inTest Corp (INTT) 2017 Q3 法說會逐字稿

Welcome to the inTEST Corporation's 2017 Third Quarter 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 will now turn the call over to inTEST Investor Relations consultant, Laura Guerrant, please go ahead.

Thank you, Amy, and thank you for joining us for inTEST 2017 Third Quarter Financial Results Conference Call. With us today are Robert Matthiessen, inTEST's Executive Chairman, President and CEO; Hugh Regan, Treasurer and Chief Financial Officer and Jim Pelrin, Executive Vice President and Chief Operating Officer. Bob will briefly review highlights from the third quarter as well as current business trends. Hugh will then review inTEST's detailed financial results and discuss guidance for the 2017 fourth 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. 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 and the economy, changes in the demand for semiconductors, changes in the rates of and timing of capital expenditures by our customers, our ability to integrate Ambrell corporation into our business successfully or operate Ambrell profitably. 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 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. During today's call, we will make reference to non-GAAP financial measures. We have provided additional information concerning these non-GAAP measures including the reconciliation to the directly comparable GAAP measure in our press release, which is posted on the investor page of our website, www.intest.com. And with that, let me now turn the call over to Bob Matthiessen. Please go ahead, Bob.

Thanks, Laura. I'd like to welcome everyone to our 2017 third quarter conference call. We continue to see strong demand for our solutions, which are increasingly broad-based. Our strategy of growth primarily through acquisition capped off by our most recent acquisition of Ambrell Corporation that we acquired on May 24, broadens our customer diversification and increases our footprint in several growth markets. Q3 marks our 32nd consecutive quarter of profitability with non-GAAP adjusted net earnings per diluted share of $0.20. Net revenue grew 9% sequentially and 60% year-over-year with 47% derived from non-ATE compared with 26% a year ago, due in large part to the Ambrell acquisition. As most of you know, there is a natural ebb and flow to the test industry with strength in the first half of the year typically balanced by seasonal declines in the second half. And while the semiconductor market continues to be very healthy, with fab spending for 2017 and 2018 expected to be at historic levels. It remains a cyclical industry and is a market which we have strategically lessened our historic dependence on.

Q3 bookings increased 21% sequentially and 56% year-over-year. Excluding the impact of the Ambrell acquisition, third quarter revenue declined 11% sequentially but increased 15% year-over-year, while bookings declined 9% sequentially and 1% year-over-year, reflecting the usual seasonal softening. And lastly, we ended the quarter with a backlog of $11.3 million.

Our Thermal Test segment is now composed of the combined businesses of inTEST thermal solutions, or ITS, and Ambrell. ITS provide thermal products for test and development applications, while Ambrell provides thermal induction heating products for industrial manufacturing applications. Ambrell's induction heating technology complements our thermal technologies and firmly establishes our position in industrial markets with a diverse customer base in a broader-manufacturing space, including in many emerging markets, consumer product packaging, fiber optic, automotive and other markets. We have strategically diversified this segment resulting in new opportunities in industrial manufacturing through both OEM and end-user applications. This diversification complements our broad penetration into electronic test markets. Broadening inTEST footprint as a provider of highly-engineered thermal products now for both test and industrial applications. Thermal segment bookings for the third quarter were better than expected at $12.1 million compared with $8.8 million in the second quarter. And Q3 revenues for the thermal segment were $11.5 million compared with $9.2 million for the second quarter. As this is the first quarter we have had the full impact of Ambrell, we will be bifurcating the thermal segment results and talking to both of the operations, ITS and Ambrell, separately. We'll be doing this for this quarter only in order to help you better understand the Ambrell contribution.

ITS experienced the normal seasonal softness typical of the third and fourth quarters with Q3 ITS bookings down 11% and revenues down 9% sequentially. While some orders from the typically strong mil/aero and semiconductor companies in North America were deferred, bookings above plan in Europe partially made up the difference. This was augmented by bookings above forecast for several liquid chillers including orders from 3 new customers.

Ambrell experienced a significant growth in bookings with Q3 a record quarter for the company. The third quarter Ambrell bookings were $6.4 million, which reflected a full 12 weeks of Ambrell contribution compared to $2.3 million in Q2, which consisted of 6 weeks. Bookings were driven by strength in North America and Europe. While Ambrell's bookings during the period were ahead of expectations, we did experience some operational issues during the third quarter that limited their shipments. We have put considerable effort into correcting these issues and have reallocated resources and are already seeing results. The Ambrell business has shown continued strength through 2017 and will have a considerably stronger second half of the year compared with the first half. As I noted earlier, Q3 was a record quarter for bookings, which we believe will lead to record or near-record shipments in Q4.

