inTEST Corporation
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Welcome to inTEST Corporation’s 2015 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. A replay will be accessible at www.intest.com. I would now like to turn the call over to Hugh Regan, inTEST’s Chief Financial Officer.

[Hugh Regan:]

Thank you, operator and thank you for joining us for inTEST’s 2015 second quarter financial results conference call. Joining me on the call today are Robert Matthiessen, President and CEO; Jim Pelrin, Vice President and General Manager of inTEST’s Thermal Products segment; and Dan Graham, Senior Vice President and General Manager of inTEST’s Electrical and Mechanical Products segments. Bob will briefly review highlights from the second quarter as well as current business trends. And then I will review inTEST’s detailed financial results and then provide guidance for the third quarter of 2015. We will then have time for any questions. If you have not yet received a copy of today’s release, a copy may be obtained on our website, www.intest.com. 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 and could cause actual results to differ materially from those expressed or implied in such statements. Such risks and uncertainties include, but are not limited to changes in business conditions in the economy, changes in the demand for semiconductors, changes in the rates of and timing of capital expenditures by semiconductor manufacturers, the success of our strategy to diversify our business by entering markets outside the semiconductor or ATE markets, progress of product development programs, increases in raw material and fabrication costs associated with our products and other risk factors set forth from time-to-time in the company’s SEC filings, including, but not limited to, inTEST’s periodic reports on Form 10-K and Form 10-Q. The company undertakes no obligation to update this information on today’s call with respect to events or circumstances after the date hereof or to reflect the occurrence of anticipated or unanticipated events. And with that, let me now turn the call over to Bob Matthiessen. Please go ahead, Bob.

[Robert Matthiessen:]

