inTest Corp (INTT) 2010 Q4 法說會逐字稿

Welcome to inTEST Corporation's 2010 fourth quarter and year-end 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 today. The recording will be available two hours after the call today. The replay dial-in number is 1-303-590-3030 the conference ID number 4417871. The replay will also be accessible at www.intest.com.

I would now like to turn the call over to Laura Guerrant, inTEST Investor Relations consultant. Ms. Guerrant, please go ahead.

Thank you, Operator. Joining us today from the Company are Robert Matthiessen, President and Chief Executive Officer, and Hugh Regan inTEST Treasurer and Chief Financial Officer.

Mr. Matthiessen will briefly review highlights from the fourth quarter and year-end, as well as current business trends. Mr. Regan will then review inTEST's detailed financial results. We will then have time for any questions.

If you've not yet received a copy of today's Release, please e-mail me at laura@guerrantIR.com. Or you can get a copy of the release off of inTEST's 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 that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, changes in business conditions in the economy generally, changes in the demand for semiconductors generally, changes in the rate of and timing of capital expenditures by semiconductor manufacturers, progress of product development programs, increases in raw material and fabrication cost associated with our products, implementation of additional restructuring initiatives, and other risk factors set forth from time to time in a 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 the information on today's conference call to reflect events or circumstances after the date hereof, or to reflect the currents of anticipated or unanticipated events.

Let me now turn the call over to Robert Matthiessen. Please go ahead, Bob.

Thank you, Laura. Welcome everyone to our 2010 fourth quarter and year-end conference call.

What a difference a year makes. 2010 was clearly a year of significant recovery for the semiconductor industry, with the semiconductor equipment market doubling compared with 2009, driven by the broad switch to mobile computing and the dynamic of new consumer product creation having more capabilities in ever smaller packages.

This has translated into considerable opportunity for inTEST as ICs increase in complexity and testing of ever finer geometries takes on an increasing importance for our customers as they seek to maximize yields while at the same time reducing their costs.

We are highly focused on driving our growth initiatives and managing to the cyclic demand levels inherent in our business. By strategically diversifying our product portfolio to include non-semiconductor thermal markets we have transformed inTEST over the past few years, expanding our served available market and opening the Company up to diverse new growth industries, including aerospace defense, automotive, telecommunications, and medical pharmaceutical, while mitigating the cyclicality associated with the semiconductor capital equipment cycle.

We have strengthened our operations and increased operational efficiencies while maintaining our fiscal discipline and cost controls. And in 2010 we delivered solid financial and operating results.

While Hugh will review the financial results of the fourth quarter, I'd like to highlight some of our achievements in 2010. We improved our performance on all operating metrics, doubled our net revenues for the year to $46 million, and improved gross margin from 33% last year to 48% this year. Net income was a record $7.3 million, and earnings per share of $0.72 with the third-highest in our Company history. These results reflect not only the soundness of our strategy, but the dedication and hard work of our entire team.

It is been said that technology enables change. We at inTEST are driven by change in the industry. Any change in package types, wafer sizes, pin counts, et cetera, results in need for new advanced inTEST products. Key drivers in the semi business as we enter 2011 are mobile connectivity, and mobile computing devices. This require complete new families of digital, analog and mixed signal devices, as well as changes in the human interface. Think of the ubiquitous touch screens which have captured our imaginations and are always evolving as we are offered new touch screens for every different purpose or situation.

Another driving force is transportation. The semi content of traditional gas diesel automobiles is increasing at an astounding rate. I've heard something like a 40% increase in just two years. For the first time in modern history, the semi content of a car is a significant component of its total cost. And now we see the emergence of gas hybrids, diesel hybrids, natural gas hybrids and totally electric drivetrains. The semi content of these offerings could be in order of magnitude greater than traditional gas diesel systems.

Coupled with these, and many other lesser drivers, is the ever-increasing need to test products not only in the factory environment, but in thermally stretching conditions that would apply to hand held electronics, automotive electronics and telecommunications equipment, as well as any component or system that will or could be subjected to a hostile environment.

So inTEST literally thrives on change as well as the increased need to test. These are elements that will persist into 2011 and beyond.

Let me turn to our segments. As you may be where we operate three segments. Mechanical Products, which consist of test head manipulators and docking hardware; Electrical Products, which are tester interfaces; and, Thermal Products.