Some thermal segment highlights for the third quarter include, at Ambrell a machinery OEM purchased several eco heat systems for integration into end product for wire applications, a major Tier 1 automotive supplier purchased another large eco heat system for hardening and tempering applications, and a spaceflight services company bought a system and a significant lab time for coil development with the intent of a future purchase. ITS performed as expected and highlights included 3 major mil/aero customers purchasing 18 systems that include, ThermoStreams, thermal plates and chambers. Telecom company has purchased 27 ThermoStreams systems as telecom continues production commands for broadband optical components. A major defense contractor ordered 2 custom systems as they continue to deploy within their automotive manufacturing line and an OEM semiconductor customer purchased multiple thermal truck units for a new wafer test platform.

Process chiller systems. In our process chiller systems, the semiconductor OEM purchased an additional fluid chiller system. 2 new customers purchased 3 fluid chillers for defense applications and a new automotive customer purchased a chiller system.

Turning to our EMS segment, Q3 EMS segment bookings were $5.5 million compared with $5.8 million in the second quarter. And Q3 EMS revenues were $5.9 million compared with $6.7 million in the second quarter.

EMS business remains strong. The combined Q3 bookings, with the first half of 2017, put EMS segment well above expectations at this time. Third quarter bookings exceeded expectations by 40%, while revenues grew by 41% compared to last year. Demand for automotive parts, the Internet of things, industrial and consumer electronics continue to drive Q3 business. EMS segment highlights for the quarter, include a large IDM who shift their production to Asia, purchased their first automotive RF interface. A leading outsourced semiconductor assembly and test manufacturer purchased 8 sets of manipulators, docking and interface hardware for new test cells. A new customer in the U.S. purchased docking and interface hardware for wafer sort test cell on the development of a solution for fingerprint recognition devices. And 2 additional new customers in the U.S. purchased a new cable interface and custom manipulator for product development and a parametric test system, respectively.

So looking forward, we continue to see significant opportunities. Key drivers for inTEST include the surging use of sophisticated electronics in automobiles, continued growth of telecommunications and Internet backbone. The drive for improved semi-device packaging and the growth of applications for the Internet of Things.

As we continue to execute our differentiated product strategy, we believe the conditions for our long-term success remain firmly in place and we are solidly on track for a strong 2017 and an even stronger 2018.

Before I turn the call over to you, I'm sure you saw a release last week announcing my retirement and promotion of Jim Pelrin. I'll be retiring from my position as President and CEO at the end of the year. It is has been my distinct honor to lead inTEST alongside our family of dedicated employees around the world and I am proud to continue serving the company and its stakeholders as Chairman of the Board. Jim will be assuming the office of President and CO -- CEO.

Many of you have met Jim at investor conferences over the last several years. Jim is currently our Chief Operating Officer and he brings considerable success to the leadership of this company, having served inTEST in various executive roles for the past 16 years. Jim's excellent performance, along with his successful experience in running our Thermal Product segment, positions inTEST to continue to deliver outstanding results to our shareholders. As Jim takes the helm, I'm confident that inTEST will continue its growth trajectory and he and the team will build on our strong foundation of success. The company is in very good hands in my opinion. And with that, I'd like to turn the call over to Hugh.

Thanks, Bob. Third quarter 2017 end-user net revenues were $17 million, or 98% of net revenues, compared to $15.1 million, or 95% of net revenues, in the second quarter. OEM net revenues were $305,000, or 2% of net revenues, down from $762,000, or 5%, for the second quarter. Net revenues from markets outside of the ATE market were $8.2 million, or $0.47% of net revenues, compared with $5.7 million, or 36% of net revenues, in the second quarter. As noted earlier in the call, Ambrell net revenues for the third quarter were $4.9 million and our net revenues for markets outside of the ATE market, excluding Ambrell, were $3.3 million, or 19% of net revenues. So clearly Ambrell has further diversified our served markets. We expect revenues from markets outside the ATE markets will equal or exceed our ATE market revenues going forward. Our third quarter gross margin was $8.8 million, or 51%, as compared with $8.4 million, or 53%, in the second quarter. The reduction in the gross margin was primarily the result of an increase in our fixed manufacturing costs and a less favorable absorption of these costs, coupled with a slight increase in our component material costs from 32.8% in Q2 to 32.9% in Q3.

