speaker Change: Thank you.
A reminder to all participants that you May press star one to ask question.
Speaker Change: Ladies and gentlemen, you May press star one to ask a question.
Speaker Change: As there are no further questions I would now like to hand, the conference over to Nick Grant for closing comments.
Nick Grant: Thank you Zico.
Nick Grant: We appreciate everyone joining us today and thank you for your time and we welcome the opportunity to answer any further questions you may have.
Nick Grant: On Slide 13, you can find the details regarding the replay of this call and a list of upcoming events, we'll be participating in.
Nick Grant: I hope to have a chance to see some of you at an upcoming conference. Thanks.
Nick Grant: Thanks, again for participating and have a nice day.
Speaker Change: Thank you. This concludes today's teleconference. You may disconnect your lines at this time.
Speaker Change: Thank you for your participation.
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