InTest Corporation (INTT) Earnings Call Transcript & Summary

Okay. We'll go ahead and get started. Welcome, everybody, to the second day of the 24th Annual Needham Growth Conference. My name is Quinn Bolton. I'm the semiconductor and -- semiconductor capital equipment analyst for Needham. It's my pleasure to introduce inTEST Corporation. inTEST is a global supplier of innovative test and process solutions for use in manufacturing and testing services across a wide range of markets, including automotive, aerospace and defense, industrial, life science, semiconductor and telecommunications. Joining me from the company are Nick Grant, President and CEO; and Duncan Gilmour, CFO and Treasurer. Nick and Duncan, thank you very much for joining us.

Thank you, Quinn.

Thank you.

Pleased to be a part of the conference, and thanks, everyone, for your interest in inTEST. Just run through the deck quickly and then we can answer some questions. Slide 2, I'll just point out at some forward-looking statement comments and nonfinancial GAAP measures statements. So why inTEST? What makes inTEST different from others out there. Well, inTEST is a 40-year-old company, has a track record of identifying and integrating attractive accretive acquisitions, prior management, did this at a pace about maybe 1 every 4, 5 years. And you'll notice, if you've been following inTEST, that's changed under the new management, myself and Duncan. We've accelerated that pace and pleased to say we were able to get 3 deals done in 2021. inTEST, as Quinn indicated, is known as an innovative solution provider of test and process technologies. And we really play in a space that's highly valued by the customer, one where we solve problems that others can't out there. So we have a very large and well-established customer base. And we are a diversified company. Also, as Quinn commented, we provide a number of markets semi, when I joined was about 50-50, we were -- the company's sales in semi and 50 outside. And last year, with the strength in semi, we actually saw that number move closer to 2/3, 1/3, but we did see our other non-semi markets growing as well. Company is, well -- as I mentioned, well established. And because we're in that high-value space, we have attractive margins that we can command from the customers and deliver consistent cash flow since inception of the company. And I commented about the new management team. So a little bit more about myself. I joined inTEST in 2020 and have a track record of delivering growth and success for a number of large multinational companies like ABB, AMETEK and Emerson, led multiple roles, the leadership roles at those companies. And really, I'm a technology guy and undergraduate in physics and got my MBA after a few years working and really gravitating towards the business side of things. And as I said, track record of delivering success on that side. Duncan, a little bit about your background?

Sure. So I've been with inTEST for just over 6 months, came across previously with ABB, where I worked with Nick for a few years, as has mentioned. I was there for about 4 years. Prior to that, I spent 13 years working in base finance roles within Tyco, mainly operational finance, but a few kind of corporate finance roles as well. And before that, spent 10-or-so years in public accounting.

Great. Thanks, Duncan. So when I joined the company in 2020, the Board and I talked and really we're well aligned on what we wanted to do with this business. And that's really untapped the potential at inTEST. inTEST is well-established 40-year company, but really has struggled to grow, was driven very much at a conservative family-owned, family brand, even though it was public, it still maintained that family-run mentality. And so really focusing on developing a strategy and executing the strategy here at inTEST that takes this business to the next level. And that's really kicked off in January of 2021, and we made tremendous progress last year on our strategy, which I'll touch on here. Our vision for the company is really to be the supplier of choice for innovative test and process technology solutions. This is where we're focused. This is where we're playing with our products and solutions that we're offering. And how do we achieve this? That's really by leveraging our deep industry knowledge. I'm talking decades worth of industry knowledge and expertise to develop these high-value, high-quality innovative solutions for customers. And we got a track record of doing this. And the opportunity for us is developing solutions that are much more applicable across a broader customer base versus just individual customers. And that's where we're focusing as we go forward here. The markets serve for us is really -- the company originated at semi, and we sell it to end users as well as to the ATE equipment suppliers. But over time, the company has diversified outside of semi through acquisitions, primarily into numerous other markets, including automotive, defense, life sciences and general industrial markets.

