inTEST Corporation
Q1 2020 Earnings Call Transcript

Published: 9 May 2020

[Operator:]

Welcome to inTEST Corporation's 2020 First Quarter Financial Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today. A replay will be at www.intest.com.I will now turn the call over to InTEST Investor Relations Consultant, Laura Guerrant. Please go ahead.

[Laura Guerrant:]

Thank you, Matt and thank you for joining us for inTEST's 2020 first quarter financial results conference call. With us today are Jim Pelrin, inTEST's President and CEO; and Hugh Regan, Treasurer and Chief Financial Officer.Jim will briefly review the quarter's highlights as well as current business trends. Hugh will then review inTEST's detailed financial results for the quarter and discuss guidance for the 2020 second quarter. We'll then have time for any questions.If you have not yet received a copy of today's release, a copy can be obtained on inTEST's website, www.intest.com. In addition to our press release, we have issued supplemental information in advance of this call, which can be downloaded from our website on the Investor Relations page.The supplemental information is offered to provide shareholders and analysts with additional time and detail for analyzing our results in advance of the company's quarterly results conference call.Before we begin the formal remarks, the company's attorneys advise that this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.These statements do not convey historical information, but relate to predicted or potential future events that are based upon management's current expectations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.In addition to the factors mentioned in our press release, such risks and uncertainties include, but are not limited to, the impact of the COVID-19 pandemic on our business, liquidity, financial condition and results of operations, including as a result of evolving public health requirements in response to the pandemic, such as government mandated facility closures, availability of employees, supply chain and distribution constraints, customers inability or refusal to accept product deliveries and the sufficiency of our current level of working capital to address the impact of the pandemic.Indications of a change in the market cycles in the semi market or other markets we serve, including as a result of the COVID-19 pandemic; changes in business conditions and general economic conditions, both domestically and globally, as a result of the COVID-19 pandemic; changes in the demand of semiconductors, generally and as a result of the COVID-19 pandemic; the success of our strategy to diversify our business by entering markets outside the semi market; the possibility of future acquisitions or dispositions and the successful integration of any acquired operations; the ability to borrow funds or raise capital to finance major potential acquisitions; changes in the rates of, and timing of capital expenditures by our customers, including as a result of the COVID-19 pandemic; progress of product development programs; increases in raw material and fabrication costs associated with our products, including as a result of the COVID-19 pandemic; and other risk factors set forth from time to time in our SEC filings, including, but not limited to, our periodic reports on Form 10-K and Form 10-Q.Any forward-looking statements made by inTEST during this conference call is based only on information currently available to inTEST and speaks to circumstances only as of the date, on which it is made.inTEST undertakes no obligation to update the information in this conference call to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated or unanticipated events.During today's call, we will make reference to non-GAAP financial measures. We have provided additional information concerning these non-GAAP measures, including a reconciliation to the directly comparable GAAP measure in our press release, which is posted on the Investor page of our website.And with that, let me now turn the call over to Jim Pelrin. Please go ahead, Jim.

[Jim Pelrin:]

Thank you, Laura. Good morning to those joining us on today's conference call and also those listening online. We appreciate your interest in inTEST, and I hope all of you and your families are safe and healthy.Before I discuss our financial results, I'd like to say a few words about the coronavirus and our response to this global pandemic. The impact of COVID-19 on our country, industries and most importantly, people, has been dramatic. And I want to thank and commend all inTEST employees, customers and supply chain partners who have helped keep our business operating during these challenging times and to express our heartfelt concern to all those who have been affected.As we navigate the COVID-19 pandemic and recovery, inTEST is focused and aligned on three top priorities

[Hugh Regan:]