For the fourth quarter, bookings in the Mechanical Products division were $4.9 million, compared with the third quarter 2010 bookings of $3.7 million. The quarterly increase was driven primarily by end users who are benefiting from the robust business in consumer electronics, such as previously mentioned touch screens and flash memory, both of which are used in significant quantities in tablet computers and Smartphones. Specific to testers, the industry experienced a continued strong recovery in tester sales in 2010 and inTEST continued to develop and refine our Manipulator and Docking Hardware products, which positions us with a well targeted product mix.

In 2009 this group developed Cobal 250 Midrange Test Head Manipulator for use with medium-sized test heads. This manipulator gained acceptance in the industry and sold in healthy quantities. Our customers are pleased with the price-performance ratio of the Cobal 250 line. During 2010 the lifting capability was enhanced, resulting in the Cobal 250 Heavy, thus expanding its addressable market to heavier test heads. This now maxes out the lifting spec of the 250, and therefore for 2011 we are developing the Cobal 500 to be used for the largest test heads commonly being sold. We are evaluating the prototype and should be ready to ship units early in Q2.

Docking hardware is a constantly evolving area, with new designs required on a regular basis as customers mix and match various testers and wafer probers and device handlers. 2010 saw the continuation of this business model with the development and sale of ever more sophisticated docks, many incorporating pneumatic or electrical power as docking requirements become more demanding with increases in tester pin count. It is not unusual to have -- to accurately mate and compress over 1,000 spring pins, requiring a significant amount of force.

In 2011 we see a continuation of trends in this business with constantly emerging new requirements as new semiconductor devices are released and resulting changes in tester wafer prober device handler combinations are demanded. We are well-suited to develop customer specific docking which we do on a very regular basis.

Our Electrical Products bookings came in at $1.5 million for the fourth quarter, versus third quarter 2010 bookings of $1.8 million. There has been a continuation of the downward business trend we saw last quarter due in part to the digestion we mentioned during our Q3 call. Our orders for these products are inherently choppy, due to the significant tester manufacturer OEM level of sales. Tester manufacturers tend to order in large quantities based on their forecast so that tester shipments are unimpeded. At this time we are seeing the tester manufacturers pull in the reins in terms of ordering to forecast, as they have seen a slight downturn in order rates.

I also mentioned in the Q3 call that we had experienced some push outs. For the most part, those push outs have turned into revenue.

Our Electrical Product segment's tester interface products are purchased primarily for manufacturing capacity expansion. In 2010 this group benefited from several interface designs that gained significant traction during the year. These products were generally at the more sophisticated end of their product offerings in both the mixed signal and high-speed digital arenas. The top three major customers included a large domestic tester company, and two of the more significant domestic IDMs. It is expected these designs will continue to be profitable contributors to the sales in 2011. In addition, in 2011 we will also see the implementation of a new in-house test system that will greatly enhance our abilities in product verification and production throughput. This means reduced development time and streamlined production schedules, both of which relate to the bottom line.

In our Thermal Products division fourth quarter bookings were $5.3 million, compared with $4.3 million for the third quarter of 2010. The quarterly increase was broadly driven by all of the products. Each of the product lines experienced at least a 10% increase, with ThermoChucks, the smallest bookings contributor, actually showing more than a 200% increase in bookings.

2010 saw the integration of Sigma Systems into the Thermal group.Sigma is a supplier of a line of thermal chambers that put a hole in the Temptronic product offerings. These products offer an effective way of expanding our served available market by acquiring non-semiconductor business, which has been a goal of the Thermal Group, opening the Company up to diverse new growth industries including aerospace defense, automotive, telecommunications and medical/pharmaceutical.

Sigma was acquired at the very end of 2008 and a good part of 2009 was spent in moving the operation from the San Diego area to the Temptronic facility in Sharon, Massachusetts and beginning the integration of the Sigma products with those of Temptronic. In 2010 we completed the integration process in terms of engineering, production and marketing. Going into 2011, in order to broaden the marketing range and the engineering capabilities of the two separate entities, we began marketing all of the thermal products under the name inTEST Thermal Solutions Corporation.

The division specializes in meeting the most demanding applications by engineering unique thermal test solutions. Whether it is a non-standard size, a very specific and challenging transition rates, specialized access ports for temperature testing in a localized area, they will engineer the broadest range of temperature-related test, conditioning and process products on the market.

Our products include thermal chambers and platforms, air and fluid chambers, semiconductor test tools, and our unique mobile temperature test system. All backed by the most comprehensive thermal test experience in the industry. The Thermal Division product line addresses a number of growth markets, including high-speed networking, and use of fiber-optic components and devices for 4G and 10G communications, broadband TV satellites and military applications.