Nick, just very quickly, it's probably just my screen, but my screen is not moving on here. Just want to make sure that it's broadcasting okay.

Good catch, Duncan. Thanks for that. So we're on slide -- I just covered Slide 6. Let's touch a little bit on Slide 7. So I touched on the value-add portion of the company or the focus of the company. And really, we do this by solving the problems others can't. And whether it's thermal problems, mechanical problems or electronic challenges that exist out there. And through our acquisitions and through our product developments, we've expanded this into a number of applications and solutions as listed on that page here in the shelf. We are a global company. About half of our sales end up in Asia this year through Q3, about 20% in Europe and the balance in the Americas. And however, while we're a global company, we are very much a North American-centric manufacturing company with our manufacturing sites, primarily in the U.S., the Northeast and New York, Massachusetts, New Jersey and with the acquisitions we've had at Toronto and Connecticut. But we also picked up some additional capabilities in Germany and in the Netherlands with these acquisitions. So starting to expand our footprint outside of the U.S. We do have sales and service offices around the globe and also accompanied by over 40 channel partners to help get our solutions to markets out there. Just a snapshot of our -- some of our blue-chip customer base, well-known companies that have been with inTEST for years. And I talked about the strategy, and this is where I want to spend a little bit of time and -- with you guys and really that's where my focus has been over the last 16, 18 months here. And that's really driving -- moving this company from a conservative-run business to more of a growth-oriented company. And I got with the management team, and we laid out the 5 areas that we're focused on. And that's to deliver this growth, and that's really global on market expansion. I talked a little bit about our operations today and how they are very much North American? How do we better serve our customers globally? How are we getting a more regional footprint, add more -- some operations in regions, more service and support in regions to better serve the customers, drive greater satisfactions but drive top line growth. We're also focusing on targeted growth areas like life sciences, electric vehicles, cannabis. These are areas that we've got solutions that we've developed that we believe and are seeing executing on driving good growth traction. And some of our acquisitions are also expanding into new markets for us, which I'll touch on here briefly. Innovation is a key focus also for our growth strategy. This is something the company did well early on when it was -- when it started, it had a number of patents and had a licensing arrangement with a number of companies. Over time, those patents expired, and they really lost their focus. And it's something that I've reinstalled and reinvigorated into the businesses and developing robust product road maps for us that deliver, kind of new to the business, new to the industry, new to the world kind of ideas to the customers in the markets that we're playing in. Top talent and culture is a key aspect of our growth strategy, and that's ensuring we have the right people in the right seat on the bus. And this is an area that I've spent quite a bit of time on this past year, bringing in talent like Duncan who joined in June of last year, brought on a leader for our M&A activities in Q4 of last year and also various upgrades across the company in additions into the company over the past 16 months. So really pleased about that. Also changing this culture wasn't sure how well the culture would respond to driving for growth being more risk-taking versus the risk-averse areas that they were, how they've been driven over time, but really pleased about how the organization has embraced the forward strategy and the actions we're executing here. So it's great to see the progress we're making on that front. And last but not least, strategic acquisitions and partnerships are one of our 5 strategies here and it's an area that we've made great progress this past year by completing 3 deals that were all done in Q4. So let me touch on those deals that closed here. The first was really a make-versus-buy decision. I challenged our inTEST Thermal, one of our inTEST Thermal businesses to leverage their industry know-how and expertise around ultra-cold test capabilities where we achieved minus 80 minus 90 C for testing applications. But how can we leverage that and use it in this fast-growing vaccine storage, vaccine transportation space. So they looked at developing solutions internally, but also are there companies out there that could give us a quicker entry into this market and allow us to pick up a portfolio that we could work with and drive better solutions on. And we came across a company called Z-Sciences, a company that is -- really got a nice portfolio, but was lacking the financial backing to really scale this business. So we closed the deal with them in early October of last year and really excited about having them part of our inTEST Thermal Solutions business and opening up life science spaces and technologies that we do not have in our portfolio like freezers and refrigerators serving the pharma -- biopharma space. So attractive product portfolio, attractive markets, faster growing and really in a sizable space of -- estimated to be about $200 million that they play in. So looking forward to seeing the -- how that business grows within inTEST here. The second deal that we got done was a company called Videology. And this was...

