Q4 2023 inTest Corp Earnings Call
Participants
Deborah Pawlowski; Investor Relations; inTest Corp
Nick Grant; President and CEO; inTest Corp
Duncan Gilmour; Chief Financial Officer, Treasurer, Secretary; inTest Corp
Jaeson Schmidt; Analyst; Lake Street Capital Markets, LLC
Ted Jackson; Analyst; Northland Securities, Inc.
Presentation
Operator
Greetings. Welcome to inTEST Corporation fourth-quarter 2023 financial results. (Operator Instructions) Please note this conference is being recorded.
I will now turn the conference over to Deborah Pawlowski, Investor Relations for inTEST. Thank you. You may begin.
Deborah Pawlowski
Good morning, 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 Gilmore, our Chief Financial Officer and Treasurer.
You should have the earnings release which crossed the wire yesterday after market as well as the slides that will accompany our conversation today. The 2023 10-K was filed yesterday as well. These documents are available on the Investor Relations section of our website, intest.com. You will also find there our restated third quarter and nine months 10QA that was also filed yesterday. Duncan will touch on that briefly.
But if you would turn to slide 2, I will 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 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 in other documents filed by the company with 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.
So with that, if you would turn to slide 3, I will turn the call over to Nick. Nick?
Nick Grant
Thank you, Deb, and good morning, everyone. Thanks for joining us on our fourth-quarter 2023 earnings call.
I'm pleased to report that 2023 was our second consecutive year of record revenue, achieving $123.3 million while also reaching net income of $9.3 million for the year, the highest level in over a decade. So I'd like to start by acknowledging and expressing my appreciation to the entire inTEST team across the globe for their outstanding efforts and commitment to our strategy.
We believe our effective execution of our five-point strategy is delivering growth, solid financial performance, and strong cash generation. Our strategy provides the framework that drives innovation, deeper penetration into target markets, geographic expansion, and attracts top talent.
Through the year, we've made good progress at key accounts and strengthened our channel relationships around the world to improve our customer reach. Additionally, we announced a new Center of Excellence in Malaysia for applications engineering, product development, and localized manufacturing that will support all of our divisions and allow us to better serve customers in Southeast Asia. We believe that as we further deepen our presence into our key target markets, we are building greater stability which is helping to offset our exposure in more cyclical semi market.
Fourth-quarter revenue was impacted by the downturn in semi back-end orders that we discussed on our Q3 earnings call. However, we are benefiting from our breadth of innovative solutions, serving the expanding needs of our non-semi customers especially in the industrial, auto EV, and defense/aero market. Specifically, compared with the fourth quarter of 2022, the industrial market had sales growth of $3.7 million as our process technologies division realized strong demand for several of their innovative products, including our popular EKOHEAT induction heating solutions. Building on that success, we launched the EKOHEAT 2 induction heating product line in December, offering the next generation of this technology. We are excited about the exclusive enhancements that we've made to this popular product line.
Additionally, we saw our fourth-quarter sales in auto EV increase $1.2 million over the prior year, driven by our environmental technologies division, where our process chillers are serving specific demands from the expanding need for inverter testing in electric vehicles. In the quarter, we also saw greater adoption of our battery test solutions for this market offered by our electronic test division.
Further supporting our diversification, our fourth-quarter sales were up 11% in the defense/aero market as activity in this segment is on the rise due to global instability. We have seen increasing demand from this market for our environmental test chambers. These products provide high accuracy test capability over a wide temperature range, supporting capacity expansion in various arsenal systems. We were encouraged to see the fourth-quarter demand continuing in defense/aero and industrial markets with orders improving 70% and 110% compared with the third quarter respectively. We also demonstrated strong cash generation that is inherent in our business in both the quarter and the year, which Duncan will cover in more detail.
Organizationally, we continue to add talent to the team and are pleased to have recently announced the addition of Michael Goodrich as President of our Process Technologies Division. Mike joined us from Vixar, Inc., a subsidiary of ams OSRAM, a manufacturer of high-performance optical components and solutions. He is a proven leader of global cross functional teams and shares the passion for the customer fostered by his deep industry expertise. We welcome him to the team and look forward to his contributions to our organization. Mike is just one example of how we are building our teams. Throughout the year and across our organization, strong talent has been added in sales, engineering, and manufacturing support roles to assist us on our transformational journey.