On the chamber sell side from the Sigma product line we are aggressively moving forward with training of our rep organizations and believe sales of this product line will grow significantly as we introduce it to Europe and Asia. In 2011 we will continue to push into the non-traditional markets, as well as researching new thermal test tools that can compliment our growth strategy and our product suite.

In summary, we have positioned inTEST for growth. We are diversifying our served available markets and have significantly improved upon the Company's efficiencies. We recently relocated our corporate headquarters and Temptronic Corporation to state-of-the-art facilities. And we expect that the accompanying reduced operating costs will result in savings of approximately $0.05 per year in annual savings per share.

We are actively managing all aspects of our materials and supply chain. In addition, we don't see the necessity of significant increases in personnel as business ramps, given the operational economies we have developed out of necessity during the down times. For instance, we are outsourcing much more of our work than ever before. Also, the sales channel has become much more efficient due to greatly improved means of connectivity, allowing fewer direct employees' feet on the ground.

As we look forward, we see a steadily improving near-term outlook from our customers and we enter 2011 optimally positioned to capitalize on the positive trends in the electronic end-markets that we serve.

I will now turn the call over to our CFO for the financial review. Hugh?

Thanks, Bob. Net revenues for the quarter ended December 31, 2010, were $10.1 million, an 11% increase -- excuse me, decrease compared with the third quarter of 2010, when net revenues were $11.3 million, and a 51% improvement over the fourth quarter of 2009 when net revenues were $8.4 million. Fourth quarter end-user net revenues were $9.1 million, or 90% of net revenues, compared with $9.5 million, or 84% of net revenues for the third quarter of 2010.

OEM net revenues were $10 million -- excuse me, $1 million, or 10% of net revenues, compared with $1.8 million, or 16% of net revenues for the third quarter. Net revenues from market outside of semiconductor test were $2.1 million, or 21% of net revenues, compared with $2.5 million, or 22% of net revenues in the third quarter.

On a product segment basis, fourth quarter net revenues for the Mechanical Product segment were $3.6 million, or 36% of net revenues, compared with $4 million, or 35% of net revenues, in the third quarter of 2010. Our Thermal Product segment had net revenues of $5.4 million, or 50% of net revenues, compared with $4.8 million, or 43% of net revenues in the third quarter. Finally, our Electrical Product segment reported net revenues of $1.4 million, or 14% of net revenues, compared with $2.5 million, or 22% of net revenue in the third quarter.

The Company's overall gross margin for the fourth quarter was $4.8 million, or 47%, compared with $5.5 million, or 48% in the third quarter of 2010, and $3.2 million, or 38%, in the fourth quarter of 2009. Due to the combination of favorable product mix and materials cost management, we have steadily maintained gross margins in the 47% to 48% range during 2010, despite the variability in net revenues during the year.

For the fourth quarter of 2010 materials cost declined to 33.6% of net revenues, from 34.1% in the third quarter, due to a more favorable product mix.

We had a net credit of $77,000 for excess and obsolete inventory in the third quarter, compared to a $68,000 charge in the third quarter. The credit in excess and obsolete inventory charges was the result of the use of material in the fourth quarter that we had previously put reserves against due to inventory risks taken earlier in 2010.

Fixed manufacturing costs, which increased in absolute dollar terms by $84,000 from the prior quarter, were 16.9% of revenues in the fourth quarter, compared to 14.4% in the second quarter. As we move forward we believe there remains considerable operating leverage in our business model.

I will now discuss the breakdown of operating expenses for the quarter. Selling expense for the fourth quarter was $1.3 million, or 13% of net revenues, compared to $1.4 million, or 13% of net revenues for the third quarter, a decrease of $154,000, or 11%. The decrease was primarily the result of reduced commission expense on lower revenue levels.

Fourth-quarter engineering and product development expense was $789,000, or 8% of net revenues, compared with $767,000, or 7% of net revenues for the third quarter, an increase of $22,000, or 3%. The increase was the result of increased spending on development materials and third-party consultants, offset by reductions in spending for patent legal.

General and administrative expense was $1.3 million, or 13% of net revenues, compared with $1.6 million, or 14% of net revenues in the third quarter, a decrease of $210,000, or 14%. The decrease was the result of reversals of bad debt expense and professional fees previously accrued during the year, partially offset by expenses related to preparation for the moves of Mechanical and Thermal segment facilities during the first quarter of 2011.

