inTEST Corporation (NYSE American: INTT) Third Quarter 2021 Conference Call and Webcast November 5, 2021
Operator: Greetings, and welcome to the inTEST Corporation Third Quarter 2021 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Deborah Pawlowski, Investor Relations. 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 third quarter 2021 financial results, which we released this morning before markets opened. If not, you can access the release as well as 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’ll 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 reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today’s release and in the slides.
With that, if you will turn to Slide 3, I will turn it over to Nick to begin. Nick?
Nick Grant: Thank you Deb and good morning, everyone.
We delivered solid third quarter results that we believe demonstrate the successful execution on our 5-Point Strategy, which is focused on driving growth, diversifying our markets and customer base while ensuring we have the right talent to execute.
In the quarter, we achieved year-over-year net revenue growth of 46% to $21.1 million as global demand for semiconductors continued to show relative strength and industrial sectors benefitted from the ongoing, broad-based recovery. Of note, our multimarket revenue grew 22% sequentially.
Like many others we continue to face supply chain constraints and inflationary pressures. We had ~$500 thousand of finished products that were unable to ship in the Qtr. due to logistic challenges. Our teams have done an excellent job managing supplier and logistics challenges to fulfill orders. We continue to implement enhanced pricing to help overcome inflation and expediting costs. The result of these efforts was reflected in our margins and profitability in the quarter, which were in our expected range.
inTEST Corporation (NYSE American: INTT) Third Quarter 2021 Conference Call and Webcast November 5, 2021
During the quarter, we generated $4.3 million cash from operations, increasing our year-to-date total cash generated to $8.1 million. Cash on hand at the end of the quarter was nearly $19 million. And, in support of our organic and inorganic growth initiatives, we announced a couple of weeks ago that we executed a new extended and expanded credit agreement. Overall, this added liquidity allows us to capitalize on the attractive debt markets and provides additional financial flexibility to continue to pursue a robust pipeline of acquisition opportunities.
Following that announcement, we successfully executed two acquisitions post third quarter close in October: Z-Sciences and Videology Imaging Solutions. Both acquisitions arose out of our M&A funnel generation program that has been developed and refined over the last year. Slides 4 and 5 provide a brief overview of each.
Z-Sciences was a small, tuck-in asset acquisition, which closed on October 6th and was funded with cash on hand. This acquisition is an ideal demonstration of our strategy to grow through innovative technologies with an eye towards fast growing, adjacent markets as it provided both a low-cost method for adding ultra-cold storage to our ultra-cold test solutions, and it allows us to gain a presence in a fragmented, but fast growing estimated $200 million addressable market.
Their portfolio of high-performance biomedical refrigerators and freezers are used to meet versatile applications, including ultra-cold storage solutions for biological sample banks, blood safety, vaccine safety, medical supplies, and reagent safety. Currently there is little to no overlap in customer base as their products are largely sold to research institutions, universities, pharmaceutical biotechnology manufacturers and hospitals.
While the current business has de minimis revenue, we believe we can build a scalable operation to accelerate growth in medical cold chain applications by leveraging our engineering expertise, manufacturing capabilities and financial strength with targeted investments in sales and marketing as well as product innovation.
Turning to Slide 5 and our most recent acquisition, Videology, which we acquired last week on October 28th. The Videology acquisition is consistent with a number of our strategic initiatives, as it will help us expand our process technology solutions and diversify our reach into key targeted life sciences and industrial markets while also broadening our international footprint and customer base. Additionally, this aligns with enhancing automation capabilities, as we will look to add future product solutions with imaging data and analytical tools, invaluable functionality, and expertise as inTEST strives to embrace opportunities created by the Internet of Things and making the most of artificial intelligence-based tools.
Their product set includes industrial-grade circuit board mounted video digital cameras and related devices, systems and software used in a broad spectrum of applications. About 72% of their revenue is in the life sciences and security markets but they also serve the aerospace, machine vision, biometrics, and diagnostic imaging industries. Customers include Fortune 500 companies and government prime contractors, as well as mid-sized security, biotech, and machine-vision OEMs and integrators. The company has a design and sales facility in the Netherlands and generates about 40% of revenue from European customers. Similar to Z- Sciences’ space, this too is a highly fragmented market that is large and growing.
inTEST Corporation (NYSE American: INTT) Third Quarter 2021 Conference Call and Webcast November 5, 2021
It is important to note that this is not a camera acquisition, it is about image capture and data analysis that Videology brings. The company is similar to our other businesses in the sense that they develop highly valued engineered solutions. I want to briefly talk to a few application- specific examples to give you a sense of the technology that we are adding.
