inTest Corp (INTT) 2014 Q4 法說會逐字稿

Welcome to inTEST Corporation's 2014 fourth-quarter and year-end financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded today. A replay will be accessible at www.intest.com.

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

Thank you, operator. And thank you for joining us for inTEST's 2014 fourth-quarter and year-end financial results conference call. With us today are Robert Matthiessen, President and CEO; Hugh Regan, Treasurer and Chief Financial Officer; Jim Pelrin, Vice President and General manager of inTEST Thermal Products segment; and Dan Graham, Senior Vice President and General Manager of inTEST's Electrical and Mechanical Products segments.

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 and discuss guidance for the first quarter of 2015. We'll then have time for any questions.

If you have not yet received a copy of today's release a copy may be obtained on 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 for potential future events and 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, changes in the demand for semiconductors, changes in the rates of and timing of capital expenditures by semiconductor manufacturers, 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 the information on today's conference call to reflect 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 Robert Matthiessen. Please go ahead, Bob.

Okay, thank you, Laura. I'd like to welcome everyone to our 2014 fourth-quarter conference call. While Hugh will review the financial results in detail I'll review some of the highlights and we'll then discuss our markets and what we are seeing in our customer base.

What a difference a year makes. At this time last year we were discussing the challenging industry conditions that had plagued the second half of 2013.

While I think it's safe to say the capital equipment industry is never truly free of challenges our results for 2014 were notably stronger than 2013 as we had forecast with business driven by strong demand and quote activity in the semiconductor, defense, aerospace and telecommunications industries.

2014 net revenues and earnings per share exceeded analyst consensus estimates. In addition we exceeded analyst consensus estimates for both net revenue and net earnings per share for the fourth quarter.

Q4 bookings were $9 million compared with third-quarter 2014 bookings of $10.6 million and net revenues for the fourth quarter were $9.9 million compared with third-quarter net revenues of $10.8 million. For the full-year 2014 bookings were $42.4 million compared with $38.4 million in 2013. And 2014 net revenues were $41.8 million compared with $39.4 million in 2013.

Steady growth in the electronics industry is boosting semiconductor manufacturing while innovations in semiconductor devices and the growing complexity of silicon chips is driving demand in the ATE industry. For inTEST we continue to see solid growth. For the full-year 2014 bookings and revenue increased 11% and 6% respectively compared with 2013 fueled by the momentum and strength of our business as well as adoption of our new products from a wide range of customers.

On a year-over-year basis, 29% of 2014 bookings and 27% of net revenues were driven from non-semiconductor test. This compares with 27% for bookings and 28% of net revenues for the end of 2013. You may recall at the end of 2013 June quarter we revised the historical thermal bookings and revenue figures to include service which had previously not been included.

We've discussed this a number of times in the past but I think it bears repeating especially given how volatile this sector can be. InTEST Corporation has demonstrated that during periods of cyclically declining revenues the Company is structured such that we can remain profitable and the fourth quarter marked our 21st consecutive quarter of profitability.

We have been profitable for five consecutive years. This is a metric we are very proud of.

Very few large-cap companies in this sector can make this claim let alone our microcap peers. Five years of profitability is not only gratifying, it's a testament to the diligence and hard work of our entire organization.

Let me turn to the segments in which we operate starting with thermal products. Our thermal products segment is our largest, most profitable and diversified division and is providing inTEST with significant growth opportunities in the future. Through the strategic diversification of our thermal product segment we are creating new opportunities in industrial testing and broadening our end market penetrations.

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 fourth quarter were $5.6 million compared with third-quarter bookings of $6.5 million. Thermal segment revenues for the fourth quarter were $6.2 million compared with third-quarter revenues of $5.9 million.

For the full year, 2014 thermal segment bookings were $24 million compared with 2013's bookings of $22 million. 2014 thermal segment revenues were $23.4 million compared with $23 million for 2013. Of particular note for the quarter service bookings were up 11% compared to Q3 of 2014 and up 22% versus Q4 of 2013.

This was our strongest Q4 service bookings in five years. We successfully passed factory acceptance and shipped two chillers for installation in the nuclear power facility and we completed the first phase of development of a cryogenic liquid chiller for a major defense contractor. We expect a PO for the second phase of this multiphase development in the second quarter.