Other income was $61,000 for the fourth quarter, compared to $8000 in the third quarter, an increase of $53,000. The increase was driven by gains on sale of certain fixed assets that were not needed as a result of our facility relocations, as well as reductions in interest expense due to the retirement of the $1.5 million in notes payable related to the Sigma acquisition.

For the fourth quarter we reported income tax expense of $131,000 with an effective tax rate of 9.2%, compared with income tax expense of $16,000 for the third quarter with an effective tax rate of 0.9%. The income tax expense recorded during the fourth quarter primarily represents amounts due to the state of California for our full-year 2010 earnings. California had suspended the use of NOLs early in the fourth quarter retroactive to the beginning of 2010. The suspension was for two years, and our California NOL of $201,000 at December 31, 2010, will be available to be used beginning in 2012.

At the end of the fourth quarter, our federal net operating loss carry-forward was approximately $5.4 million, and our state NOLs range from approximately $200,000 to $2 million, depending on the state in question, and we have fully utilized our NOLs in the state of Massachusetts. We currently do business in a number of states, and while we have tax loss carry-forwards available in most states we operate in, if those states in which we have unused net operating losses take actions similar to California, our tax expense may increase prior to the full use of our NOLs. Therefore, our effective tax rate may vary over the next several quarters, depending on the level of our earnings.

Fourth quarter net income was $1.3 million, or $0.13 per diluted share, compared with a third quarter net income of $1.7 million, or $0.17 per diluted share. Included in the fourth quarter results were several adjustments that totaled approximately $0.03 per diluted share related to our year-end audit that are non-recurring, including inventory adjustments, including the previously discussed credit for excess and obsolete inventory totaling $153,000, or $0.015 per diluted share; the reversal of previously accrued bad debt expense of $86,000, or approximately $0.01 per diluted share; the reversal of previously accrued professional fees of $109,000, or $0.01 per diluted share; and, finally, move-related expenses of $47,000, or $0.025 per share. $0.005, excuse me.

Consolidated headcount, which includes temporary staff, was 129 at December 31, no change from the end of the third quarter. As always, we closely monitor our resource levels and adjust as needed if we see any prolonged softness in demand level. As Bob noted earlier, with the operational economies we have developed, we don't see the necessity of significant increase in personnel as business ramps.

I will now turn to our balance sheet. With demand fluctuations being the norm in our business, it is critical that we always strive to strengthen our balance sheet ,so that in down markets we can continue to strategically invest in key R&D and growth initiatives. Cash and cash equivalents at December 31, 2010, increased to $6.9 million, from the $6.2 million reported at September 30. As previously noted, during the fourth quarter we used approximately $1.5 million to fully retire the notes payable associated with acquisition of Sigma in October, 2008. As a result of this action, we no longer have any long-term debt. We currently expect cash to grow sequentially throughout 2011.

Fourth quarter inventory was $3.5 million, compared with $3.2 million reported at the end of the third quarter of 2010. We were able to keep inventory relatively flat with the prior quarter as we continue to manage our inventory to meet customer demand levels.

Capital expenditures during the fourth quarter 2010 were $575,000, compared with $8,000 during the third quarter of 2010. Fourth quarter capital expenditures, including equipment purchased in connection with our facility relocations, Thermal segment inventory which was converted to fixed assets, which represent equipment which we are leasing certain customers in Europe, and test fixtures purchased for our Electrical segment. We do not expect this level of capital expenditures in future periods and expect our capital expenditures to return to historically normal levels in future periods.

As Bob noted earlier, bookings for the fourth quarter were $11.7 million, and bookings for markets outside of semiconductor tests were $2.3 million, or 20% of fourth quarter bookings. This compares with third quarter bookings of $9.8 million, with bookings for markets outside of semiconductor tests of $1.9 million, or 19% of third quarter bookings. The backlog at the end of the fourth quarter was $6.1 million, compared with $4.5 million at the end of the third quarter.

In terms of our financial outlook, as noted in our Earnings Release, we expect that net revenue for the first quarter ended March 31, 2011, will be in the range of $11 million to $12 million, and that net income will be in the range of $0.11 to $0.15 per diluted share.

The first quarter 2011 financial outlook reflects the expected impact of approximately $155,000 in costs related to the first quarter relocation of the Company's corporate headquarters, as well as the operations of Temptronic Corporation.

