inTEST Corporation (AMEX:INTT) Q1 2024 Earnings Call Transcript May 6, 2024
inTEST Corporation misses on earnings expectations. Reported EPS is $0.05445 EPS, expectations were $0.08. INTT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentleman, Greetings, and welcome to the inTEST Corporation First Quarter 2024 Financial Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Sean Sutter, Investor Relations. Please go ahead.
Sean Suter: Good afternoon, everyone. We certainly appreciate your interest in inTEST Corporation, and thank you for sharing your time with us today. Joining me on our call are Nick Grant, our President and Chief Executive Officer, and Duncan Gilmour, our Chief Financial Officer and Treasurer. You should have the earnings released, which crossed the wires today after market. As well as the slides that will accompany our conversation today. If not, you can find these documents on the Investor Relations section of our website, intest.com. Please turn to Slide 2, and I’ll review the Safe Harbor statement. During this call, management may make some forward-looking statements about our current plans, beliefs, and expectations. These statements apply to future events that are subject to risks, uncertainties, and other factors that could cause actual results that 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. Also, management will refer to 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. You can find reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today’s release and slides. Now, please turn to Slide 3, and I’ll turn the call over to Nick. Nick?
Nick Grant: Thank you, Sean, and good afternoon, everyone. Thanks for joining us for our first quarter 2024 earnings call. The quarter came in about where we had expected, and I’d like to thank the entire inTEST team for making it happen in a relatively tough environment. Revenue of nearly $30 million was somewhat higher than expected, while gross margin of $43.8 was lower, primarily driven by the timing of the acquisition of Alfamation. With operating expenses coming in slightly lower than expected, EPS was $0.05, and was $0.10 on an adjusted basis. Alfamation, which we owned for about 2.5 weeks in the quarter, contributed $1.4 million of the $1.9 million revenue increase over the fourth quarter of last year. However, given the timing of the acquisition and having revenue and costs misaligned in a short stub period, they were a drag on our gross margin.
In a normalized quarter, we would expect their typical margins to be similar to ours. We continue to execute our 5-Point strategy, which focuses our growth efforts in diversified markets and drives our strategic thinking. These efforts are helping as we manage through the tough semiconductor cycle. In fact, while they can be lumpy in their own rights, defense aero and industrial remain solid markets for us in the quarter. The addition of Alfamation, which provides us a meaningful position in the electronics and infotainment test space for the automotive industry, will provide further diversification. Importantly, we continue to generate cash from operations, and even after the Alfamation acquisition where we used about $19 million, we ended the quarter with $27 million in cash.
We believe this is adequate financial flexibility to keep advancing our transformation strategy. Turning to Slide 4, I’ll review the orders and backlog. As we have been communicating since last November, the first half of 2024 was expected to be weaker than the second half of the year. However, we had a measurable change in order trends at the very end of the quarter, and that has now impacted our outlook for the year. Specifically, we had about 5 million orders we had anticipated that were either delayed or reduced in size from expected levels. Encouragingly, back-end semi was up sequentially, showing signs of stabilization, which we had noted on our year-end call. This helped to partially offset a notable decline in front-end orders in the first quarter.
One bright spot to note is our backlog is at a record $56 million at quarter-end. The boost is directly the result of the acquisition with Alfamation contributing $22.8 million in backlog. You may recall that we had reported their backlog at about €13 million, when we acquired them. However, their accounting for revenue was based on the percentage of completion methodology. After the acquisition, we have concluded that under U.S. GAAP, point-in-time revenue recognition is more appropriate. As a result of this change, acquired backlog increased to $22.4 million. Keep in mind that the accounting treatment is related to the timing of revenue recognition and does not impact our previous statements regarding Alfamation’s annual revenue. While it’s in its early days, the integration of Alfamation is progressing as planned.
In fact, we have already jointly participated in trade shows and numerous customer interactions. We are really excited about Alfamation joining the inTEST team and all that we could do together to further our strategy. With that, let me turn it over to Duncan to review the financials and outlook in more detail. Duncan, over to you.
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Duncan Gilmour: Thank you, Nick. Starting on Slide 5, revenue for the first quarter was $29.8 million including $1.4 million from Alfamation, which was acquired with only 19 days or 2.5 weeks remaining in the quarter. The $2.1 million decline compared with Q1 2023 was driven by a $2.7 million decline in Semi, partially offset by growth in the industrial and defense/aerospace markets. Sequentially, first quarter revenue increased $1.9 million with Semi revenue up 39%, off of the exceptionally low fourth quarter, while defense/aerospace was up 34%. Revenue from Alfamation was primarily in auto EV, which helped offset a decline in that market within the organic businesses. Moving to Slide 6, gross margin of 43.8% for the quarter contracted 80 basis points sequentially, driven by a 100 basis point negative impact from the stub period for Alfamation.