Our fixed manufacturing costs increased by $537,000, or 28% sequentially, and represented 14% of our net revenues in the third quarter compared to 12% in the second quarter. Ambrell's third quarter fixed manufacturing costs were $913,000, up from $404,000 for the second quarter, which only represented 6 weeks versus a full quarter in Q3. And excluded the impact of Ambrell -- and excluding the impact of Ambrell, our fixed manufacturing costs would have only increased $19,000, or 1% sequentially, and would represent 12% of our net revenues for the third quarter. The increase in our second quarter fixed manufacturing cost is primarily the result of increased salary expense resulting from additional operations staff brought on during the third quarter in our ITS operation. The increase in our component material costs was driven by an increase in the component material costs of our EMS segment, which grew from 32.7% in the second quarter to 33.8% in the third quarter due to a less favorable product mix, which reflected a lower level of docking hardware sales and a higher level of manipulator sales in the third quarter as compared to the second quarter. This increase was partially offset by a slight decrease in the component material cost of our Thermal segment, which declined from 33.0% in the second quarter to 32.6% in the third quarter. This reduction was due to a more favorable product mix in the third quarter as compared to the second quarter in our ITS operation. Excluding the impact of the acquisition of Ambrell, our third quarter gross margin would be $5.9 million or 52%. Ambrell's third quarter 2017 gross margin was 46%.

Selling expense was $2.3 million for the third quarter compared to $1.9 million in the second quarter, an increase of $451,000 or 24%. Third quarter selling expense included $850,000 for Ambrell. Excluding this amount, our third quarter selling expense would have been $1.5 million, which was $82,000 or 5% decrease sequentially. The reductions were primarily related to lower levels of advertising, sales travel and commission. Engineering and product development expense was $1.1 million for the third quarter compared to $982,000 for the second quarter, an increase of $157,000 or 16% sequentially. Third quarter engineering and product development expense included $269,000 for Ambrell. Excluding this amount, our third quarter engineering and product development expense would've been $870,000, which was a $30,000, or 3% decrease, sequentially. The reduction was primarily related to lower levels of spending on development materials by our Thermal segment, as well as reduced travel costs. General and administrative expense decreased from $3.3 million in the second quarter to $3.1 million in the third quarter, a decrease of $143,000 or 4%. Third quarter G&A expense included $31,000 of transaction costs related to Ambrell as well as $1.3 million in G&A costs for Ambrell. While second quarter G&A expense included $849,000 of transaction cost related to the acquisition of Ambrell and $536,000 of G&A cost for Ambrell. Excluding these amounts, our third quarter G&A expense would've been $1.8 million compared to an adjusted $1.9 million for the second quarter, which was a $91,000, or 5%, sequential decrease. The decrease is primarily the result of lower levels of officer bonus, discretionary bonuses in our Corporate segment. Third quarter G&A expense included $560,000 for acquired intangibles amortization compared to $197,000 accrued in the second quarter. During the third quarter, we completed our purchase price allocation process for Ambrell and the level of acquired intangible assets increased from the $9.5 million determined at June 30 to $16.3 million determined at September 30 and the increased amortization expense was related to the increase in the level of intangible assets.

During the third quarter, we finalized our purchase price allocation related to the contingent consideration liability that was established due to the 2017 and 2018 potential earn-out payments from our acquisition of Ambrell. At June 30, we had a preliminary -- we had preliminarily valued the contingent consideration liability at $2.3 million, subject to completion of the valuation work to be done by Crowe Horwath who we have engaged to assist us in the purchase price allocation work. Crowe valued the contingent consideration liability at $4.1 million as of the date of the acquisition of Ambrell. We are required to revalue this contingent consideration liability each quarter based upon changes in our expectation of the future earnings and cash flow of Ambrell, as well as the impact of changes in the present value of the future obligation.