Turning to slide 4, I want to highlight the progress we've made on our diversification front which is an important component of our five-point strategy and one that separates inTEST from its past. As part of our strategy, we have made tremendous strides to strengthen our presence in key target growth markets outside of semi as well as looking to diversify within semi with an eye towards the front end. Our efforts have resulted in increasing our non semi markets combined share of revenue from around 35% in 2021 up to 47% in 2023, and we accomplished this while also growing our semi revenue by approximately 20% over the same timeframe.
As I mentioned earlier, 2023 revenue increased despite the second-half slowdown in semi because of our growing presence in key target markets like defense/aero, industrial, security, life sciences, and the electric vehicle market. I'm quite pleased with the diversification progress we have made, which aligns with the strategy we laid out at our inaugural Investor Day back in 2022.
With that, let me turn it over to Duncan to review the financials and outlook in more detail. Duncan, over to you.
Duncan Gilmour
Before I review the results for the fourth quarter and 2023 as a whole, I want to touch on what caused the third quarter restatements where we are now deferring 1.7 million of previously recognized Q3 revenue along with the associated costs. While we felt we had accounted for this correctly in our earlier Q3 report, subsequent consultation during the year end audit process ultimately resulted in us reaching a different conclusion. Help everyone's understanding. Let me give you some additional details. As with most manufacturing companies, we have many carefully chosen and qualified suppliers for materials and components that we use in the building material for our products. During the year, we had a handful of suppliers notify us of their plans to discontinue some key materials or components that we used within a few customer systems. This is often referred to as a last time buy notification or opportunity. We notified our customers in the event they wanted to buy more of our systems that utilize these components. While not necessarily ready to commit to placing orders for additional systems at the time, a small number asked us to purchase exclusively on their behalf a certain amount of these obsoleting components to ensure they would be able to order more of our systems in the future without the need for design changes. Due to changes within the detailed bills of material. We did this for them and were paid in full for these purchases with full legal ownership and risk transferring. To the customer. However, in most cases it was requested that these materials remain at our production facilities and despite the fact that one that is not guaranteed that we will ever actually get future additional orders from these customers. And two, all future orders are subject to terms unknown at this time. It would be for additional consideration. We have determined that the revenue from the pre purchase and sale of these last time buy components should more appropriately be deferred until there is certainty as to the ultimate customer use for and physical of these materials and components. As already mentioned, the impact from the third quarter was a deferral of 1.7 million of revenue as well as the associated purchasing costs after being tax affected. This reduced our previously reported net income in the third quarter by approximately $700,000. On a fully diluted basis, this reduced our third quarter EPS by $0.05. In 19 cents, the deferred revenue and costs are now on the balance sheet and will be released if and when future orders using these materials and components are fulfilled or when they are physically shipped. To our customers. The restatement has had no impact to our cash balance at the end of the third quarter as the related transactions were 100% paid for by our customers. So with that. Let's turn to the 4th. Quarter and full year review. Starting on Slide 5, revenue for the full year was a record 123.3 million, up 6% or 6.5 million over the prior year's record. This 6.5 million revenue growth was driven by a 5.5 million increase in the defense sales space market, a 4.3 million increase in bus rail and increases of 14% and 6% in security and Life sciences respectively. As Nick just touched on, the diversification of revenue. More than offsets the 2.7 million decline in semi. Fourth quarter revenue was down 4.5 million year over year and 3.1 million on a sequential basis. In both cases, this was primarily due to the softness in the semi markets, which was partially offset by increases in the industrial and auto EV markets. Moving to Slide 6, gross profit for the year increased 7% to 57 million. Gross margin expanded 50 basis points to 46.2%, reflecting the impact of higher volume, favorable