Slides -- I think that stuck again, Nick. I think the slides stuck again, sorry.

It's advancing on one screen, but not the other, I think. Thanks for catching that, Duncan. So the next is Videology, which is a company that expands our process technologies capabilities. This is, as I said, innovative test and process solutions. And we had a company, we acquired back in 2017 called Ambrell is really the cornerstone of our process business -- our process technologies. It's induction heating. It's a technology that's used in a wide variety of applications and industries, anywhere there's a furnace or a burner of flame, heated welding -- is where -- these induction heating solutions could play that we wanted to build out around that and add additional automation capabilities. And image capture is one that we targeted as the technology that would complement the solutions they're providing but also could be leveraged into other areas of inTEST. And then, ultimately, opens up a really nice attractive growth areas for us outside of our core spaces today. So this Videology Imaging Solutions, we closed this deal towards the end of October. It's a roughly $10 million revenue business that we're adding -- we added into the company, expanded our footprint with the European operation and add some nice technologies that we can leverage, as I touched on. The last one that got done, we closed on at the end of December as a company called Acculogic. And this is an expansion of our electronic test platform or segment, if you will, and really opens up new markets, provides diversification for our electronic test capabilities where we were primarily serving the semi markets in this EMS space that we played in. So now we've moved beyond semi into defense, aerospace, into life sciences and then also really attractive electric vehicle battery testing capabilities and systems that they have there. So strengthens our already presence in the electric vehicle market and now adds more test capabilities that we can provide the solutions to customers there. So again, around a $9 million, $10 million company headquartered out at Canada, brought capabilities -- our footprint expansion over in Germany for us. And both deals Acculogic and Videology are expected to be accretive to us in 2022. So excited about these 3 companies being part of inTEST. And to give you a little bit more about the financials of the company. Let me turn it now over to Duncan Gilmour. Duncan?