If we look at it by region, in Europe our German operation reported its highest revenue quarter and highest revenue year in its 14-year history and the first sales of two WindChill gas chillers were shipped to a new OEM integrator building production test systems for a major automobile supplier with more orders expected. Our European outlook is positive with January 2015 revenue led by strong semi and auto markets.

In North America we received orders from a major defense contractor for highly customized chambers for use in their nuclear defense group. We also delivered the first custom chamber for use in an automated manufacturer of MEMS devices. This is fully integrated with the production test handler. If successful this will create significant OEM business.

The outlook is also positive for North America with a strong semi market. Significant orders are expected from four major semi manufacturers. The defense market is also active with a major order expected from a defense contractor during the first quarter.

Turning to Asia in October we received an order for 10 ATS-545 streams from a fiber optic manufacturer in Taiwan. It's the largest telecom order from that country to date.

In Asia the outlook continues to reflect the softness in their markets particularly in the fiber optic segment of the telecom market. Our general outlook for thermal business for the thermal business unit is positive with a healthy semi-market and improved auto and mil/aero spending. This will be offset somewhat by the softness in Asia compounded by Chinese New Year shutdowns.

Turning to the mechanical product segment fourth-quarter mechanical products bookings were $1.9 million compared with third-quarter product bookings of $2.3 million. Mechanical sales were $2.0 million compared with $3.1 million in the third quarter. For the full year, 2014 mechanical product bookings were $11.4 million compared with $10.1 million for 2013 and 2014 mechanical product sales were $11.2 million compared with $10 million for 2013.

Highlights for the quarter included multiple orders from a major US IDM for our new IntelliDOCK. Deliveries started at the end of Q3 but were mostly in Q4. This brings us to a total of 20-plus setups installed worldwide.

The inTEST 4 cam version of Ultra Probe PIB direct docking hardware was proven in and accepted at a major IDM. They have since purchased multiple sets of this.

Our general outlook for the mechanical business is also positive. We see continued capacity growth from customers and first-quarter orders received so far are comparatively strong and broad-based.

We have two major IDM projects, one to integrate IntelliDOCK to the Teradyne ETS-800 and the other for next-generation Cobal series for our large test heads, for larger test heads I should say. And we continue to forecast growth of our IntelliDOCK and accompanying interface with a major IDM anticipating 10 new setups in Q2 and 14 in Q3.

In our electrical segment, bookings for the first quarter -- fourth quarter, I'm sorry, were $1.5 million compared with $1.8 million for the third quarter. Q4 revenues were $1.7 million compared with $1.8 million in the third quarter.

For the full year, 2014 electrical segment bookings were $7.2 million compared with $6.3 million for 2013. 2014 electrical segment revenues were $7.1 million compared with $6.5 million for 2013.

Fourth-quarter electrical highlights included installation and successful testing of a new high pin count interface for a major domestic IDM that is built to be mechanically stable over a temperature range of negative 50 degrees centigrade to positive 150 degrees centigrade. Also a domestic customer with a large Malaysian facility purchased multiple MD&I setups for the Q4 expansion in Asia.

As with our other business units our general outlook for the electrical business is positive. We just sold 12 new interfaces to a major subcontractor in Asia and we are developing a new interface for the Teradyne ETS-800 tester to run at extreme temperatures, again from negative 50 degrees C to a plus-150 degrees C for a major IDM. And we expect to ship 10 Teradyne J750 prober interfaces to a new customer in Asia.

Before I turn the call over to Hugh, let me give some perspective on the markets we serve. We are growing inTEST on the base of our semiconductor business. We have increased our footprint in the thermal test solution area and serve a number of vertical markets outside of semi which we have significant exposure to.

Technological forces are driving opportunity for inTEST that include the Internet of Things, pervasive connectivity with faster, lighter and smaller mobile devices fundamentally changing the way we live and work, improved efficiency that optimizes products' environmental impact and reliability to enhance confidence in new products while we're reducing the cost of ownership. Our technology-driven innovation will provide inTEST with significant growth opportunities in the future. Our long-term objective, of course, is to grow and transform this Company into a broad-based thermal test solutions company while continuing to supply our valued customers in the semi test arena.