mix and ongoing pricing and cost actions. For the fourth quarter, gross profit of 12.4 million was down 2.5 million compared with a year ago and 2,000,000 sequentially. Margin contraction was related to product mix. And lower volume. As you can see on slide seven, our operating expenses for 2023 were up 3.8 million / 2022 driven primarily by 1.2 million of higher corporate development expenses. As a percent of sales, OpEx increased 110 basis points to 37.7. Met. For the fourth quarter, the modest year over year increase included approximately 400,000 of higher corporate development expenses. Turning to slide eight, you can see our bottom line and Adjusted EBITDA results for the quarter. Net earnings were 1.5 million or $0.12 per diluted share. Adjusted net earnings were 1.9 million or $0.16 per diluted share. Adjusted EBITDA for Q4 was 2.4 million, representing an 8.7% Adjusted EBITDA margin. For the full year, net earnings of 9.3 million benefited from interest on higher cash balances, which resulted in other income of 1.3 million. On a per diluted share basis, net earnings for 2023 were up 1% to $0.79 compared with $0.78 the prior year. Adjusted earnings per diluted share were $0.94 compared with $0.99 in 2022. Adjusted EBITDA for 20/23 was 15.8 million, representing a 12.8% Adjusted EBITDA margin. Slide nine shows our capital structure and cash flow. We achieved strong operating cash generation in each quarter of the year, including 4.7 million in the fourth quarter totaling 16.2 million for the year. Capital expenditures in the fourth quarter were point 3,000,000, unchanged from the prior year and 1.3 million for the full year, down from 1.4 million. In 2022. Given our modest capital expenditure requirements, free cash flow for 20/23 was 14.9 million. Cash and cash equivalents at the end of 2023 or 45.3 million including the 19.2 million raised to our ATM equity offering in the second quarter. We paid down 4.1 million in debt during the year, including one million in the fourth quarter. Total debt at year end was 12 million. We ended 2023 with 85 million in liquidity which included the 45.3 million in cash and borrowing capacity of 30 million with our delayed draw term loan facility and another 10 million. On our revolver. Our leverage ratio at the end of 2023 was about 0.8. X. While we are talking about 2023, I should note in the first quarter of 2024 we used about 19 million of cash for the previously announced acquisition of Alpha Nation. Turning to slide 10, our fourth quarter orders of 27.5 million were down 12% year over year and up 2% versus the prior quarter with sequentially and year over year. We experienced strong demand in defense, sales space and industrial markets as well as front end Fermi. Sequentially, orders from defense aerospace increased 70%, while industrial orders more than doubled. Semi front end orders were resilient in the fourth quarter, primarily supporting epitaxy applications. Back end orders declined further year over year and sequentially but began to show stabilization. Combined semi orders while down 10% year over year improved sequentially by 3% to 13.3. Million. Backlog at year end was 40 point 1,000,014% lower than the prior year and down 1% compared with the prior quarter. Approximately 45% of the backlog is expected to ship beyond the first quarter 2024. Turn to slide 11, as we review our outlook for 2024. This first quarter has had a good number of moving parts as we come to the end of it here, including just over 2 weeks of acquired operations from our formation, we are expecting revenue to be about 29 million with gross margin of approximately 45 to 46%. First quarter operating expenses including amortization are expected to be approximately 13 million. This is somewhat elevated given corporate development expenses and the higher level of professional fees both from the Alpha Nation acquisition as well as with the restatement process. And tangible asset amortization after tax is expected to be approximately .5 million. We expect our effective tax rate to be between 16% and 17%. We are expecting EPS for the first quarter to be about $0.06 per diluted share, while adjusted EPS should be approximately $0.10 per diluted share. As a reminder, we simply adjust for tax affected amortization expense. For our full year. Outlook with the addition of affirmation, which we acquired in March 12, we expect 2024 revenue to range from 145 to 155,000,000. Gross margin for 2024 is expected to be approximately 45 to 46% with expected operating expenses of roughly 57 to 59,000,000. This includes tax adjusted intangible asset amortization expense of approximately 3.5 million. Expected effective tax rate is higher given the jurisdictional impact of the acquisition and is expected to be about 18 to 20%. 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 12.
I will now turn the call back over to Nick.