At September 30, 2017, we adjusted the contingent consideration liability by reducing it by $549,000 to $3.6 million, which was the value determined by Crowe based upon changes in our 2017 forecast for Ambrell as well as changes in the present value. Other income was $100,000 in the third quarter compared to $54,000 in the second quarter, an increase of $46,000 or 85%. Included in other income for the third quarter was $90,000 of foreign-exchange transaction gains for Ambrell. The increase in foreign exchange transaction gains was partially offset by a reduction in the interest income and other income. We accrued an income tax expense of $823,000 in the third quarter compared to $891,000 accrued in the second quarter. Our effective tax rate decreased from 38% in the second quarter to 29% in the third quarter. The reduction in our effective tax rate primarily reflects 2 factors; first, the contingent consideration liability adjustment was tax neutral and not taxable and second, the percentage of income provided by our foreign operations with lower effective tax rates increased significantly between the second and the third quarters. At September 30, 2017, we had a deferred tax liability of $4 million, which decreased to $93,000 sequentially. As previously noted, during the third quarter, we completed our purchase price allocation process and adjusted our deferred tax liability for the adjustment in our acquired intangible assets. We expect that our tax rate in the fourth quarter of 2017 will be in the range of 36% to 37%. On a GAAP basis, third-quarter net earnings of $2 million, or $0.19 per diluted share, compared with second-quarter net earnings of $1.4 million or $0.14 per diluted share. On a non-GAAP basis, third quarter adjusted net earnings were $2.1 million, or $0.20 per diluted share, compared with second quarter adjusted net earnings of $1.7 million or $0.16 per diluted share. The non-GAAP measurement adjusted net earnings removes the -- the non-GAAP measurement adjusted net earnings removes the impact of both acquired intangible amortization and the adjustment of the contingent consideration liability from our net earnings. Diluted average shares outstanding were $10,351,009 at September 30. During the third quarter, we issued 9,000 shares of restricted stock and did not repurchase any shares. As of September 30, 2017, we have repurchased accumulative total of 297,020 shares or approximately 2.8% of our outstanding common stock at a net cost of $1.2 million or $4 per share. Amortization and depreciation expense was $794,000 for the third quarter compared to $373,000 in the second quarter. Acquired intangible amortization was $613,000 in the third quarter, an increase of $364,000 from the second quarter and the increase in acquired intangible amortization is related to the acquisition of Ambrell and Ambrell had depreciation and amortization expense of $637,000 for the third quarter compared to $227,000 in the second quarter. EBITDA was $3.1 million for the third quarter, up $376,000, or 14%, from the $2.7 million in EBITDA reported for the second quarter. Consolidated headcount at the end of September, which includes temporary staff, was 216, a decrease of 1 person from the level we had at June 30. Included in the September total were 89 Ambrell staff, down from 93 at the end of June. Our ITS operation added 5 staff while our EMS segment reduced headcount by 2 staff.

I'll now turn to our balance sheet. Cash and cash equivalents at the end of third quarter were $11.5 million, up $3.9 million from June 30. We expect cash and cash equivalents to increase during the fourth quarter of 2017. Accounts receivable decreased to $10.3 million at September 30, a decrease of $1.7 million sequentially. Included in this amount was $2.5 million for Ambrell. Adjusted to exclude this amount, accounts receivable would have been $7.7 million, a decrease of $900,000 or 10% sequentially. Inventory decreased $179,000 sequentially to $6 million at the quarter end. Included in this amount was $1.9 million for Ambrell. Adjusted to exclude this amount inventories would've been $4.2 million, a decrease of $100,000, or 2%, sequentially. Capital expenditures during the third quarter were $232,000, up from $89,000 in the second quarter. Included in the third quarter capital expenditures was $32,000 for Ambrell. The additions during the third quarter primarily represented lease systems in our Thermal segment. Bob provided consolidated and segment revenue booking data earlier. The backlog at the end of September was $11.3 million, up slightly from the $11.1 million at the end of June. Included in the September 30 backlog was $5.9 million for Ambrell. Excluding this amount, backlog would've been $5.4 million, down $1.2 million from the end of June. In terms of our financial outlook, as noted in our earnings release, we expect that net revenue for the quarter ended December 31, 2017, will be in the range of $17.5 million to $18.5 million and that GAAP net earnings will range from $0.11 to $0.15 per diluted share. And that non-GAAP adjusted net earnings will range from $0.13 to $0.17 per diluted share. We currently expect that our Q4, 2017 product mix will be less favorable as compared with the second quarter and that second quarter (Sic-fourth quarter) gross margin will range from 47% to 49%.

Finally, I want to let investors know that we plan to file a shelf registration statement shortly after we file our Q3 Form 10-Q later this month. The new $50 million shelf replaces the $30 million shelf that expired in May 2017. The increase in the amount of shelf reflects the growth in our market cap from when the shelf was originally filed a number of years ago. Operator, that concludes our formal remarks. We can now take questions.

(Operator Instructions) We have a question from Joan Tong with Sidoti & Company.