Leveraging the strength of our semiconductor business we have increased our footprint with the evolution of our non-semi thermal test solutions. 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 telecommunications. We believe the conditions for our long-term success remain firmly in place.

With that I'd like to turn the call over to Hugh who will provide a detailed review of Q4 numbers and discuss our guidance for the first quarter of 2015. Hugh?

Thanks, Bob. Fourth-quarter 2014 end-user net revenues were $9.4 million or 95% of net revenues compared with third-quarter 2014 end-user net revenues of $9.9 million. OEM net revenues were $504,000 or 5% of net revenues, down from $894,000 or 8% for the third quarter of 2014.

As noted earlier, net revenues for markets outside of semiconductor test were $3.4 million, or 34% of net revenues compared with $3.6 million or 34% of net revenues in the third quarter. The Company's gross margin for the fourth quarter was $5 million or 51% as compared with $5.2 million or 48% in the third quarter.

The improvement in the gross margin was the result of a reduction in our component material costs which declined from 35.4% in the third quarter to 30.7% in the fourth quarter. This improvement was partially offset by an increase in our fixed manufacturing costs as a percentage of our net revenues which increased from 14% of third-quarter net revenues to 15% of fourth-quarter net revenues.

While these costs increased as a percentage of our net revenues sequentially they actually declined $18,000, or 1% sequentially due to lower facility costs in the fourth quarter compared to the third. The significant reduction in our consolidated component material costs in the fourth quarter was driven by a very favorable product mix in both our mechanical and electrical product segments.

Our mechanical products segment's component material cost decreased from 47.5% in Q3 to 36.3% in Q4 while our electrical product segment saw its component material costs decline from 37.3% in Q3 to 34.3% in Q4. The decrease in the component material costs in both segments was driven by changes in both product and customer mix. Our thermal products segments component material cost to remain steady at 28.3% for both Q3 and Q4.

I'll now discuss the breakdown of operating expenses for the quarter. Selling expense was $1.4 million for fourth quarter compared to $1.5 million for the third quarter, a decrease of $45,000, or 3% sequentially. The decline was due to lower levels of sales commission expense resulting from reduced sales levels in the fourth quarter compared to the third quarter partially offset by increased product warranty expenses in our thermal product segment.

Engineering and product development expense was $876,000 for Q4 compared to $894,000 for Q3, a decrease of $18,000 or 2%. The decrease was the result of reduced spending on patent legal costs which were partially offset by increased product development expenses.

General and administrative expense for the fourth quarter was $1.6 million compared to $1.5 million for the third quarter, an increase of $22,000 a 1%. The increase was primarily driven by higher levels of administrative travel costs related to our strategic initiatives and increased audit costs. Other expense was $8,000 for the fourth quarter compared to $16,000 for the third quarter.

We accrued income tax expense of $217,000 during the fourth quarter compared to $431,000 during the third quarter. Our effective tax rate was 19% in the fourth quarter compared to 34% in the third quarter. The reduction in the effective tax rate was driven by two factors: the fourth-quarter approval of the US R&D tax credit and our recording of the year-to-date impact of that credit as well as the recording of the reduction in the valuation allowance we carry against our German deferred tax asset.

At December 31, 2014 our deferred tax assets were $1.4 million unchanged from the level at September 30 and our remaining net loss carryforward at December 31 was $111,000 for domestic state and $1.5 million foreign related to our German operation. Fourth-quarter net income was $959,000 or $0.09 per diluted share compared with third quarter net income of $837,000, or $0.08 per diluted share. Average shares outstanding were 10,481 at December 31.

Amortization and depreciation expense was $216,000 for the fourth quarter and EBITDA was $1.4 million for the fourth quarter, down from $1.5 million and EBITDA for the third quarter. EBITDA for all of 2014 was $5.8 million compared to $4.8 million for 2013. Consolidated headcount at the end of December, which includes temporary staff, was 130, the same level we had at September 30.

