InTest Corporation (INTT) Earnings Call Transcript & Summary

Greetings, and welcome to the InTest Corporation Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] It is now my pleasure to introduce Sanjay Hurry, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us. With me on the call are Rich Rogoff, President and Chief Executive Officer; and Duncan Gilmour, Chief Financial Officer and Treasurer. The earnings press release was issued this morning as well as the slides that management will use during today's call. Both can be found in the Investor Relations section of the intest.com website. Please turn to Slide 2 for a review of the safe harbor statement. During this call, management may make some forward-looking statements about their 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, 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 [indiscernible] can be found on the InTest website or at sec.gov. Also, as covered in Slide 3, management will refer to some non-GAAP financial measures. We believe these will be useful in evaluating the company's performance. However, 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. Before management begins today's discussion on Slide 4 of the presentation, please note that certain first quarter 2026 comparisons in their prepared remarks reflect InTest's revised Q1 results. As the company announced on July 31, and management revised Q1 cost of revenues, gross profit, gross margin, income tax expense, net earnings and earnings per share, together with their related non-GAAP measures. Q1 revenue and operating expenses were not affected by the revision. Q1 2026 financials provided as part of this presentation have been revised accordingly. With that, I would now like to turn the call over to our first speaker, Rich Rogoff, President and CEO. Please go ahead, Rich.

Thank you, Sanjay. Good morning, everyone, and thank you for joining us. On today's call, I will start with an overview of our second quarter performance. And Duncan will walk you through the Q2 financial results, after which I will discuss end market dynamics, that support our raised revenue guidance for the year and then open the call to Q&A. We are reporting Q2 results that are in line with our preannouncement with revenue of $35 million, gross margin of approximately 41% and operating expenses of $13.9 million. Demand across InTest divisions remained healthy in Q2, with revenue up approximately 26% year-over-year. Q2 also marks our third consecutive quarter of sequential revenue growth and our second consecutive quarter of year-over-year growth above 25%. The strength we saw was broad, led by strong project delivery in auto EV and a semiconductor funnel that continued to build towards the second half. The diversity we have built continues to broaden our revenue base which gives us confidence in our raised full year top line guidance. As disclosed in our pre-announcement on July 31, our second quarter margin reflected an unfavorable mix of high-revenue, low-margin projects at alphamation alongside a shortfall of higher contribution revenue that shifted to the third quarter. Turning to orders and backlog on Slide 5. Q2 orders were $28.9 million down 9% sequentially, following 3 consecutive quarters above $30 million and up 4% year-over-year. Semi was a standout. Orders here increased 56% sequentially, our strong semi order intake in 6 quarters and grew 64% year-over-year. The semi wave that we referenced in our Q1 call is now converting into orders. In auto EV, orders declined 67% sequentially after 4 quarters of strong order flow. Funnel activity in this end market remains healthy. In defense, aerospace, orders declined 28% sequentially, reflecting nonrecurring orders that drove strong Q1 and increased 70% year-over-year on higher DoD procurement. Turning to backlog at quarter end. Backlog was $45.4 million, a sequential decrease of 12%, reflecting normalization of an elevated peak in auto EV projects. This also represents a year-over-year increase of 20%. Approximately 45% of the backlog is expected to ship beyond the third quarter. With that, I will turn it over to Duncan to take you through the financial detail beginning on Slide 6. Duncan?