When one compares our first quarter 2011 guidance with our Q3 2010 actual financial results, when we had net revenues of $11.3 million and net earnings of $0.17 per share, there are several reasons, in addition to the moving costs just mentioned, that our EPS guidance for the first quarter 2011 is lower than the net income EPS achieved in the third quarter of 2010. The first and most important reason is that we are forecasting a change in product mix and expect material costs in the first quarter of 2011 will be approximately 250 basis points higher than that achieved in third quarter of 2010. Another factor impacting the first quarter will be the accrual of income taxes for California which will increase our expected tax rate from 0.9% in the third quarter of 2010 to approximately 4% for the first quarter of 2011.

Please note our outlook is based on the Company's current views with respect to operating and market conditions and customer forecast which are subject to change.

Operator, that concludes our formal remarks. We can now take questions. Operator?

Yes, sir. Ladies and gentlemen, we will begin the question and answer session at this time.

(Operator Instructions)

Our first question comes from the line of Ken Nagy with Zacks Investment Research. Please go ahead.

Hi, everyone. Congratulations on a strong quarter. I was thinking back to the quarter two conversation you had with respect to the docking manipulator sales, and the end-users versus the OEMs, and I was wondering if you are seeing any similar trends in the bookings now?

The bookings have shifted to end users. I mentioned the tester manufacturers pulled their horns in, and let me elaborate on that little bit. The buy to forecast well ahead of when they are going to ship the systems, so that what we ship them does not impede their tester shipments. Sometimes they get so far ahead of themselves to get a little scared. And so they'll slow that down Which is what they've just done. As a result, our product mix shifts from OEM to end-user, and that indeed has happened here.

Yes, it has. Although, Ken, the one thing I'll note is that really does not have a significant impact on our overall profitability. But the difference between OEM and end-user sales net profitability over the last several years has really significantly been reduced. So, it is not a significant impact on net profitability.

Okay. Great. That's great, thanks. And just one more question. I was wondering -- what's the potential for non-semi in terms of percentage of revenues that that can reach?

It is endless, because it's any market that uses thermal. Our internal target is to get up to about 50% of our business.

Okay. That's great. Thanks again.

You're welcome.

Thank you.

Our next question is a question from the line at Jay Kumar with Midsouth Investment Fund. Please go ahead.

Hi. Two questions. Do you see any seasonality in your business, like June quarter being a good quarter compared to other quarters?

Good question. Historically we have seen seasonality in our business, typically the fourth quarter for us would be a trending downward quarter. But, for instant, clearly in 2009 as production was beginning to ramp as the cycle was a starting, it was an up quarter. And then, this year, clearly as we had that mini-downturn in the middle of the year, the quarter had trended down.Traditionally the second quarter is a very strong quarter for us, historically, as well as the third quarter. But seasonality goes out the window depending on where you are in a particular cycle. But all things said, traditionally we do see some softness in the fourth quarter.

Okay. You mentioned you are going to be start paying taxes the first quarter of 2011?

Actually we started paying taxes in 2010, unfortunately Governor Schwarzenegger is making us pay some things in the state of California, and we have a few other states we do business in where NOLs are not of use to us.

We expect our effective tax rate to increase because we will be now booking it consistently throughout the year, as opposed to the fourth quarter, where we had a significant accrual right in the fourth quarter for the whole year's California tax.

Okay.

And we expect our federal deferred tax asset to be sufficient to cover all of our earnings in 2011. So I do not expect us to go back to a full 39% to 40% in 2011, I would expect that at some point in 2012.

Okay. That's good to know. Finally, do you see increasing or decreasing in R&D spending? Because that's quite a big chunk of money there. I was wondering if you were (inaudible) earnings increase or decrease of spending on R&D there?

Our R&D spending primarily is the salaries of our engineering and product development staff. We do clearly from time to time spend additional money on product development, materials and third-party consultants. And we are, as Bob mentioned earlier, working on some product development issues that at the current time. Historically our spending in that area runs anywhere from 7% to 10% of our revenues. And if we are in an inactive mode we are going to tend to trend toward the higher end of that range.

Alright. Thanks.

You're welcome.

(Operator Instructions)

I would now like to turn the conference over to Mr. Matthiessen. Please go ahead, sir.

Thank you for interest in inTEST. In closing we remain confident in our business prospects. InTEST occupies a profitable niche space. We have a proven long-term history with customers across the globe. And provide high-quality mission-critical products that perform in high stress environments. We will continue to work with our customers and drive innovations that allow us to continue being a leader in our target markets.

Thank you, again, and we look forward to updating you on our progress when we report our first quarter results.

Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.