First Quarter 2022 Teleconference Call and Webcast

Operator: Greetings and welcome to the inTEST Corporation First Quarter 2022 Financial Results Conference Call. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Deborah Pawlowski, Investor Relations for inTEST. Thank you. Please go ahead.

Deborah Pawlowski: Thanks, and good morning, everyone. We certainly appreciate your time today and your interest in inTEST Corporation. Here with me are Nick Grant, our President and CEO, and Duncan Gilmour, our Chief Financial Officer and Treasurer. You should have a copy of the First Quarter 2022 Financial Results, which we released this morning before markets opened. If not, you can access the release and the slides that will accompany our conversation today at our website, www.intest.com . After our formal presentation, we will be opening the line for Q&A.

If you turn to Slide 2 in the deck, I will first review the Safe Harbor statement. You should be aware that we may make some forward-looking statements during the formal discussions, as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov.

During today's call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided a reconciliation of non- GAAP measures with comparable GAAP measures in the tables that accompanied today's release and in the slides.

With that, if you turn to Slide 3, I will turn it over to Nick to begin. Nick?

Nick Grant: Thank you, Deb and good morning, everyone. Thanks for joining us this morning for our First Quarter 2022 Earnings Report. I would like to start by thanking the entire inTEST organization for their resiliency and never-ending desire to exceed customer expectations and deliver a solid start to the year.

The first quarter played out as expected, with both top and bottom-line results in line with our guidance, despite Omicron, supply chain constraints, transportation shortages and continued inflationary pressures. We are advancing our 5-Point Strategy and executing well. Revenue grew 23% year-over-year and 8% sequentially to $24.1 million and was the result of continued demand for our innovative and differentiated solutions.

The quarter was not without its challenges. An estimated $1 million of the product could not ship due to supply chain constraints or logistic issues. As an example, we had a product on a ship that could not get into port in Baltimore in time; however, as we advanced through the quarter, we improved our ability to deliver by bringing on more qualified suppliers, increasing the inventory of raw materials and driving greater efficiencies in our production processes. We are becoming experts at whack-a-mole to get product out the door to our customers.

Acquisitions contributed $4 million in the quarter, primarily from demand in industrial, security and other markets. Organic growth of 3% reflected our growing presence in automotive electric vehicles and select industrial segments. We believe that our diversification efforts around targeted growth markets are working well. This is demonstrated by the strong sales of our leading test and process solutions to the automotive industry, including electric vehicles.

First Quarter 2022 Teleconference Call and Webcast

In fact, in Q1, we saw our bookings and sales for Automotive EV applications more than double from the prior- year period. As we have been communicating, our diversification within Semi is also providing benefits. We had sales of our innovative solutions for the front-end space, specifically in silicon-carbide crystal growth applications, and sales of our thermal back-end solutions. Both increased sequentially in the quarter, more than offsetting lower volume in our back-end electronic test solutions.

For Semi sales to hold up that well is remarkable, given the atypical strength we saw during the first half of 2021 for our back-end electronic test solutions. A few factors impacted margins, both sequentially and from a year-ago period. When comparing the year-over-year, the change in product mix was the primary reason for margin contraction, due to the significant volume from our back-endsemi-electronic test solutions during the first half of 2021.

Our custom-engineered solutions in this back-end test space generally command our highest margins. From a sequential comparison, the initial contributions from the acquisitions had a drag on margins as they were not where we expected they would be at the end of the year. Margins should improve as we drive productivity gains, and the investments we have made to grow revenue and realize operating leverage begin to pay off as we advance through the year.

Integration of the three acquisitions that closed during the fourth quarter of 2021 is going as planned. We are improving their systems and processes with more discipline and sophistication to enable greater scalability while investing in the sales organization across our enterprise to support our growth plans. We are building out our sales teams domestically and in Europe, and we recently opened our newest induction heating demonstration lab in conjunction with our channel partner in Mexico.

History has shown we have a high success rate of converting prospects to customers when we demonstrate how our technology solves their production challenges in our labs. Our strategy is to invest in more labs worldwide to drive greater market penetration through customer conversion. In parallel with these sales and marketing efforts, we continue to advance our new product innovation efforts, further enhancing our solutions offerings and helping to drive additional sales growth. As we tackle supply chain constraints, we have to redirect our development engineers to qualify new suppliers and validate product specifications, which is somewhat slowing our new product development efforts.

Last year, we defined our vision and mission and initiated our 5-Point Strategy. As we announced at our recent Investor Day, it was necessary to reorganize our structure after completing the three acquisitions we made at the end of last year to execute our forward plans better. We now have three reportable segments that align with our technology platforms: electronic test, environmental, and process technologies. We believe this division structure enables us to increase efficiencies, broaden opportunities, better utilize our manager's talents and leverage our strong customer relationships to accelerate growth and capture cost synergies. We also expect to be able to increase collaboration across the businesses, which will help to create broader customer solutions.