Nick Grant
Thanks Duncan. Slide 12 shows how well suited to our five point strategy. The acquisition of Affirmation was. We view the business as an ideal fit for our electronic test division as it deepens our presence in key target markets such as auto EV and life sciences. Further diversifies us into the consumer electronics space, extends our geographic reach with the sizable footprint in Europe and broadens our portfolio of differentiated automated test solutions. And if you'll turn to slide 13, you can see how the additional scale provided by the acquisition furthers our progress towards our 2025 revenue goal of 200 to 250 million. Assuming all goes to plan this year, 2024 revenue will be over 2 1/2 times what we achieved 4 years ago, while also continuing to deliver on our solid margin profile. Slide 14 shows the translation of revenue growth to strong earnings. Our goals are to maintain our top tier margin profile, harvest the economies of scale, and leverage the diversity of our served. Markets. We are executing to plan as noted on slide 15, our five point strategy is delivering results for shareholders. Our engineered solutions are valued by our customers and we believe our diversification efforts are demonstrating results with our focus on key target market growth. I'm proud of the entire end test team for delivering another solid quarter and the year as we continue on our journey to becoming a supplier of choice for innovative test and process technology solutions. We remain very active in pursuing acquisition opportunities to enhance our product offerings, expand our global footprint and deepen our presence in targeted industries and our balance sheet is in a solid position to support these efforts.
With that, operator, let's open the lines for questions.
Question and Answer Session
Operator
(Operator Instructions) Jaeson Schmidt, Lake Street.
Jaeson Schmidt
Hey, guys. Thanks for taking my questions. I I know the Q1's almost over, but just curious if you could just discuss what you've seen from an order pattern perspective and orders were up sequentially in Q4. Just curious if that trend has continued here in Q1?
Nick Grant
Hey, good morning, Jason, and thanks for the question here. You know as we you know laid out before we kind of anticipated the first half of the year was going to be slower and then? With the second-half kind of ramp up as we see our back in semi and I would say things are kind of playing out in line with with that perspective that we've discussed.
Jaeson Schmidt
OK. That's really helpful. And then on the semi market, I know you highlighted it's becoming a smaller piece of the pie, but just given the volatility in that Ender end market would be curious what you're seeing from a visibility perspective there and how you're thinking about trends in that market for the year?
Nick Grant
I'm sorry, Jason, were you talking about the semi market or the automotive cut out on my end?
Jaeson Schmidt
I'm sorry, the semi market.
Nick Grant
The semi back end market now again we saw you know I'd say the stabilization with Q3 orders Q4 orders back in semi you know relatively stabilizing there and we think that we'll continue. With what our customers and others are saying that back end semi space will anticipate to see more of a CapEx investment in the second-half. So we still feel that that's the right trajectory that we've laid out and we're marching towards here front end semi we highlighted. In.
The call notes here that you know remain resilient in Q4. These more so geared towards the epitaxy application and you know I would say we have quite a bit of activity on that front as well with the timing of orders will determine whether or not that you know we we. See him in Q1 or Q2 for continuing on that, but still active on the front end side of semi out there and yeah, you know what I'm mentioned and what we've highlighted is you know the diversification that we provide. Added throughout the our efforts to to expand in other markets you know have really positioned us well. So we're very, very pleased with that.
Jaeson Schmidt
Got it. And then just the last one from me and I'll jump back into queue. I know you highlighted sort. Of all the. Bullet points on the information acquisition a couple of weeks ago, but when you look at your outlook for the year, does that assume that you can sort of hit the ground running with alternation or are you expecting any sort of just general friction? Out of the gate as things get integrated here.
Nick Grant
Yeah, you know it. It takes time to drive the synergies together that we've kind of identified what we do have though is you know Nice backlog coming in with with semi. I mean with the affirmation there. So you know I feel like it it's execution is the focus. As we integrate the business and then try to build the groundwork around these synergies that we see from the sales side, which then should should help us continue to accelerate the growth going going forward there. But you know we do anticipate. That you know that business is going to continue to tick along as it has, which we laid out there.
Jaeson Schmidt
Okay. Perfect. Appreciate the call here guys. Thanks a lot.