Thanks, Nick. And just to be clear, the Q3 financials here, these are all before the 3 acquisitions that we highlighted which all closed in Q4. I'm going to start talking about kind of revenues here. Some of your revenue has been taking along in the kind of $20 million range [ loss ] in a couple of quarters. You can see that the semi components of our revenues there has grown significantly kind of year-over-year. You're up on -- not far off 100% versus kind of Q3 of last year. Also nice to see sequentially in Q3, our multimarket revenues is going to -- grew nicely in Q3 versus Q2, kind of reflective of really what we're seeing is a broad-based recovery across the industrial sectors. Also starting to see some benefits from trade shows opening back up again, maybe temporarily holding a little bit as of right now, but certainly nice to see some of that live contact happening again here in Q3 and Q4. On the semi side, although we saw some softening kind of Q3 versus Q2, we continue to see strong demand for our semiconductor-based products that looks good across that sector both on the back end and front end, and we do kind of play in both back end and front end across our different product lines. If we move to talk a little bit about margins. Gross profit margin across our businesses [indiscernible] [ 50% ], a little bit drop in Q3 reflective of a slight shift in mix as well as some of the supply chain challenges that we've been fighting [ 90 ]% material costs. We were constantly kind of chasing our pricing initiatives to make sure we stay on top of that. And that slight kind of drop in the top line as well, really driving that based on profit margins. But overall, very kind of happy with the overall profitability across our different product lines. If we look now to operating expenses, we've been managing costs effectively, even though we've been growing very nicely over the course of the last 12 to 15 months. We've been making sure we have been investing for ongoing growth. And looking to kind of maintain our operating expenses as a percentage of revenue in that kind of high 30s sort of range that you can see there for the last 2 or 3 quarters. So as we continue to grow, we're looking to invest some of that to support our 5-point strategy as we continue and move forward with the journey here. From a net income perspective, you'll roll all that together. Our EPS in Q3 came in on a GAAP basis around $0.20, non-GAAP around $0.23. That $0.03 delta really just reflective of intangible amortization. That was kind of right in line with our guidance. On EBITDA -- our adjusted EBITDA does add back our noncash stock compensation charges. You were in the $3 million to $4 million range, as you can see there in the last 2 or 3 quarters, and that's reflective of the strong cash generation that we've seen across the business, which when we look on the next slide, our cash performance, we have a nice operational cash flow, nice free cash flow numbers during the course of 2021, generating just over $4 million in Q3. Just over $10 million -- or $8 million in the year-to-date. We're just under $19 million of cash as of the end of the of the quarter. We did enter into a new 5-year credit agreement in early October 2021, a delayed drawdown facility for $25 million. And we did leverage that facility for the Acculogic and Videology acquisitions, which took place in Q4. Previously, there was no debt on the balance sheet. We've now drawn down $20 million against that facility to finance those 2 acquisitions given the low cost of debt right now didn't really make sense to have 0 leverage. So starting to get what we believe is a more appropriate kind of capital structure in place as we move forward. On the auto side, somewhat reflective of the revenue profile, relatively quick turn kind of business. I say again, you can see semiconductor business, very strong growth in 2021. On a little bit of moderation coming into Q3. There's a lot on the capital equipment side, a lot of our customers kind of digesting what they purchased, waiting for other elements to come into your complete production lines and so on, fully expect capital budgets opening up to continue [ with constraint ] within our semiconductor business. And then on the multi-market side, as it's still kind of turned here, we did see some nice new orders in our targeted electric vehicle and cannabis markets during the course, relatively small at this stage, but both markets with kind of great growth potential as we look forward. From a backlog perspective, exited Q3 with around $20 million of backlog, about 3/4 of that expected to turn in Q4. For a bit more perspective on guidance, I'm going to throw it back over to Nick.

All right. Great. Thanks, Duncan. And hopefully, you guys get the message here for us. It's a new management team. It's a new company, a new approach, and we're focused heavily on growth, profitable growth, and excited about the new acquisitions we've got into the company now focused on integrating them, working on, as I mentioned, driving innovation differentiation, our new product development efforts are progressing. And our market -- sales and market expansions are driving a solid pipeline of new customer opportunities. So we're excited about the future. And what you see here relative to the guidance was what was provided on our November 5 earnings call for the fourth quarter. And just to note that this does not include the impact of the Acculogic acquisition, which came later. So that's the inTEST story. Again, attractive company, accretive acquisitions, high-value partner to innovative test and process solutions, blue-chip customers, diversified markets and really a strong balance sheet and margin profile and cash flow generation. So let me end it there and open it up for questions if we have any.

Great. Thank you, Nick. Thank you, Duncan. I guess my first question, and I just really -- clarification before the question. I might have missed it, but the Z-Sciences trailing 12-month revenue or revenue expectations, where did that fall out?

So that -- Duncan, do you want to jump on that one?

Yes. I mean Z-Sciences were basically kind of small bolt-on, low-single digit, I mean, really minimal revenue stream with respect to that particular technology, $0.5 million purchase price for that particular deal.

Got it. Okay. So I guess my first question then as I look at the consensus forecast and trying to reconcile this forecast. It looks like you'll do about $85 million of revenue in 2021 at the midpoint of guidance. And I'm wondering, the Street's looking for about $107 million right now. If I just take the Videology and the Acculogic trailing 12-month revenue, combined that's about $20 million, and so if I add that to what you did in '21, I'm kind of right there at the consensus assessments for '22. So I'm wondering, do the '22 estimates does not yet include these acquisitions? Or is the core business not showing a lot of growth next year -- or this year?