This is just the result of a timing mismatch on recognition of revenue and expenses given the short ownership timeframe in Q1. On a year-over-year comparison, gross margin contraction was a result of lower volume and product mix, as well as the aforementioned impact from the acquisition. Our trailing 12 months gross profit of $55 million, or 45.4% of sales, is in line with our updated outlook for this year of gross margin between 44% and 46%. As you can see on Slide 7, our operating expenses were up $1.1 million versus the prior year, driven by higher corporate development expenses, incremental operating expenses inherited with the acquisition, and higher professional fees. As a percent of sales, OpEx increased 610 basis points to 42.2%. Turning to Slide 8, you can see our bottom line and adjusted EBITDA results.
For the quarter, net earnings were $662,000 or $0.05 per diluted share. Adjusted net earnings were $1.2 million or $0.10 per diluted share. Adjusted EPS reflects adding back tax-affected acquired intangible amortization. On an after-tax basis, our required intangible amortization amounted to approximately $500,000 or about $0.05 per diluted share in the first quarter. Adjusted EBITDA for Q1 was $1.8 million, representing a 6.1% adjusted EBITDA margin. Slide 9, shows our capital structure and cash flow. We had a solid quarter of cash generation, adding $2.1 million from operations. Capital expenditures in the first quarter were $300,000 unchanged from the prior year period. Given our modest capital requirements to grow the organic business, free cash flow was $1.8 million.
Cash equivalents at the end of the first quarter were $27.3 million, down $18 million from the trailing quarter, reflecting the use of approximately $19 million for the acquisition of Alfamation. Borrowings increased in the quarter due to the $9 million in debt we assumed from the acquisition. We ended the quarter with total debt of $20.4 million, which we believe is very manageable and reflects a total debt leverage ratio of 1.6x. During the quarter, we repaid approximately $1 million of debt. We continue to have $30 million available with our delayed draw term loan and an incremental $10 million available under our revolver. As announced on Friday, we extended the maturity date on these facilities by 4 years to May 2031, and the drawdown period was extended 3 years to May 2026.
Turn to Slide 10 as we review our outlook for 2024. For the second quarter, we are expecting revenue to be between $34 million and $36 million, with gross margin of approximately 44% to 45%. Second quarter operating expenses, including amortization, are expected to be in the range of $14.5 million to $15 million. This range reflects the incremental operating costs gained from the acquisition of Alfamation and higher total intangible asset amortization. After tax, this is expected to be approximately $1.2 million, or about $0.10 per share. We are expecting EPS for the second quarter to be between breakeven to $0.06 per diluted share, while adjusted EPS should be approximately $0.10 to $0.16 per diluted share. As a reminder, we simply adjust for tax-affected amortization expense.
For our full-year outlook with the addition of Alfamation and the recent order trends Nick discussed, we now expect 2024 revenue to range from $140 million to $150 million. Gross margin for 2024 is expected to be approximately 44% to 46%, with expected operating expenses of roughly $56 million to $58 million. This includes tax-adjusted intangible asset amortization expense of approximately $4.1 million. Our expected effective tax rate is now projected to be about 17% to 19%. For capital expenditures in 2024, we expect to run between 1% to 2% of sales. As usual, our guidance does not include the potential impact from any non-operating expenses such as corporate development that may occur from time to time, nor does it include the potential impact from any additional acquisitions we may make.
With that, if you will turn to Slide 11, I will now turn the call back over to Nick.
Nick Grant: Thanks, Duncan. In a tough macro environment, our team is keeping their heads down and executing our plan. We have been up against some heavy headwinds in the semi-market, which is about half of total sales, but less than it had been historically. Our latest acquisition will help the further advance market diversification. Nonetheless, we like our position in the semi-market, which over the long run has exciting megatrends to drive growth as we leverage our know-how and innovative solutions. We continue to innovate by providing more automated technologies, and through responsive solutions-oriented service, we are gaining additional traction within our existing customers while also capturing new ones. Our diversified markets are serving us well, but it’s the team’s effort to expand our reach and leverage unique solutions across more channels and markets that are enabling inroads with new customers and channel partners.
Underpinning our 5-point strategy is the accountability and discipline required to execute well. Our teams are consistently evaluating market position, pricing, competition, opportunities, and the talent within as well as across our channel partners to drive growth. We are encouraged with our progress and excited about our future. With that, operator, we can open the lines for questions. Thank you.
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