I'll now turn to our balance sheet. Cash and cash equivalents at the end of the third quarter were $23.1 million, up $3 million from September 30 and up $4.1 million during all of 2014. We currently expect cash and cash equivalents to increase throughout 2015.

Accounts receivable decreased during the quarter by $2.5 million to $5 million at December 31. The reduction was driven by strong collections during the fourth quarter.

Inventory was unchanged at $3.8 million at December 31 and capital expenditures during the fourth quarter were $295,000, down from $112,000 in the third quarter and primarily represented additions to the lease systems in our thermal product segment. For 2014 capital expenditures totaled $831,000, almost doubled from the level in 2013. We currently expect capital expenditures for 2015 to be consistent with those in 2014.

Bob provided consolidated in segment booking data earlier in the call. The backlog at the end of December was $3.8 million, down from $4.7 million at the end of September.

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 March 31, 2015 will be in the range of $9 million to $10 million with net earnings ranging from breakeven to $0.04 per diluted share. As I noted in our earnings release, we currently expect that our Q1 2015 product mix will be less favorable than the very favorable product mix we experienced in the fourth quarter of 2014 and that the first-quarter gross margin will range from 44% to 46%.

Operator, that concludes --

I'm going to stop him from concluding because we have a correction to make.

Okay.

Outstanding shares you gave in thousands, Hugh, and that's in millions.

Outstanding shares was 10.481 million. Thank you.

Okay.

Operator, that concludes our formal remarks at this point and we can now take questions.

(Operator Instructions) Srini Sundararajan, Summit Research.

Hi guys. My first question is how do you see 2015 going forward? I'm not asking you for guidance specifically but how would you characterize 2015 in terms of what opportunities that you see and how you can maximize those opportunities within the expected seasonality and stuff like that?

This is Bob. We see 2015 in our opinion as being modestly better than 2014. I would guess numbers, I'm just throwing numbers out, 4%, 5%, 6% improvement I would think in our existing businesses.

And to try to drive that a little harder we have some new products coming out which we always do and so we could possibly exceed the normal growth rate that we see there. And of course as you're aware we also are pursuing some M&A activities and at some point someday in the future they should finally pan out and give us a boost. So all of those things will be working for us I think as we go through 2015.

Okay. And as a quick follow-up, what would be the M&A criteria like traditionally it needs to be accretive and what are the criteria that you have in mind? Does it have to be geographically contiguous to you?

This is Hugh. Clearly we're looking for accretive acquisitions. We're focused on thermal technologies primarily that would complement our existing thermal technologies.

We are looking to possibly fill in some holes we have in our product lineup in the thermal side which are humidity and vibration so we might be looking in those areas as well. But at the same time we may be opportunistic and look at some other technologies that are not thermally oriented but are broader test technologies. Again everything would be accretive.

As far as company size we're looking at companies with revenues ranging from $15 million to $30 million and I guess that's probably all the criteria I can think of at this point. Geographically, I know you had asked about that, we're looking primarily in the US at this point but we'd be willing to consider things overseas as well.

Okay, thank you. You're so generous with your answers. Thank you.

Les Sulewski, Sidoti & Company.

Hey guys, thanks for taking my call. So looking first Hugh, perhaps this one's for you, how sustainable are the reductions of component costs moving forward?

Well as I think I hoped I pointed out in this call the Q4 component material cost it was a real low point. We've had that a few times in my experience as CFO. We had it a few years ago in the June quarter and we actually had a 53% margin in that particular quarter because it was a strong revenue quarter where our fixed manufacturing costs also had gone down as a percentage of revenues.

As we've guided in the first quarter of this year we're going to I would say the opposite end of the spectrum but a very unfavorable mix driven primarily by for instance in our mechanical segment significant shipments of manipulators with a contribution margin of between 25% and 30% incrementally which drives down the overall margin. That's for the first quarter.

We provide guidance on a quarter-by-quarter basis as you know and is it possible that we will have another quarter in 2015 that has component material costs of between 30.5% and 31%? It's possible. Again it really does rely on what's happening not in just one product segment but all three product segments.

You had both mechanical and electrical with relatively low component material costs and our thermal group also stayed at a fairly low trend. And as I've said for Q1 we see all three groups unfortunately heading in the other direction due to product and customer mix.