Thanks, Hugh. I would like to welcome everyone to our 2015 second quarter conference call. Well, Hugh will review the financial results in detail as he just said, I will review some of the highlights and then we will discuss our markets and what we are seeing in our customer base. We delivered another strong quarter increasing nearly all metrics and driven predominantly by strength in the telecom industry, where we are making head roads with a number of customers as well as the auto and industrial segments. On a sequential basis, second quarter net revenues increased by 14% and exceeded guidance. Second quarter gross margin grew by 19%, while net earnings substantially increased by 147%. Net earnings per diluted share grew by $0.06, making inTEST – marking inTEST’s 23rd consecutive quarter of profitability. Our Thermal Products segment is our largest, most profitable and diversified division and is providing inTEST with growth opportunities in the future. Through the strategic diversification of our Thermal Products segment, we are creating new opportunities in industrial testing and broadening of end market penetration. Our solutions are highly engineered and application-specific and often create or operate in extreme temperature environments. These thermal test systems are highly customizable and can be readily adapted not only to our traditional semiconductor market, but also to electronics test applications in various growth markets, including automotive, consumer electronics, defense, aerospace, energy, industrial, and telecommunications. Thermal segment bookings for the second quarter were $6.1 million compared with first quarter bookings of $6.4 million. Second quarter Thermal segment revenues were $6.7 million compared with first quarter Thermal segment revenues of $5.7 million. Revenue has trended up with non-semi improving. Semi declined in the quarter consistent with the industry. Semi is of course cyclical and variable with up-cycles balanced against down-cycles and forward-looking can be murky at times. And while it’s declined, it can reverse quickly at any moment as anyone in this industry already knows. We are at one of those frustrating points, where we just can’t see what is on the horizon. We do not believe that we have lost market share. It’s more that the customers that we typically serve that put a damper on ordering. So, it isn’t a manner – a matter in which we have lost to competitors rather the order pattern has changed over time and the size of the orders has diminished. In mil/aero, overall bookings were down slightly in Q2 compared to Q1. Q1 actually benefited from a single large order for our proprietary defense product from a customer that periodically gives us very large orders though additional orders are not expected this year. If we exclude this Q1 order, we have actually had an increase in mil/aero bookings in Q2. North American bookings are also attributable to industrial and the internet of things. In Europe, we have delivered six air chiller systems to the system integrator for automotive radar testing. Of note is the fact that in June 2015, our German operations achieved an all-time high monthly revenue of €365,000. And in Asia, telecom is up after having slowed down somewhat in the previous quarter. Although the big players in telecom are still not buying much, we have now gained a number of new accounts among the smaller manufacturers from which we are gardening bookings and revenues. This accounted for heavy telecom bookings in June, including multiple system orders from four Chinese telecom manufacturers. In chillers, we successfully installed and received factor buy-off of 2, 3 kilowatt chillers at a major energy customer. These chillers were actually shifted in Q4 of 2014, but not installed until Q2 of 2015 due to the customers’ construction delays. We have increased spending on product development in the thermal product group and recently introduced two new products that were very well received at SEMICON West, one for the semi-market and the other for semi and electronics tests. We introduced a pair of bench-top systems for temperature testing ICs, including high watt emitting devices. For the launch of the ThermoSpot bench-top product line broadens the temperature forcing solutions available for semiconductor testing from Temptronic. IC developers now have the option to test ICs with an efficient direct contact method in addition to the widely used ThermoStream systems that can generate extreme temperatures very quickly. In addition, we introduced an environmentally friendly series of Temptronic ThermoStream temperature forcing systems that use one-third less energy than the standard models and with very low audible noise. These portable systems are ideal for temperature test in a lab environment. Moreover, these systems provide remote communications and setup, touch-screen operation and a wide reaching thermal head for easy positioning over the test device. Turning to the Mechanical Products segment, second quarter Mechanical Product bookings were $1.9 million compared with first quarter bookings of $2.5 million. Bookings slowed down in the second half of Q2, which is attributable to a slowdown in our largest customer for docking components. Mechanical sales for the second quarter were $2.5 million compared with $2.4 million for the first quarter. During Q1, we won new business with a domestic IDM for test cells for their ETS 800 tester. We were actually in direct competition with the tester manufacturer for that sale. The first manipulator, docking and interface were successfully installed during Q2 for this new tester. Also National Instruments has entered the tester business and we installed our first Cobalt 250 for this new tester in Asia. And additionally, we are developing a new manipulator in the 400 kilogram case – class for which we will have improved capability to handle variable loads over our counterbalanced units. Now, let me turn to our Electrical segment, which is doing quite well. Overall, Electrical had a good quarter with both bookings and revenues above forecast. Q2 bookings were $2.3 million compared with first quarter bookings of $2.5 million. Q2 electrical revenues were $2.4 million compared with Q1 bookings of $2.0 million. It bears noting as always that the sales cycle in the Electrical division is a lengthy one, upwards to a year and a half and we are seeing the benefit of the considerable effort and infrastructure we put in place a few years ago. Some of these products continue to ship and we would expect to see continued improvements in Electrical. Several highlights for the quarter included the fact that the booking of a significant new project for development of very high-frequency interface for probe test of automobile radar chips. We have also been using our proprietary links tester that we have developed recently to offer refurbishment for interfaces for our own and competitor’s units. We delivered the first of a new interface to a major domestic IDM for use with their Teradyne J750HD test system. In the first 440-millimeter influx interface sold, we have previously concentrated on 300-millimeter. We shipped 10 interfaces to a major domestic IDM for use by their optical test group. And our inFLEX wafer probe or interface is for a major family of testers, the Teradyne FLEX series continue to sell well. And we continue to develop a new piece of equipment to measure probe card deflection under load that would occur at an actual probe or while testing wafers. So, the overall outlook continues to improve for electrical and orders have continued strong into Q3 of 2015. Before I turn the call back over to Hugh, let me wrap up. In summary, our operating results reinforced the strength of our business model, which is centered on our core market in semiconductor ATE complemented by an expanded product offering for nontraditional electronic markets that require thermal testing. Our long-term objective is to grow and transform inTEST into a broad-based thermal test solutions company, while continuing to supply our valued customers in the semiconductor test arena. Leveraging the strength of our semiconductor business, we have increased our footprint with the evolution of our non-semi thermal test solutions and we offer a comprehensive product portfolio capable of addressing growth markets in both the semiconductor and non-semiconductor sectors including automotive, consumer electronics, defense/aerospace, energy, industrial and communications. We aim to be recognized authority on extreme temperature environments and provide highly engineered application-specific thermal solutions with timely delivery, superior quality and reliability. And we believe the conditions for our long-term success remain firmly in place. With that, I would like to turn the call back over to Hugh.