Finally, with our new technology division structures, we believe we are well-positioned to build our forward vision of innovative test and process technology solutions and the platform to support our growth ambitions. You can find the results by segment in both our news release and the supplemental tables of our slide deck.

We had orders of $25 million in the first quarter of 2022, a record backlog at quarter-end and a demand that has elevated as we advance into the second quarter. These all provide us with the confidence to reaffirm our guidance for 2022 and establish second-quarter revenue guidance of approximately $27 million to $29 million.

First Quarter 2022 Teleconference Call and Webcast

Let me now turn it over to Duncan to review the financials in more detail. Duncan, over to you.

Duncan Gilmour: Thank you, Nick. Starting on Slide 4, we provide some detail regarding our top line. As Nick indicated, revenue for the first quarter of 2022 was $24.1 million, a 23% increase over the same period last year and at the midpoint of guidance. Compared with the prior-year period, revenue growth of $4.5 million included $4 million from our Q4 acquisitions.

Those acquisitions contributed to growth in Life Sciences, Security, and other markets and is indicative of the Company's strategy to diversify and expand with new customers and into new markets. Organic growth amounted to $0.5 million, or 3%, reflecting demand from the automotive, particularly electric vehicles, and industrial markets.

Sales to the Semi industry were relatively unchanged on a year-over-year comparison as growth and shipments to front-end Semi customers offset the decline in sales to the traditional back-end Semi markets, which were exceptionally strong in the prior-year quarter. It is also important to note that first quarter's supply and logistic challenge levels were similar to our experience throughout the last couple of quarters. We estimate supply chain and logistic constraints impacted Q1 2022 revenue by approximately $1 million, even as our teams continue to do an outstanding job of working through the issues, finding alternative solutions and aligning operations to best meet customer expectations.

Compared with the trailing fourth quarter of 2021, sales to the Semi industry grew 9%, driven primarily by demand from back-end Semi thermal applications. Life sciences, Industrial and Defense/Aero markets also improved sequentially. Still the Company's top five customers in the first quarter represented approximately 20% of revenue and no single customer during the quarter accounted for 10% or more in revenue.

Moving to Slide 5, our first-quarter gross margin of 45.7% compares with 46.3% in the fourth quarter of 2021 and 48.7% a year ago. The contraction from both prior periods reflects a less favorable product mix, the impact of acquisitions, production inefficiencies driven by supply chain constraints and delayed recovery of cost increases as pricing improvements tend to lag inflationary increases in component material and labor costs in preexisting order commitments.

As it relates to the mix in the prior-year quarter, back-end Semi Test was at a strong level with the market resurging and we believe we were capturing more market share. As noted in the past, our back-end Semi Test business is the most lucrative in our product portfolio from a margin perspective. What is encouraging for this segment is that the new leadership and focus have reignited our customer relationships.

Sales to back-end Semi were $11.1 million in the 2022 first quarter compared with $12 million last year. Front- end Semi sales stepped up from $1.3 million in last year's first quarter to $2.3 million this year.

The impact of our acquisitions is tied to them closing toward the tail end of 2021. We expect Inefficiencies from the early stages of integration, and we anticipate improvement with more consistent go-forward quarterly performance. Overall, we expect modest margin improvement through the rest of 2022, driven by improving contributions from acquisitions and increasing volumes.

Slide 6 details our operating expenses and expectations going forward. Operating expenses were $10.2 million in the first quarter, representing 42.4% of revenue compared with $10.1 million, or 45% of revenue, in the fourth quarter. First-quarter 2022 operating expenses reflect the impact of a full quarter of costs associated

First Quarter 2022 Teleconference Call and Webcast

with the Company's fourth-quarter acquisitions and include approximately $780,000 pre-tax intangible asset amortization expense.

Intangible asset amortization expense was $522,000 in the fourth quarter, with the step-up directly related to the acquisitions. We expect quarterly operating expenses for the balance of 2022 to be in the $10.9 million to $11.2 million range. We have annual merit pay increases during the second quarter and we expect growth- related investments to step up through the year, which are reflected in this range. As we continue with our growth investment plans to support our 5-Point Strategy, we are confident that we will continue to demonstrate improving operating leverage with volume and scale.

On Slide 7, you can see our bottom line and Adjusted EBITDA results. Both GAAP and adjusted EPS were within our guided ranges. We had GAAP net earnings of $577,000, or $0.05 per diluted share, for the first quarter compared with net earnings of $287,000, or $0.03 per diluted share, for the fourth quarter of 2021.

EPS was $0.12 per share compared with $0.07 per share in the fourth quarter, on an adjusted basis. Adjusted EPS reflects tax-affected acquired intangible amortization. On an after-tax basis, acquired intangible amortization amounted to $689,000 in the first quarter. We expect a similar amount of intangible amortization in the second quarter of 2022, with declining levels during the second half.