Operator
(Operator Instructions) Ted Jackson, Northland Securities.
Ted Jackson
So Duncan, I'm just a quick question for you on the you know we've put, you know as like a million three deferred revenue on the balance sheet now that will be you know burned off over time. Can you is there a timeline you can put around that? I mean is that something we should see happening over you know the next 12 months? Years and you know, I mean, is there something that we should be doing with modeling?
Duncan Gilmour
Yeah, I think that the deferred revenue is probably closer to about 2 million in terms of what's on there. And we're talking about, we're estimating that. Just over kind of two years kind of time frame about 40% or so you know within 12 months and the rest and after that you know as indicated in the in the kind of prepared statement. That gets released as and when we receive future orders from customers or there's clarity from the customer that they just want to receive the you know the the the raw materials and components etcetera. So our best estimate at the moment is that kind of 40%, twelve months, 60% kind of beyond is the way we're looking at it.
Ted Jackson
Okay. And then we had a nice discussion from you all with regards to the semi market, which was very informative. But can we talk a bit about industrials and what's driving you know your business there? I mean it's actually you know just I mean Simply put it's performed well you know kind of throughout the past two years you know from. Reported levels all also on an ordering level. What's driving that growth and how do you and what do you see, it will be the same drive as the drive growth going forward?
Nick Grant
Yeah. Well, we're serving the industrial across all of our businesses outside of the the the EMS business there. So you know, we do have a lot of products that with where we focused on targeted applications that we believe are the right growth. Revenues and it has delivered for us there and then our innovation of. New products that we continue to launch and and bring the market is opening up additional opportunities. You know in that industrial space. So yeah, yeah, it's not like we're you know, one trick pony in that race in the industrials, we're covering it at a multiple fronts, so so we. We'll have success in some some areas 1/4 and other areas the other. But overall, collectively we're moving the needle in that industrials as you point out.
Ted Jackson
If you move away from kind of your products, which it's nice to have a diversity in terms of the products you're selling into the industrial segment at their particular industrial markets that are more important to you than others.
Nick Grant
Yeah, you know, we've. Well, I was going to say where we saw some traction last year in that space was with our green initiative and our induction heating solution. You know which went more into the power utility space and into some some oil and gas applications where induction heating was, you know, preferred versus torch flame use out there in that so. And is a much greener, greener solution for customers out there. So we continue to see that got the Nice pipeline of new ones around that green initiative that we have there. So that's you know, one example, one product that's working well, but again it. These products like induction heating solutions, cameras, chillers you know can be used in a wide variety of applications out there, and we're certainly going after as many as we can find.
Ted Jackson
Okay. And then I'll step out of line for this question, but I'm just kind of sticking into the different verticals and end markets on the order side, the security business, the orders were you know, I mean they fell off a Cliff and I'm kind of curious as to, you know what's going on within the security business? You know, you know, what was the? Reason for the big drop, the fourth quarter and how can we think about that? In 2024.
Nick Grant
Yeah, it's all timing. You know, these are identification cameras, traffic management cameras and you know the order the customers will place a large order at any given time for multiple. Quarters, you know, 3-4 quarters out and well depending on when those hit, it will move the needles, but because they're small numbers still and so you don't read into too much of things cratering. It's just more of a timing on orders out there.
Ted Jackson
Would you expect to see the business? I mean, I don't know. I mean it you had a really good year in 22 and you know this year was you know clearly down a bit from that. I mean do you expect that business to grow in 24 from fiscal 23?
Nick Grant
Absolutely. We continue to pursue opportunities, launch new cameras. You know, in this space and yeah, we would expect to continue to drive growth across that vertical.
Operator
We have reached the end of our question and answer session. I would like to turn the call back over to Nick Grant for closing remarks.
Nick Grant
Thank you, Sherry. Before we close, I would like to once again express my sincere gratitude to our global team as they continue to deliver outstanding results. And finally, we will be participating in the LD Micro 2024 Invitational Conference in New York on April 9th. We hope to connect with some of you. There. We appreciate you taking the time to join us on our call today and for your interest. In. End test. Thank you all and have a great day.
Operator
Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.