[Hugh Regan:]

Thanks Bob. Second quarter 2015 end user net revenues were $10.8 million or 93% of net revenues compared to $9.4 million or 92% of net revenues in the first quarter. OEM net revenues were $839,000 or 7% of net revenues, up from $793,000 or 6% for the first quarter of 2015. Net revenues from markets outside of semiconductor tests were $3 million or 26% of net revenues compared with $1.8 million or 18% of net revenues in the first quarter. The company’s gross margin for the second quarter was $5.8 million or 51% as compared with $4.9 million or 48% in the first quarter. The improvement in the gross margin was the result of better absorption of our fixed manufacturing costs, which were unchanged at $1.5 million, but as a percentage of revenues, declined from 15% in Q1 to 13% in Q2. Also contributing to the improvement was a slight reduction in our consolidated component material costs which declined from 33.8% in the first quarter to 33.6% in the second quarter. While our consolidated component material costs remained stable sequentially, we saw both increases and decreases within our product segments. Our Thermal Products segment saw a small sequential increase in its component material costs, growing from 28.5% in Q1 to 29.2% in Q2, while the increase in our consolidated component material costs in our Electrical Products segment increased from 2.3% – increased 2.3% from 34.3% in Q1 to 36.6% in Q2. These were fully offset by a reduction of 2.9% and the costs of our Mechanical Products segment, which declined from 44.9% in Q1 to 42% in Q2. The changes in component material costs were driven by changes in both product and customer mix. Selling expense was $1.6 million for the second quarter compared to $1.5 million for the first quarter, an increase of $105,000 or 7% sequentially. The increase was primarily due to increased travel expenses during the second quarter. In addition, there were increases in both sales commission expense and advertising costs. Engineering and product development expense was $1 million for Q2 compared to $942,000 for Q1, an increase of $105,000 or 11%. The higher levels of spending in the second quarter were driven by product development efforts in our Thermal Products segment as Bob discussed earlier in the call. General and administrative expense for the second quarter was $1.6 million compared with $1.8 million in the first quarter, an increase of $238,000 or 13%. Our first quarter G&A expense included $320,000 of cost related to our due diligence efforts and transaction-related costs associated with the potential acquisition. Adjusted for these non-recurring expenses, our Q2 general and administrative expense would have increased $75,000 or 5% sequentially due to officer bonus accruals and increased spending on professional fees. While we reported our Q1 results in late April, our due diligence efforts on a potential acquisition were not yet complete and we noted that certain criteria, which impacted our decision with regard to consummating this transaction would not be known until the quarter’s – until the target company’s second quarter results were complete. The target company has not yet released its final second quarter results to us. However, based upon the interim information shared to-date with us, we know the target had been experiencing less-than-expected bookings during the second quarter of 2015, which had reduced our confidence that they will achieve their original financial projections for the second half of 2015. We expect to meet with the target company’s management soon to review final Q2 results as well as the revised forecast for the second half of 2015. As I noted in our last call, the inTEST senior management team is very focused on identifying and reviewing acquisition opportunities that will create shareholder value and we have a strong track record of integrating businesses that either expand our market share or product offerings. Among our goals for future acquisitions are that they are a strategic fit and provide access to markets outside of the semiconductor market, which creates stronger revenue growth opportunities. The acquisition process can use significant portions of our time and resources and we will continue to look to leverage our considerable financial flexibility as suitable inorganic growth opportunities arise. Other income was $21,000 for Q2 compared to other expense of $11,000 for Q1. And the $32,000 change was primarily the result of foreign exchange losses in the first quarter compared to foreign exchange gains in the second quarter. We accrued income tax expense of $579,000 during the second quarter compared to $233,000 booked in the first quarter. Our effective tax rate was 35% in both the first and second quarters. At June 30, 2015, our deferred tax assets were $1.2 million and our remaining net loss carry-forward was $1.2 million for domestic state, primarily California and $930,000 for foreign related to our German operations. Second quarter net income was $1.1 million, or $0.10 per diluted share compared with first quarter net income of $438,000, or $0.04 per diluted share. And average shares outstanding were 10,495,000 at June 30. Amortization and depreciation expense was $195,000 for the second quarter and EBITDA was $1.8 million for the second quarter, up from $869,000 in EBITDA for the first quarter. Consolidated headcount at the end of June, which includes temporary staff, was 132, up 2 from the level we had reported at March 31. Shortly after the close of the second quarter, we had a reduction in force in our Mechanical Products segment and reduced the headcount there by 5 staff. I will now turn to our balance sheet. Cash and cash equivalents at the end of second quarter were $23.5 million, up $981,000 from March 31. We currently expect cash and cash equivalents to increase throughout 2015, excluding the impact of the closing of any acquisition. Accounts receivable increased during the quarter by $923,000 to $7.4 million at June 30 driven by increased shipments during the second quarter. Inventory decreased slightly by $146,000 to $4 million at June 30. Capital expenditures during the second quarter were $206,000, up from $179,000 in the first quarter and primarily represented additions to leased systems in our Thermal Products segment. Bob provided consolidated and segment booking data earlier in the call and the backlog at the end of June was $3.8 million, down from $5 million at the end of March. In terms of our financial outlook, as noted in our earnings release, based upon the normal seasonality we see each year in our business, we expect that net revenue for the quarter ended September 30, 2015 will be in the range of $9 million to $10 million and that net earnings will range from $0.03 to $0.07 per diluted share. We currently expect that our Q3 2015 product mix will be slightly more favorable than Q2 and that our third quarter gross margin will range from 49% to 51%. Operator, that concludes our formal remarks at this point. We can now take questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Srini Sundararajan with Summit Research.