The effective tax rate for the quarter was 12%. We continued to benefit from tax credits related to high export sales and released a small valuation reserve of tax assets associated with some old foreign net operating losses. Adjusted EBITDA was $2.1 million for the first quarter, up 56% from the fourth quarter of 2021, reflecting higher bottom-line profitability and the impact of acquisitions on Q1 2022 amortization and interest expense.

In our Adjusted EBITDA calculation, we removed the impact of stock-based compensation. Stock-based compensation is a non-cash expense and, as such, does not impact our liquidity. Accordingly, we believe our Adjusted EBITDA is a better performance measure to assess the strength of our cash generation ability than EBITDA alone. More detail on the calculation of Adjusted EBITDA can be found under non-GAAP financial measures in our earnings release.

Slide 8 shows our capital structure and cash flow. Cash and cash equivalents were $17.2 million compared with $21.2 million at the end of 2021. We used approximately $900,000 in cash to pay down debt in the quarter, reducing our balance to $19.2 million. As a reminder, we had debt of $20.1 million at the end of 2021 as we established a term loan facility to finance two of our three acquisitions during the fourth quarter.

We believe we have better leverage in our balance sheet than we had historically and have plenty of financial flexibility to continue executing our 5-Point Strategy for growth. Our liquidity stands at $32.2 million, including cash and approximately $15 million available on a revolver and term loan facilities. We used $2.7 million in cash during the first quarter. The first quarter typically consumes cash due to the timing of year-end bonus payments and cash taxes.

Capital expenditures during the first quarter were $335,000 compared with $417,000 in the fourth and $388,000 in the year-ago quarter. For 2022, we expect capital expenditures to be around 1% to 2% of annual revenue; however, depending upon changes in market demand or manufacturing sales strategies, we may make purchases or investments as we deem necessary and appropriate.

With that, I will now turn the call back over to Nick.

First Quarter 2022 Teleconference Call and Webcast

Nick Grant: Thanks, Duncan. Slide 9 highlights our orders and backlog performance. Overall, demand for our products and solutions remained solid with a first-quarterbook-to-bill of 1.04. While we will always welcome market tailwinds, our objective is to execute our 5-Point Strategy to grow faster than our served markets.

We continue to extend our reach in targeted growth markets while deepening customer relationships across these industries. In the first quarter, our businesses continued to add new customers, focusing on both end- users and OEMs. Orders for the first quarter of $25.1 million were essentially flat with the year-ago period and were down from a record $30.5 million in the fourth quarter.

As we mentioned on our last call, the fourth quarter included a large, approximately $10 million order for our front-end Semi solutions. We will deliver against this order throughout 2022, primarily in the second, third and fourth quarters. The pipeline remains very active for more front-end Semi orders for our induction heating solutions used in silicon-carbide crystal growth applications.

Our Semi back-end orders were lower year-over-year than an atypically strong period of demand that occurred during the first half of 2021. Still, they remained at an elevated level from historical rates. Outside of Semi, orders for the first quarter of 2022 reflected strong demand from the automotive industry, particularly for EV applications requiring inTEST's induction heating technology and our newly-acquired battery test solutions.

Orders were up in Life Sciences, driven by demand for a variety of inTEST's technology solutions, including digital imaging and induction heating. In the quarter, demand increased for environmental technology solutions from the Defense/Aero industry. Our backlog at quarter-end reached another record level at $35 million, approximately 63% of which is expected to convert to sales in the second quarter. Our level of longer-term backlog is higher than historical trends as customers seek to secure production capacity and cope with longer lead times.

Slide 10 reaffirms our guidance for 2022 and provides second-quarter expectations. Although we only have one quarter in the books, I'm pleased with how the year is shaping up.

As a result of our solid start, we expect revenue for 2022 to be in the range of $110 million to $115 million, with quarterly gross margins ranging between 46% and 49%. We also expect interest expense to run approximately $150,000 per quarter and our effective tax rate to be between 15% to 17% for the year.

As I mentioned earlier, for the second quarter of 2022, we expect revenue to be in the range of $27 million to $29 million. Q2 GAAP EPS should be in the range of $0.11 to $0.16 per diluted share, while we anticipate adjusted non-GAAP EPS to be approximately $0.18 to $0.23 per diluted share. The difference between GAAP and non-GAAP is tax-effective acquisition amortization expense.

Our guidance is based on our current views with respect to operating and market conditions, customer forecasts that are subject to change as well as our expectations for the balance of the quarter, and are subject to any strategic investments we may choose to make. It also assumes supply chain challenges remain relatively consistent with what we've been seeing, with gradual improvement as we move through the second half of the year. Actual results may differ materially as a result of, among other things, the factors described under forward-looking statements found in the materials that accompany this conference call, including the press release and the slides.

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inTest Corporation published this content on 25 May 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 May 2022 20:18:27 UTC.