Yes, great question. I think what the -- talking with the analysts there is what they've done is they feel the supply chain challenges they're going to continue into next year and kind of limit the ability to grow that base business beyond what we were able to achieve this year. Obviously, we've got plans to go above and beyond, if you will, from what they're forecasting on that side of things there. But that's kind of what I believe they built into their models after talking about.

Okay. So it's sort of conservative assumptions on the core business, reflecting supply chain and then adding in the recent acquisitions?

Exactly. Duncan, any comments that you would add?

Yes. No, I think that's fair. I mean I think there's also just historically a little bit sensitivity around the semiconductor capital equipment market, in particular. So I think there's a degree of risk kind of built into that number. I mean, we think that it does look strong as we continue to kind of look at and perhaps that volatility does lessen versus what's been seen in the past. But I also think there's an element of that baked into some of the numbers as well.

I was going to say in some of the more back-end and front-end companies that Needham follows, whether it's Cohu on the Handler side or [ Coloken Sofa ] on the core wire biding side, I think we saw a very strong '21. It looks like your business saw that same surge, but then perhaps some moderation in 2022. And so I guess my question is, is the semiconductor business for you, does that tend to be more driven by growth in IC units every year so that if unit growth isn't accelerating that you can kind of see that business slow down? Like if unit growth is just flat year-to-year, does that mean that, that business -- the core semi business for you, does that see typically a decline if I see units are just flat year-to-year?

So I would say, as Duncan commented earlier, because we are in front-end semi go all the way up in the front-end on the silicon crystal growth side up there with our induction heating system solutions and that -- so the demand, the material requirements as more and more chips are required, really feeds how much that volume we're going to see on that front end. And we do expect that to be quite strong in 2022. The back-end test side of it is more about capacity expansion and new product introductions where they need to do a new interface or a change over a test add, more frequently as they make changes to their production runs, et cetera, et cetera. So that drives demand for us on the back-end side. And then we also have testing -- thermal test capabilities that are done more -- used more often in the semi lab R&D side of things as well. So within semi, we're kind of diversified. So as we see capacity expansions might slow, but now that they've added all this capacity, they need material, we'll see a pickup over on that side of our semi business. And then the R&D is pretty more stable as they continue to develop new products and new modifications to their lines out there.

This is a question I have, I apologize if it's more basic, but the Thermal systems for ATE, is that used to sort of either heat or cool the device under test? And so are you selling those thermal systems to the folks like Teradyne and Advantest or Cohu? Or are you selling -- do you play in a different area within the ATE segment?

No, we do sell into that to -- to them some in areas, but we also play in the trucks and the labs and the development chambers where they're testing the quality of the products up and down life cycle testing, if you will. So really outside of the process, if you will.

Got it. Got it. Okay. Moving to the non-semi applications. What are you most excited about? What's growing fastest outside its semiconductors in '22 or '23?

Yes, a couple of areas there. Electric vehicles I've touched on is really a market that we're excited about. It's really started years ago -- probably 3, 4 years ago with the leader in this electric vehicle space where we started to develop induction heating solutions used in electric motors for the vehicles and then they went to breaking, then it went to steering and then it went to battery cooling. And so we've got a wide variety of solutions in the production of electric vehicles out there and the components that go into them. But then now with the Acculogic acquisition, now adds additional capabilities for electric vehicle market and the battery testing. They've got some solutions that are pretty unique where the sense that they had some patents IP around that they can provide a -- because of their technology is free-floating and has variable -- full variable angle measurement capabilities, they can go in and measure sell blocks in a fashion that others can out there that gives a pretty attractive value proposition for electric vehicle testing markets out there. So that market is really a space that has us excited. We -- the life science plays that not only Z-Sciences and Videology brings for us, but that market is an area that we see leveraging our technology know-how as an area that will position us well going forward. So we're excited about the entry into that. And then, of course, in that life sciences and kind of a derivative is cannabis that it's more in the CBD, THC, oils kind of the extraction process. So we develop chillers that are, again, leveraging ultra-cold temperatures for extraction, cooling of the fluids for the extraction in that. So it gives them a higher yield, have better quality product. And so we're excited as that market continues to build for us -- for the -- around the globe that it should drive more volume for us.