[Srini Sundararajan:]

Nice. Congratulations on a good quarter and thanks for taking my questions. I have one question and a quick follow-up. Can you make any comments on your China sales in the second quarter versus China sales in the first quarter?

[Hugh Regan:]

Good question, Srini. This is Hugh. It’s funny. I don’t have geographic data in front of me here on the call. The one thing I can do is ask Jim Pelrin, if he can recall for the thermal group sales into China Q1 versus Q2. It’s not a normal metric, Srini, we have available on this call. So, I apologize that we may not have that available. Jim, would you have that readily with you?

[Jim Pelrin:]

Yes. I can answer qualitatively. We experienced an increase in sales in China. In this fourth quarter of last year, the first quarter of 2015, most of our telecom sales were to the Big Three as we call them. And now, we have developed sales and – bookings and sales into some of the smaller players.

[Srini Sundararajan:]

Okay, great. And then I am not expecting guidance from you on the fourth quarter, but could you give me any qualitative highlights of the various segments in the fourth quarter?

[Robert Matthiessen:]

Good question, Srini. Normally, our fourth quarter trails down seasonally from Q3, like Q1 they tend to be the trough quarters for us. I understand you got a model that you need to update at this point and that we don’t provide guidance for the fourth quarter, but I would expect our results in the fourth quarter at this point to be probably somewhat consistent with the first quarter of the year.

[Srini Sundararajan:]

Okay, great. Thank you very much.

[Robert Matthiessen:]

You are very welcome.

[Operator:]

[Operator Instructions] There are no further questions at this time. I would now like to turn the call back over to Mr. Matthiessen for any closing remarks.

[Robert Matthiessen:]

Thanks, operator and thank you for your interest in inTEST. We look forward to updating you on our progress when we report our third quarter results. Good evening.

[Operator:]

Thank you for participating in today’s conference. You may now disconnect.