Thanks, Hugh, and I guess just to build on that was any of the cost associated to a stronger US dollar so more favorable to you at that point?

We sell in US dollars globally except in Europe where we do sell in euros. So I would say that the strong dollar against the weak euro has caused us to book in Qs 3 and 4 about $20,000 a quarter related to foreign currency translation losses.

That's the only part of the world where we really have that type of exposure. I don't see it as being significant for us or as significant for us in 2015 but clearly I don't attempt to guess where currencies will trade ultimately at the end of the day.

Sure. For the R&D tax credit I guess is this something new --

No, the credit's been there for a number of years. It's just the federal government doesn't bake it in. It's got to be reapproved by Congress and Congress does not always act on this administrative issue when it should.

So for instance we had hoped that it would have been passed sooner in the year. It was passed in the fourth quarter. I believe they passed it at this point for just 2013 and 2014 -- and 2015 as well, I'm just getting I'm being told by my controller 2015 as well.

So we won't have this issue impacting us during this year. But unless they permanently bake this into the tax code we face this issue and we're not allowed to accrue the tax benefit until the quarter in which the tax legislation has been enacted and it was enacted in the fourth quarter.

So the other thing impacting this just for your information is a reversal of a valuation allowance on our German tax assets as well. And they both had about a comparable impact I would say.

So then I guess as far as perhaps tax guidance for modeling terms normalized rate is a good way to go?

Yes, mid-30%s I would say. We would have been mid-30%s in Q4, had we not had those two items we would have been right around 35%. So I think I would guide you to the mid-30%s for 2015.

Okay, thank you. I guess maybe this one might be for Bob. You guys enjoyed some nice steady growth you mentioned five years now.

We all know that doesn't last forever. Do you see any downturn in the cycle? How do you look at the business at this point?

It's different this time. It's going to be good forever. We of course see the cycles, the cycles are never going to stop.

The only thing that's changed in the cycles is the duration of them. We used to go through a five-year cycle; now it's down to a one-year cycle where we gradually build through the year to Q3 which is the peak quarter, and then things drop-off again.

And that's one thing I might mention just to jump in here is that over the last five years while we've been profitable revenues have actually declined and then grown again. I'm just looking here, 2010 was $20 million, $46 million, 2011 was $47 million so you had growth in those two years. You had 2012 and 2013 that declined slightly, $43 million and then $39 million and then we've started growing back up again in 2014.

So you have a couple of curves going there.

Yes. I think the important thing as Bob noted in the call was that we've been consistently profitable during this period and there was a quarter in there where revenue dipped fairly low if I recall but we had a breakeven quarter. So I think as Bob talked about with a response earlier, we see moderate growth in our base business for or on our existing business for next year and then whatever impact acquisitions could have for us when we're ultimately able to get one done.

Great, thanks guys. Thanks for walking us through that. I guess the other one would be the stock.

The stock is very cheap at this point. More than half of the market cap is in cash. How do you look at it from the point of view where you can maximize the shareholder value at this point?

I don't think a share buyback is right given the small float, maybe another dividend if possible or an M&A strategy, I know you've been searching for that. I just wanted to get an idea how do you look at the growing cash base and you put that into use?

As you know we've stated this many times on these calls say that we're currently retaining our cash balances to grow through acquisition. We are very focused on that.

We hope to be in a position to execute on something during 2015. That said, the Board of Directors if it is unable to ultimately execute on an acquisition plan would look at other capital assets for our capital allocation strategies including a buyback or a dividend.

As you point out a buyback is really somewhat counterintuitive with our low number of outstanding shares and small float and small trading volume. So I would think if our Board were to do anything it would probably be a dividend. But I think the greater -- our Board is more focused on growth and diversification of the Company's cash flow stream and that would be best executed through acquisitions.

Okay, guys. Thank you so much.

(Operator Instructions) At this time we have no further questions. I would now like to turn the floor back over to Mr. Robert Matthiessen for any additional or closing remarks.

Well, thank you for joining us tonight. We thank you for your continued interest in inTEST and we look forward to updating you on our progress when we report our first-quarter results. Good evening.

Thank you. This concludes your conference. You may now disconnect.