Thank you, Rich. Starting on Slide 6. On a sequential basis, revenue in Q2 increased $1.4 million or 4% from $33.9 million in Q1 to $35.3 million. The net increase was driven almost entirely by auto EV, which increased by $6 million on the shipment of high revenue, lower-margin Alfamation automotive projects from backlog Industrial contributed $1.1 million. Partially offsetting these gains was a $2.1 million decline in defense aerospace following a particularly strong first quarter as well as decreases of $1.6 million in Life Sciences and $1.4 million in semi. Compared to Q2 2025, revenues increased $7.2 million or 26% from $28.1 million. The increase over the prior year period reflects the continued gradual recovery in the capital spending environment and continued penetration of non-semi correlated end markets. Non-semi markets accounted for approximately 74% of Q2 revenue. Sales in auto EV increased $7.6 million followed by Life Sciences and Industrial at approximately $0.6 million each. Partially offsetting these gains was a $1.1 million decline in semi. Turning to Slide 7. I Second quarter gross profit was $14.3 million and gross margin was 40.5%. Compared to revised Q1 results, gross margin declined 280 basis points sequentially, reflecting a shift in revenue mix towards high revenue, lower-margin auto EV shipments. For the same reason, gross margin declined 210 basis points from 42.6% in the prior year period. Moving on to Slide 8. Operating expenses for the second quarter were $13.9 million, a decrease of $0.5 million sequentially. The sequential decrease was due primarily to approximately $0.7 million in nonrecurring restructuring costs associated with the CEO transition that we recorded in Q1 and did not recur in the second quarter. On a year-over-year basis, we generated $7.2 million of incremental revenue while absorbing only $1 million of incremental operating expenses, which resulted in a reduction in operating expenses as a percentage of revenue to 39.5%. Turning to Slides 9 and 10 that collectively measure our profitability. On Slide 9, for Q2, net income was $0.5 million, representing a net margin of 1.3%. Adjusted EBITDA was $2.2 million, representing an adjusted EBITDA margin of 6.2% and up approximately 73% from $1.3 million in Q2 of 2025. On Slide 10, net income was $0.04 per diluted share. Adjusted EPS, which adds back tax-effected acquired intangible amortization and restructuring charges was $0.09 per diluted share. Our Q2 results included a discrete income tax benefit of approximately $0.02 per diluted share that is driven by stock option exercises during the quarter. This benefit is specific to the second quarter but we continue to expect a full year effective tax rate of approximately 18%. Slide 11 shows our capital structure and cash flow. We ended the second quarter with cash and cash equivalents of $22.1 million, an increase of $6.4 million from the end of Q1. During the second quarter, we generated $6.3 million of cash from operating activities and received $2.9 million in proceeds from stock option exercises. These inflows were partially offset by $2.3 million of net debt repayments, including a $1 million reduction in term debt and by $0.4 million of capital expenditures. At June 30, 2026, we had approximately $62 million in total liquidity. In addition to $22.1 million of cash and equivalents, we have $40 million of available borrowing capacity under our delayed draw term loan and revolving credit facilities, which we have extended through August 28, 2026. Total debt was $6.2 million, and our leverage ratio was 0.8x trailing 12 months adjusted EBITDA. Turning to Slide 12 and our financial guidance for the year. We are introducing guidance for Q3 and are reiterating the outlook we provided on July 31. For Q3, we project revenue of $33 million to $35 million. gross margin of approximately 44%, operating expenses of $13.8 million to $14.2 million and amortization of $0.5 million. For the full year, we now expect revenue of $135 million to $140 million. At the midpoint, this represents growth of approximately 21% over 2025's $113.8 million. This increased revenue guidance reflects continued diversified demand supported by our backlog and improving order flow and outlook into the second half, particularly in semi sales. gross margin, approximately 43%. Operating expenses of $55 million to $57 million amortization of $2.6 million and interest expense of approximately $0.3 million with an effective tax rate estimated to be 18%. And finally, we expect capital expenditures of 1% to 2% of revenue, consistent with our historical investment levels. This guidance excludes any potential acquisitions and restructuring costs and assumes our view of macroeconomic conditions remain unchanged through the end of the year. Finally, a brief word on internal controls. In connection with the Q1 revision on July 31, management and our Audit Committee concluded that the controlled efficiencies underlying the revision at Alfamation constituted a material weakness in our internal control over financial reporting. We have implemented remediation plans and fully expect to demonstrate that these controls are operating effectively by fiscal year-end. This is described more fully in our Form 10-Q that will be filed later today. With that, if you turn to Slide 13, I will now turn the call back over to Rich.

Thanks, Duncan. On our Q1 call, I noted that funnel activity and order flow were pointing to a strong second half of the year. Since then, we have seen demand strengthen leading us to raise our full year revenue outlook. To date, in the third quarter, we have recognized the roughly $2 million of delayed shipments that moved out of Q2 and order activity across all our divisions is demonstrating momentum. Opportunities in the higher-margin end markets we serve are expanding. In semi, the pace of activity in the back end markets is picking up, reflecting growing demand to test high-power devices in the new electrified economy. In Defense and Aerospace, significantly higher DoD spending and capacity expansion are building an expanding funnel of testing opportunities. And in our auto EV market, demand remains healthy, supported by rising electronic content of today's vehicles. Order activity follows the cadence of our customers' multiyear automotive programs. Much of our growth in Q2 came from deepening and expanding our position with existing strategic accounts where customers are standardizing on InTest solutions and returning to us as they move to new test platforms and programs. We are also realizing the benefit of our broader portfolio as we cross-sell our businesses and bring combined capabilities to shared customers. At the same time, we are steadily building our channel and partner coverage to extend our reach into customers and new geographies. Turning to technology and innovation, which is the foundation of InTest's long-term value creation, we are seeing good traction from recently introduced products. In our induction heating business, our next-generation eco heat is progressing through applications lab and distributor testing with first customer shipments targeted for later this year. Across electronic testing, our robotic docking and intelligent interface solutions are increasingly being qualified as tools of record as customers transition to new tester and handler platforms. which positions us to win follow-on hardware as those programs ramp. Our advanced high-powered chillers is another place where customers are pulling us forward. Our current portfolio delivers between 1.5 and 7 kilowatts of cooling capacity and customers need more as they embrace the demand for much higher power conversion. We are also directing new product development toward the highest value, fastest-growing pockets of demand in each of our divisions. For example, our test solutions for high power, high-voltage devices, including silicon carbide, gallium nitride, power modules, rising electronic content batteries and battery management systems are all involved in today's evolving power conversion architectures. In conclusion, we have ample opportunities for growth in our end markets. and profitability has further to go. My aim is to build consistency into how this business performs converting our commercial momentum into steadier adjusted EBITDA as we gain operating leverage across our cost structure. Near term, that means taking a close look at our manufacturing footprint and business unit cost structure with a view towards improving cost efficiencies and productivity. This continues the operational review I described on our Q1 call and remains central as we move through the second half. There is a great deal of work ahead, and we are on it. With that, operator, please open the call to questions.

