inTEST Corporation (AMEX:INTT) Q1 2023 Earnings Call Transcript

inTEST Corporation (AMEX:INTT) Q1 2023 Earnings Call Transcript May 5, 2023

inTEST Corporation beats earnings expectations. Reported EPS is $0.29, expectations were $0.26.

Operator: Greetings, and welcome to the inTEST Corporation’s First Quarter 2023 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shawn Southard of Investor Relations.

Shawn Southard: Thank you. Good morning, everyone. We appreciate your interest, and thank you for sharing your time with 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 2023 financial results, which we released earlier this morning. If not, you can access the release as well as the slides that will accompany our conversation on our website at intest.com/investor-relations. After our presentation, we will open the lines for Q&A. If you’ll turn to Slide 2, I’ll 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, uncertainties and other factors are provided in the earnings release as well as in other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. During today’s call, we will 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 reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today’s release and slides.

With that, please turn to Slide 3, and I’ll now turn the call over to Nick.

Nick Grant: Thank you, Shawn, and good morning, everyone. Thanks for joining us on our first quarter 2023 earnings call. We delivered another strong quarter as the team is continuing to execute well on our 5-point strategy for growth. I would like to once again thank the entire organization for their commitment to our strategy and for delivering the plan. Revenue grew 33% year-over-year to $32 million, driven by strong performance across most markets, with particular strength shown in front-end semi for silicon carbide crystal growth and epitaxy applications, as well as defense/aero and life science markets. The revenue growth was all organic as we now have a full year of the acquisitions under our belt. I believe our results are demonstrating the success we are having with the integration of those three businesses.

Under our 5-point strategy, we are beginning to unlock their potential. I should point out that we believe innovation is at the heart of our success, which is validated with every new product we launch. For example, our compact EKOHEAT system is now a standard offering in our induction heating solutions. We’ve made significant headway in our electronic test business with our high-voltage, high-current superset interface solution for testing higher-powered chips, as well as our continued expansion of our automated manipulator portfolio with our new LSC and LFL manipulators. And we are excited about Videology’s new SCAiLX Zoom Block camera with AI-capable edge computing technology, which formerly launched last quarter and will start shipping in June.

Innovation is driving demand. Our sales and marketing efforts to expand our business are also validated by our continued success. We are consistently adding new customers, deepening our reach into existing customers in key markets, while expanding into new applications. A good example of this is our industrial grade embedded video cameras, which are finding their way into pipe inspections for the energy industry. Our opportunities also continue to expand in silicon carbide and gallium nitride as those markets develop. We are supporting our customers in this space as they ramp capacity and optimize operations. Profitability in the quarter increased year-over-year on favorable mix and realization from our ongoing pricing efforts. Our year-over-year expanded operating margin also demonstrates the power of operating leverage as we achieve higher sales.

As to demand, we continue to see strength in semiconductor, industrial, defense/aero and life sciences markets. These markets drove first quarter orders of $31 million, up 23% versus the prior year. Larger orders can often create lumpy comparisons quarter-to-quarter. For example, while auto EV orders were down year-over-year, they were up sequentially, and we just announced this morning a nearly $2 million order from an EV customer for a brand-new application utilizing our chiller solutions. In fact, this is just another example of where our focus on this target market is helping to uncover new opportunities in the manufacturing of EVs for our portfolio of technologies. And our backlog at the end of the first quarter remained solid at approximately $46 million.

Organizationally, we continue to add talent to the team, and we are pleased to have announced the addition of Michael Tanniru as President of our Environmental Technologies division. He joins us from Cincinnati Test Systems, and I had the opportunity to work with Mike in the past at both Emerson and AMETEK where he had a track record of success. We are excited to welcome him to the team and look forward to seeing the impact he will have in the role. With that, let me turn it over to Duncan to review the financials in more detail. Duncan, over to you.

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Duncan Gilmour: Thank you, Nick. Starting on Slide 4, revenue for the first quarter 2023 was $31.9 million, up 32.5% or $7.8 million versus the same period last year and at the top end of our guidance range of $30 million to $32 million. This revenue growth of $7.8 million was entirely organic and, as Nick mentioned, was driven by strong demand across semi, defense/aerospace, life sciences, security and other markets. In the case of semi, increased demand for induction heating technology solutions for silicon carbide crystal growth and epitaxy applications, combined with strength in supporting trailing edge or less capital-intensive technologies for analog and mixed signal applications, drove semi sales to $17.7 million, up 32% year-over-year.