Thanks Jim. As we noted earlier, our first quarter net revenue was at the lower end of our guidance range and came in at $11.2 million, down 18% sequentially. First quarter gross margin of 43% was also at the lower end of our guidance range and was down from 48% gross margin we reported for the fourth quarter, reflecting a less favorable absorption of fixed production costs and reduced revenue levels, which was partially offset by improved component material costs, which declined from 31.5% in Q4 to 30.3% in Q1.Selling expense grew by 5% sequentially to $2.1 million for the first quarter, driven by increased compensation expense and commission, partially offset by reduced advertising and warranty costs.The higher sales commission expense was primarily driven by seasonal-related increases as well as new sales staff added in the first quarter and the increased commission expense was the result of an expansion of Ambrell's sales representative network.Engineering and product development expense increased 7% sequentially to $1.3 million, primarily as a result of seasonal-related increased compensation expense, partially offset by decreased patent legal costs.General and administrative expense grew 7% sequentially to $2.9 million, driven by increased professional fees and seasonal-related compensation expense, partially offset by reductions in stock-based compensation expense and travel.Our loss for the first quarter drove our accrual of $250,000 income tax benefit, which reflected an effective tax rate of 18%. This compares to a $76,000 income tax benefit booked in the fourth quarter, which reflected an effective tax rate of minus 12%.The income tax benefit booked in the fourth quarter was the result of reconciling the impact of the foreign-derived income -- intangible income deduction allowed under the new income tax law, which benefits companies that manufacture in the U.S. and have significant overseas sales as well as a book to tax return adjustment.We now expect that our effective tax rate will range from 16% to 17% throughout the balance of 2020 and that the higher effective tax rate in the first quarter was driven by an additional book to tax return adjustment.For the quarter, we reported a net loss of $1.1 million or $0.11 per diluted share, compared to net earnings of $724,000 or $0.07 per diluted share for the fourth quarter. Diluted average shares outstanding were $10.2 million for the first quarter of 2020.During the first quarter, we issued 58,160 shares of restricted stock and repurchased 13,767 shares under our stock repurchase plan, which commenced on September 18th, 2019.In response to concerns over COVID-19, we suspended our stock repurchase plan on March 3rd, 2020, and through the state, we had repurchased 243,075 shares at a total cost of $1.2 million.EBITDA was a negative $927,000 for the first quarter compared to $1.1 million for the fourth quarter. Consolidated headcount at March 31st was 205, a reduction of one from the level we had at December 31st.I'll now turn to our balance sheet. Cash and cash equivalents declined by $294,000 sequentially to $7.3 million, and cash flow used in operations was $119,000 for the first quarter. The decrease in cash was primarily driven by our operating loss in the first quarter. We currently expect cash and cash equivalents to increase throughout 2020 and as of today, cash stands at $6.9 million.Accounts receivable decreased $1.2 million during the first quarter and was at $8.1 million at March 31st with 65 DSO, up from 63 at December 31st. Inventories increased $538,000 or 8% sequentially and was primarily driven -- the increase was primarily driven by the aforementioned customer shipment delays caused by COVID-19.Our backlog at the end of March was $8.1 million, up from $5.5 million at December 31st, reflecting the growth in orders in the first quarter. As to guidance, as noted in our earnings release, we continue to see uncertainty with regard to our customers' ordering patterns stemming from responses to the coronavirus pandemic, which we are closely monitoring.Accordingly, we are providing a wider than usual guidance range and expect that net revenues for the second quarter ending June 30th, 2020 will be in the range of $11.5 million to $13 million and that our financial results will range from a net loss per diluted share of $0.09 to breakeven.On a GAAP basis, our financial results will range from an adjusted net loss per share of $0.06 to net earnings of $0.03 and we currently expect our gross margin for the second quarter will range from 44% to 46%.Operator, that concludes our formal remarks. We can now take questions.

[Operator:]

Thank you. [Operator Instructions]Our first question will come from Jaeson Schmidt with Lake Street.

[Jaeson Schmidt:]

Hey guys. Thanks for taking my questions. I just want to start with, saying, if you could provide some color on what you saw from an order momentum standpoint and linearity of orders in April and now sort of in the first part of May?

[Hugh Regan:]

Yes, Jaeson. Orders were, for the quarter, I wouldn't call it linear, we actually saw a bit of a peak in the middle of the quarter, this particular quarter, on a consolidated basis.Within the business units, though, we did see some different activity, for instance, EMS had a more backend loaded quarter, while iTS and Ambrell had a quarter that was more evenly spaced. But on a consolidated basis, if you've looked at the bookings pattern, it was $4.2 million, $5.2 million and then $4.4 million on a monthly basis.

[Jaeson Schmidt:]

Okay, that's helpful. And then I apologize if I missed it, but are you guys seeing any component shortages or supply constraints anywhere?

[Hugh Regan:]

No, it's a matter of -- well, as Jim mentioned -- my apologies.

[Jim Pelrin:]

Yes, Jaeson, I'll be happy to answer that. We have -- we had some components that we were sourcing from China, in particular, and back when -- in the January, February time frame when the COVID-19 erupted in China, we quickly changed to non-Chinese sources for those components. So, there was a slight delay for a short period of time, but everything is pretty much normal now.

[Jaeson Schmidt:]

Okay. And then the final one for me, and I'll jump back into queue. Are you seeing any significant pushback from customers from a pricing standpoint, just given the current macro backdrop?