Videology supplies cameras in the ophthalmology markets to capture images of the inner eye to examine patients for refractive correction, glaucoma, and other degenerative eye diseases.
Another example is spectroscopy applications which are commonly used in chemical analysis to provide a structural fingerprint by which molecules can be identified. Videology cameras are used by a leading Fortune 500 company in their handheld and tabletop devices providing this type of analysis.
Finally, their small cameras are commonly used to inspect pipes of all diameters from large Oil and Gas pipes to smaller Fiber Optic applications. The medical applications for “Pipe” inspection include Medical/Intra-Oral Endoscopes.
What sets Videology apart from their competition is their design expertise and flexibility to work with customers on unique solutions. From a financial perspective, Videology’s trailing twelvemonth revenue as of the end of September 2021 was approximately $10 million and provided comparable gross margins with inTEST. We expect the acquisition to be approximately $0.05 accretive to diluted earnings per share in its first year with inTEST. This is net of one-time acquisition related expenses of approximately $0.03 per diluted share, which will be recognized in the fourth quarter of 2021. While we financed the Videology transaction with a portion of our new credit facility, we still have the financial flexibility and resources to continue to pursue a robust pipeline of acquisition opportunities.
Lastly, life sciences is a key target market for inTEST and both of these acquisitions bring technology and engineering know-how that enhances our medical offerings in that space. Importantly, with some incremental investments and operational support, we believe we can scale these businesses and benefit from secular tailwinds in the life sciences markets.
These are exciting times for inTEST as we drive change throughout the organization and build momentum by augmenting our deep industry knowledge, reputation, and expertise to develop and deliver more high quality, innovative solutions to address our customers’ complex requirements.
With that, let me turn it over to Duncan to review the 3rd quarter financials in more detail. Duncan over to you.
Duncan Gilmour: Thank you, Nick. Starting on Slide 6, we provide some detail regarding our top line. Revenue for the third quarter was $21.1 million, a 46% increase over the same period last year and just above the mid-point of our guidance. Multimarket revenue grew 22% from the second quarter fueled by strength in the industrial market, while our Semi business remains at historically high levels despite the sequential dip. We continue to see the benefit of our ongoing innovation and development efforts as our new product designs are being well-received in our markets. We are gaining new customers and winning business from competitors.
Moving to Slide 7, our third quarter gross margin of 49.2% was in line with guidance and compares with 50.2% in the second quarter of 2021 and 44.7% a year ago. When compared
inTEST Corporation (NYSE American: INTT) Third Quarter 2021 Conference Call and Webcast November 5, 2021
with the second quarter, the change in gross margin reflected higher component material costs not yet fully covered by price improvements as well as changes in product mix and less favorable absorption of fixed manufacturing costs. We continue to actively manage ongoing challenges of supply chain constraints and expect to start seeing some positive impact from the price increases we have rolled out in the 2nd and 3rd quarters, although we do not expect the full benefit of this initiative will be felt until next year.
Slide 8 details our operating expenses and expectations for the fourth quarter. Selling expense grew 9% sequentially to $2.8 million in the third quarter, driven by increased headcount, a return to more normal levels of travel as restrictions are lifted, and an increase in spending on new advertising initiatives. Engineering and product development expense remained relatively unchanged compared with the trailing period.
General and administrative expense decreased 4% sequentially to $3.6 million for the third quarter. Restructuring and other charges were $51,000, down from $197,000 in the second quarter. The third quarter included an increase in expenses related to M&A activities, but this was more than offset by the $324,000 reduction quarter-to-quarter related to non-recurring CFO transition costs in the second quarter; a sequential quarter reduction in costs associated with finalizing the integration of our EMS manufacturing operations, which is now complete; and a reduction in spend on non-M&A related initiatives as focus and spending on M&A activities has ramped up.
We expect operating expenses to trend up significantly in the fourth quarter reflecting the impact of the businesses acquired in October. In addition, we expect an incremental increase in costs related to acquisition activities of approximately $300,000 and incremental amortization related to acquired intangibles of approximately $100,000.