The automotive EV market was down 6% on a tough comp, and the large order we announced this morning, we believe, shows the decline is less meaningful than it might first appear. Moving to Slide 5. Gross margin of 47.2% in the quarter was up 150 basis points compared with the prior year Q1 period due to higher volume, better product mix and improved pricing. Compared with the trailing quarter, gross margin improved 100 basis points, reflecting favorable product mix and improved pricing. Our trailing 12 months gross profit of $57.5 million or 46.1% of sales is in line with our updated outlook this year of gross margin between 46% and 47%. As you can see on Slide 6, our operating expenses were up $1.3 million versus the prior year but down 630 basis points as a percentage of revenue, driven by operating leverage as the business scales up.

Versus the trailing quarter, total operating expenses were up $600,000 at $11.5 million. This was a little higher than anticipated due to slightly higher selling commissions and noncash stock compensation expense as we saw higher and more profitable revenue and an increased stock price. We continue to invest in sales and marketing as we execute on our strategy to drive growth. Turning to Slide 7. You can see our bottom line and adjusted EBITDA results. We had net earnings of $2.8 million or $0.25 per diluted share for the first quarter, which is up from $600,000 and $0.05 per diluted share in Q1 2022 and at the upper end of our guidance range. Adjusted EBITDA was $4.8 million, up from $2.1 million last year. Adjusted EBITDA margin expanded 620 basis points to 15.1% year-over-year.

On an adjusted basis, non-GAAP EPS was $0.29 per diluted share compared with $0.12 per diluted share in the first quarter of 2022. Adjusted EPS reflects adding back tax-effected acquired intangible amortization. On an after-tax basis, our acquired intangible amortization amounted to $452,000 in the first quarter. We expect after-tax intangible amortization for the second quarter to be similar. Slide 8 shows our capital structure and cash flow. We had a strong quarter of cash generation, adding $2.5 million from operations. Given our modest capital requirements to grow the organic business, free cash flow was $2.2 million or about 80% of net earnings. Cash and equivalents at the end of the first quarter was $15.4 million, up $2 million from the trailing quarter.

We also have $500,000 in restricted cash related to a prepayment on a customer order. In addition, we have $30 million available with our delayed draw term loan and an incremental $10 million available under our revolver. Our current leverage ratio is also below 1, at 0.81x, giving us considerable flexibility to continue to pursue our acquisition strategy. As we did in each of the prior quarters, we repaid $1 million of debt, bringing it down to $15.1 million. Note that repayment of debt does not increase funding available under the terms of our $30 million term loan facility. Turning to our order activity. As previously mentioned, our first quarter orders of nearly $31 million was a 23% increase versus the prior year. This reflected increase across all end markets, except in automotive EV, which declined $600,000 due to the timing of orders received.

While orders are generally lumpier from quarter-to-quarter, demand in that market remains strong, as noted by the order we announced this morning. Sequentially, overall orders were down a modest 1.6%. Growth in demand in both front end and back end semi, automotive EV and industrial, helped to offset sequential declines in security, defense/aerospace, life sciences and other markets. Again, while we think most of the sequential declines are primarily driven by the timing of underlying customer projects, we are seeing more cautious spending from customers with smaller order sizes and POs taking longer to get signed off. While not unexpected, given the macro environment, we are optimistic about our funnel activities, which remain healthy. Our backlog at March 31, 2023 was $45.7 million, a 30.5% increase over the prior year, although down 2.3% compared with December 31, 2022, mostly on variability and timing of orders and shipments.

Approximately 45% of the backlog is expected to ship beyond the current quarter. Turning to Slide 10. Let me review our updated outlook for 2023. We continue to be excited about where we’re headed this year. While we expect the quarterly cadence of orders to be lumpy, we believe we can achieve our revenue target, which represents high single-digit organic growth. In addition, we continue to pursue strategic acquisitions and partnerships to expand our portfolio and better serve our target markets. We expect revenue for the second quarter of 2023 to be in the range of $31 million to $33 million with a gross margin of approximately 46%. Second quarter operating expenses, including amortization, should run between 11.4 and $11.7 million. This is elevated to reflect annual merit increases, stock compensation expense and continued sales and marketing investments.