[Jim Pelrin:]

No, we're not, actually. That has not been an issue. We've had some customers we haven't been able to ship to at the end of the quarter, as we noted, because they -- their facilities were closed due to the corona issue. But no, we haven't seen any pushback on pricing. We haven't seen anyone asking for a special pricing or -- anywhere in any of our businesses that I'm aware of.

[Jaeson Schmidt:]

Okay, that's helpful. Thanks a lot guys.

[Jim Pelrin:]

Thank you.

[Hugh Regan:]

Thank you, Jaeson.

[Operator:]

And our next question will come from Theodore O'Neill with Litchfield Hills Research.

[Theodore O'Neill:]

Thanks. Good morning. Follow-up to Jason's question here. When you switch to a supplier that was not Chinese, did the -- I assume the costs went up somewhat.And second question is, Hugh, you mentioned that you had lower advertising costs in the quarter. Is that a change in strategy or a COVID-related reduction in things like conferences?

[Jim Pelrin:]

Well, I'll answer the first part. As far as increased costs, yes, there was a small incremental increase in costs, but these components are a very small percentage of the cost of the product. So, it's really -- it's in the mud even on a gross margin basis.

[Hugh Regan:]

And Peter, the second part of your question was related to G&A. I apologize it cut off, and I didn't hear it exactly.

[Theodore O'Neill:]

Sorry. You mentioned that you had lower advertising costs in the quarter. And I was wondering if that a change in the strategy or COVID-related reduction in things like conferences.

[Hugh Regan:]

It's really a COVID-related strategy and reduction to conferences. We continue to move forward with our traditional marketing methods, but things such as conferences and another area, quite frankly, that's off materially is -- and will start showing up and our explanations is travel simply at this point because we can't jump on planes.There wasn't as much of that scheduled in the first quarter, but a very significant of that is scheduled obviously in Q2 and at what point we'll be able to get back to that is unclear.

[Theodore O'Neill:]

Thanks very much.

[Hugh Regan:]

You're welcome.

[Operator:]

And our next question will come from Dick Ryan with Dougherty & Company.

[Dick Ryan:]

Thank you. Jim, on the wider guidance for Q2, how are you handicapping your two divisions, Multi Market and semi? What are your kind of puts and takes on guidance for those segments for Q2?

[Jim Pelrin:]

Well, Dick, let me answer that more generally and say that we've gone into Q2 with a much stronger backlog and that has given us confidence in our guidance. And the backlog is across the board in both semi and Multi Market.

[Dick Ryan:]

I think you said you had some delays in shipments in EMS. Is that -- so how should that backlog flow into Q2? How much will ship in Q2?

[Jim Pelrin:]

Just about everything that was delayed because of coronavirus has already shipped, in fact. I think there's one or two orders that are still pending. So, I would expect that all of the delayed orders will ship in Q2.

[Dick Ryan:]

Okay. The new Fremont facility, what markets are you kind of keying off of that new opening?

[Jim Pelrin:]

Well, there's a tremendous amount of industry, as you know, on the West Coast, in general, but we also happen to be right down the street from one of the major EV manufacturers, and that doesn't hurt, which has been quite active building two new factories.

[Dick Ryan:]

And how are you staffing? What's your headcount going to be over there?

[Jim Pelrin:]

Well, it's -- right now, it's staffed with a single body, which is more than adequate because it's supported also from our Rochester, New York facility. But particularly, in this time, where travel is restricted to wherever you can drive to, it's -- this is an important tool for us.

[Dick Ryan:]

Okay. So, Hugh, did you say you amended the credit facility or what -- can you refresh me on what availability you have?

[Hugh Regan:]

We have $7.5 million available under the credit facility. As Jim mentioned, we did repay the $2.8 million in PPP loans that we had borrowed as a result of changes in the treasury department's guidance on those loans.

[Dick Ryan:]

Okay. Thank you.

[Hugh Regan:]

You're welcome.

[Operator:]

[Operator Instructions]And with no further questions, I'd like to turn the call back over to Mr. Pelrin for any closing remarks.

[Jim Pelrin:]

Well, thank you for your interest in inTEST, everyone. We appreciate your listening in. If you have further questions, don't hesitate to call me, Hugh, or Laura. We look forward to updating you on our progress when we will report our results for the second quarter. Everyone, please stay safe and healthy. Thank you.

[Operator:]

Once again, that does conclude our call for today. Thank you for your participation. You may now disconnect.