Understood. And on the Acculogic side and EV battery tests, does Acculogic have sort of design wins where they're the incumbent or sort of tool of record at either major battery manufacturers or maybe some of the start-up battery manufacturers that as just EV battery production grows, they write that wave? Or are they still mostly still in a design win, design engagement sort of phase with their solutions?

Yes. Great question. So similar to our Ambrell, they got in early also in that 2017 -- '16, '17 time frame with the leader in the electric bag vehicle market there who happens to manufacture their own batteries through a partnership or what have you. But they are the incumbent at that company, which our Ambrell provides as well. So we've got a deeper relationship now with the leader in the electric vehicle space. But what they've seen and where the real opportunity lies is doing more with all the other battery manufacturers in the space where they focus -- because of the size of the business and the resources they had, they focus really on supporting that -- the one customer. And then as they saw, they had individuals leave that company and go to others in the industry they got pulled in rather than being proactively going out and marketing the product. So we see that as really the opportunity at inTEST here is to make investments, market these solutions that they go after the broader battery market for these type solutions. And we're confident that we can drive growth in that area with the right investments.

Great. And I know we've got a couple of minutes left. So I just wanted to ask sort of what are you seeing in the supply chain, both in terms of constraints or COVID-related effects on your component supply? And then a related question, are you seeing rising input costs? And are you able to pass those higher input costs on to customers?

Yes, I'll take the second one first. So obviously, yes, we're seeing rising input cost. I mean, that's been a continual of churn, I would say, over the last number of months, and we're always striving to kind of price up to cover that. It's a little bit of [indiscernible] but a game of whack-a-mole at times because things are not moving. So still [ plenty ] there and fully expect that to continue in the short term. But yes, we're certainly kind of tasking our operations to make sure we are staying on top of that and maintaining kind of margin and driving kind of price there. On the supply chain side, I mean we've been impacted, everyone has been impacted. We certainly have seen kind of shipments push out from a logistics standpoint. I would say though that we haven't been as impacted as perhaps some of the bigger global players. We're relatively kind of regional manufacturer in the Northeast, most of -- a lot of our supply base is relatively regional, which has made "easier" to manage versus having very extended supply chains, but we still have challenges. I mean it's still been very challenging for you and the teams to keep up. I mean you only need one component to be missing and it can delay an entire production run or shipment. So -- but I would characterize the impacts for the most part as manageable. We certainly haven't been losing business. If anything, things have maybe shifted to the right a little bit, again, relatively modestly. We have not seen orders being canceled or anything like that. So I think the teams have been doing a great job managing through it. So yes, an impact, but not as material as perhaps some of the bigger companies out there.

Understood. And it sounds like most importantly, the demand you think is nonperishable. And to the extent you're constrained, it's just sort of pushes into the next quarter.

Correct. We certainly aren't seeing a loss of business because of the challenges that's for sure.

Well, that's good news. And I know we're bumping up against the end of the session. So maybe I'll just hand it back to you, Nick or Duncan, if there are any closing statements or any sort of reporting thoughts you'd like to leave with the audience?

Great. Thanks, Quinn. And we really appreciate the opportunity to present today and -- at the Needham conference. And I just would reiterate again that it's not the traditional inTEST folks that have followed the company, it really is a different business going forward here. I'm excited about the progress we've made in 2021. And really in the early stages here of our growth plan going forward. So keep an eye on us.

All right. Well, Nick, Duncan, thank you very much, and we look forward to tracking your progress.

All right. Excellent. Thanks, Quinn. Thanks, everyone.

Thanks, everyone.