Just a couple of questions here, for the fourth quarter guidance, that $17.5 million to $18.5 million revenue, you said that the mix would be a little bit different compared to this quarter, can you give us a little bit more color? And when you say mix, you're talking about mix of Ambrell versus legacy business? Or within the legacy business there's a mix shift in the fourth quarter?

Joan, it's Hugh. The mix shift was in our legacy business. It was a less favorable margin profile in both our EMS Product segment as well as our Thermal Product segment, specifically our ITS operation, and with Ambrell -- Jim, correct me if I'm wrong, we expect margin profile to be consistent for Ambrell in Q4 with Q3?.

We don't expect any major changes.

Correct.

Questions regarding Ambrell, you mentioned like during the quarter there was some operating issue limiting this shipment but I assume that, that hiccup it's being corrected. Am I correct?

Yes, you are. These are -- the kind of things you run into with acquisitions. You finally get in there and see what's happening and they've had a few problems and we have the horsepower to straighten that out and that's exactly what we're doing. Jim, do you want to expand on that?

Yes. I think that's exactly right. Some of them were some material issues like sourcing materials which were able to help them out. We brought some additional resources to bear and that's why we can say that we expect record or near record shipments in Q4.

Great. So obviously, the bookings for Ambrell is very solid and it's $6.49 million and can you talk about the pipeline as well? Just want to get a sense of how that pipeline is? And what are some of those opportunities going forward in terms of growth market that you mentioned in the past?

Jim, you want to take that?

Sure. Well, I can say that Ambrell's total business outlook in terms of backlog pipeline expected revenue is really high -- you can say it's at an all-time high. It's never been quite as robust as it is now and that's expected to continue. They have some very, very strong relationships with large OEM firms -- customers and those relationships are really beginning to blossom now.

Okay, got it. And then any longer-term sort of like strategy? How to think about Ambrell perhaps? Since you guys have a pretty solid international platform and most of Ambrell's business is more domestic, so any strategy going forward you maybe expand like leveraging your international platform to -- on an Ambrell piece?

Well, Ambrell -- I'll answer this. Ambrell actually is quite strong in both domestically and in Europe. Where they have not had much activity historically is Asia and we're taking steps to begin a program to grow that business and we expect that Asia would be a major component of 2018 and going forward.

Okay. So the timing actually can be as soon as 2019, right?

Yes. Compared to -- you have to remember they are coming from very, very little revenue in Asia right now. We expect important revenue next year and setting the stage for it to continue to grow.

Right. And then finally, for profitability for Ambrell, do you guys talk about what is the operating income contributed by Ambrell for the quarter?

Ambrell actually had the loss for this quarter of $48,000. So as opposed to last quarter, where we had a contribution is essentially broke-even this quarter, had a slight loss and that was really due to the inability to get the shipments out the door. We expect that's turned around during the fourth quarter and to have it being accretive and contributing to both revenue and earnings and cash flow.

Your next question comes from of line of Dick Ryan with Dougherty and Company.

So just you used a couple of housekeeping numbers, stock-based comp, what was that in the quarter?

Stock-based comp for the quarter, bear with me one second, was $88,000.

Okay. And I may have missed, did you give any guidance for OpEx in for -- Q4?

No guidance for OpEx. The only guidance we gave was for top-line EPS and the margin.

And Jim, on the Ambrell, I think the view is then that the existing business has been pretty sticky, the strategy would be to go out and really knock open some of these growth markets. Can you talk about maybe the pipeline or there are any certification programs underway if that's increasing? And maybe just what's the general response with 1 quarter under your belt from the customers of Ambrell?

As you just said, Dick, it's only 1 quarter, but I can tell you that for an example one of the largest first Tier suppliers to the automotive industry, Ambrell has now entered into discussions to possibly become the preferred supplier worldwide for this contractor and that's a strategic account that they have been working towards for some time and they've now had very high-level meetings with them and the outlook is very positive. It's too early to make a prediction but the outlook is very positive. So there's several things of that nature going on. There's a major OEM that has been now to the factory twice for their quality and business audits and we expect to hear favorable news from them shortly as well.

(Operator Instructions) There are no further questions at this time. I would like to turn the call over to Mr. Matthiessen.

Okay. Thank you for your interest in inTEST. We look forward to seeing many of you at the investor conferences we'll be attending in December. We will be at the LD Micro Conference in Los Angeles December 5 and the New York City CAP Summit December 6 and the Benchmark Conference in Chicago on December 14. And to updating you on our progress when we will report our fourth quarter results. Operator, this call is concluded.

Thank you. This concludes today's conference. You may now disconnect.