You can see our bottom-line and Adjusted EBITDA results on Slide 9. We had net earnings of $2.2 million, or $0.20 per diluted share, for the third quarter, which was in line with guidance and compares with net earnings of $2.6 million, or $0.24 per diluted share, for the second quarter. We accrued income tax expense of $357,000 in the third quarter, reflecting a 14% effective tax rate. This compares with $447,000 of income tax expense accrued in the second quarter, which reflected an effective tax rate of 15%. We expect that our effective tax rate in 2021 will range from 14% to 16%.
Diluted average shares outstanding were 10.8 million for the third quarter of 2021. During the third quarter we saw 3,435 option shares exercised, bringing the total for the nine months to 149,010 which has raised $1.0 million in cash proceeds this year.
Adjusted EBITDA was $3.4 million for the third quarter, compared with $4.0 million for the second quarter, and $1.0 million during the prior-year period. Beginning with the third quarter, we are reporting adjusted EBITDA, which removes the impact of stock-based compensation from EBITDA. 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 than EBITDA alone. More detail on the calculation of adjusted EBITDA can be found under “Non-GAAP Financial Measures” in our earnings release.
inTEST Corporation (NYSE American: INTT) Third Quarter 2021 Conference Call and Webcast November 5, 2021
Consolidated headcount at September 30th was 232, an increase of 10 staff from the level we had at June 30th. The increase was primarily in our Thermal segment.
I’ll now turn to Slide 10 for our capital structure and cash flow. As previously announced on October 18th we executed a new five-year credit agreement with M&T Bank, which includes a $25 million non-revolving delayed draw term loan and a $10 million revolving credit facility. This new agreement replaced our existing $10 million facility with M&T Bank, which had no borrowings at quarter-end. On October 28th, we used $12.0 million under the Term Note to finance the acquisition of Videology.
Cash and cash equivalents increased by $4.1 million sequentially to $18.7 million. We generated $4.3 million of cash from operations during the third quarter. We currently expect cash and cash equivalents to increase throughout the balance of 2021, subject to any strategic investments we may choose to make.
Accounts receivable declined $600,000 or 5% sequentially to $12.2 million at September 30th, with 53 DSO (down from 54 DSO at June 30th). Inventories grew $657,000, or 8% sequentially, to $9.4 million, primarily driven by raw material influx in our Thermal segment to support the increased multimarket demand we are seeing.
Capital expenditures during the third quarter were $114,000, down from $75,000 in the second quarter. We have no significant commitments for capital expenditures for the balance of 2021; however, depending upon changes in market demand or manufacturing and 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.
Nick Grant: Thanks, Duncan. Slide 11, highlights our orders and backlog. Overall, demand for our products and solutions remains strong, and we continued to secure new orders in our targeted growth markets and are making inroads in working with OEMs to embed our solutions for broader market exposure.
Orders for the third quarter were $21.1 million, a 47% increase over the same period last year and was supported by growth in both the multimarket and semi market. The year-over-year increase in multimarket orders was primarily from the automotive industry, which includes the EV market. During the recent third quarter, we received a significant follow-on order for approximately $1.0 million from one of our EV customers, which we expect to ship over the next several quarters. As a reminder, in the second quarter of 2021, we received a record order for chillers from a key automotive OEM manufacturer for approximately $1.5 million. This order is also shipping over multiple quarters beginning in Q4.
Note this trend of placing larger orders that will ship over several quarters is one we are seeing with more frequency. We expect this may, at times, result in period over period fluctuations in order levels that are not necessarily indicative of changing demand but rather reflect the timing of when these large orders were placed.
Our backlog at quarter-end was $20.4 million, approximately 75% of which is expected to convert to sales in the fourth quarter.
Please turn to Slide 12 and I will provide an update on our near-term expectations.
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Disclaimer
inTest Corporation published this content on 08 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 08 November 2021 21:31:20 UTC.
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Technical analysis trends INTEST CORPORATION
| Short Term | Mid-Term | Long Term | |
| Trends | Bullish | Neutral | Bullish |
Income Statement Evolution
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Sell
Buy |
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| Mean consensus | BUY |
| Number of Analysts | 2 |
| Last Close Price | 15,00 $ |
| Average target price | 19,00 $ |
| Spread / Average Target | 26,7% |
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