Intangible asset amortization is expected to be approximately $540,000 pretax or $450,000 after-tax. Given loan balances and current rates, our interest expense should be approximately $190,000 for the quarter. We anticipate second quarter 2023 EPS to be in the range of $0.21 to $0.26, while non-GAAP adjusted EPS should be in the range of $0.25 to $0.30. As a reminder, we simply adjust for tax-affected amortization expense in this latter non-GAAP measure of profitability. We expect our growth this year to be driven by strong demand across nearly all technology offerings and end markets. The progress we are making with our 5-point strategy is being realized through the implementation of disciplined processes in sales and marketing and accountability across the entire organization.

We are holding our guidance and outlook for 2023 annual revenue of $125 million to $130 million, which represents a 9% organic increase year-over-year at the midpoint of the range. This, of course, does not include the potential impact from any acquisitions we may make this year. We are, however, raising our gross margin outlook for 2023, which is now expected to range between 46% and 47%, driven by anticipated improved mix and pricing realization. Offsetting this increase at the gross profit line are likely higher operating expenses for the year, which should be in the range of $45 million to $47 million. This includes intangible asset amortization expense of approximately $2.1 million for the full year. This translates to tax-adjusted amortization expense of approximately $1.7 million for determining adjusted non-GAAP earnings.

Our effective tax rate is expected to be similar to 2022 or approximately 16% to 17%. Finally, our capital expenditures for 2023 are expected to continue to run between 1% to 2% of sales. With that, if you would turn to Slide 11, I will now turn the call back over to Nick.

Nick Grant: Thanks, Duncan. Slide 11 shows that we are making solid progress towards our 2025 revenue goal of $200 million to $250 million. Including our 2023 expectations, we will have grown the company at a greater than 30% CAGR since we implemented our 5-point strategy at the start of 2021. Excluding future acquisitions, we expect to continue driving high single-digit growth with our base business. With future strategic acquisitions, it should enable us to achieve our 2025 goal of between 200 and $250 million in revenue. We have an active pipeline of acquisition and partnership opportunities, and we have flexibility with our capital structure that we believe will allow us to execute on our plan. If you’ll turn to Slide 12, our revenue growth goals should translate into strong earnings growth.

Our plan is to deliver divisional operating income of over $40 million, adjusted EBITDA of over $30 million and improved earnings power to over $20 million in 2025. Let me sum up on Slide 13. As I have noted, our 5-point strategy is delivering results for our shareholders. Our engineered solutions that enable our customers to improve productivity or create more effective solutions within their own portfolio are in high demand. Our growing sales force is reaching more prospects and our new organization structure with three technology-focused business segments has driven greater focus and collaboration across the company. We believe this, in turn, will create even more opportunities for growth. We continue to unleash the potential of inTEST on our journey to becoming a supplier of choice for innovative test and process technology solutions.

We are driving organic growth and actively pursuing acquisition opportunities to build our technology base, deepen our market penetration and broaden our market reach. With that, operator, let’s open the lines for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Jaeson Schmidt of Lake Street. Please go ahead.

Operator: Thank you very much. The next question is from Ted Jackson of Northland Securities. Please go ahead.

Operator: Thank you very much. The next question is from Tim Moore of EF Hutton. Please go ahead.

Operator: Thank you. The next question is from Peter Wright of Intro-act. Please go ahead.

Operator: Thank you very much. [Operator Instructions] The next question is from Brian Kinstlinger of Alliance Global Partners. Please go ahead.

Operator: Thank you very much. Ladies and gentlemen, we have no further questions in the queue. And I would like to hand the floor back over to Nick Grant for some closing comments.

Nick Grant: Thank you, Chris. I want to reiterate that I’m exceptionally proud of our global team who continue to deliver outstanding results. We look forward to connecting with some of you on May 10th at the EF Hutton Inaugural Global Conference in New York City. We really appreciate you taking the time to join us today on our call and for your interest in inTEST. Thank you all, and have a great day.

Operator: Thank you very much. Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time, and thank you for your participation.