[Operator Instructions] Our first question today will come from Max Michaelis Males with Lake Street Capital Markets.

A few for me, so in the quarter as well. Just going to the order number, semi, obviously up nicely this quarter. I mean, can you give us a sense, was that in line with internal expectations? And maybe not you can't give exact detail, but maybe help us on how you expect orders to trend throughout Q3 and Q4.

Sure, Max. Thanks for joining us. Yes. So I think the order intake is as expected, as we mentioned in our Q1 call, we're pretty optimistic about the second half, and we're actually seeing that come to fruition. As we see it now, the order intake through the next quarter to quarter, maybe 2 will be as expected. There's unless something changes in the market space as we see it, things are looking strong. So I don't know, Duncan, if you have anything to add to that.

Yes. No, agreed. I think as we said earlier in the year, we see semi starting to come back, we start to see that here in the Q2 order numbers, the other side of that, as you can see, our mix shifts as we look towards the second half of the year with some of those strong auto EV revenues dropping a little bit and semi starting to come through.

Yes, totally understood. And then can you help me auto EV, was that just 1 large customer, 1 large program that kind of drove the massive outperformance in [indiscernible].

Well, it was a combination, actually. So as we mentioned, and I think you saw a Q3, Q4 of last year, even into Q1, we had a strong order intake in auto EV. So there was planned deliveries, of course, of those -- of that backlog. So it would make a good Q2, and then there were some pull-ins from 1 or 2 customers that increase the revenues as well. .

And next, we'll move to Ted Jackson with Northland Securities.

On the quarter. I'm going to start out on auto EV. That's been -- I mean, it's an awesome business that you bought, and that's really contributed to the company tremendously. It goes through its own kind of cycle. And I was Kind of curious when you -- since you're tied to the development cycles of your auto customers, can you give us a sense with regards to kind of the cadence of projects in front of you? I mean, do you have like a pipeline of opportunity that's going to keep the business growing? Or have you kind of run through some of that pipeline and it's in the backlog, you're going to work through it. So maybe that would be my first question is kind of trying to think about that business over the next 6 to -- yes, 6 to 18 months?

Yes. Great question. Thanks, Tim. The cycles are a little bit longer, as we've discussed in the past, in the auto EV where they will develop a new product and will develop solutions for that product. There are some commonality of course, but there's also some customization that occurs. Our funnel is pretty strong with those projects. So we don't see a major shift in things going forward. Of course, the cycles of new product introductions from the automotive companies themselves will dictate a little bit of that. But we have quite a few projects that we're working on, which we believe will we'll continue the momentum there as well as we're looking to expand beyond automotive, of course, as we did last year a little bit with Life Sciences.

Okay. And then shifting over, kind of a similar question on the semi side of the house. The company has an extensive history with regards to the semi test market, particularly in the back end. And you're kind of going through a new cycle now you're seeing a pickup in order activity you expect to continue through the second half. How long is a typical cycle for something like that? I know that typically, with regards to it, sort of the back end of the cycles as they go through, but I mean is it the kind of thing where you see continue typically, that's kind of say, this is what this personal, this particular situation is. But typically, do you see a pickup in order and activity that lasts for 6 months, 12 months, 18 months in -- what's kind of a standard way to think about that in terms of like a cycle for you? .

Yes, it's a great question. I guess if I had the exact answer, we have a different conversation, right? But I've been in the semi business myself for more than 30 years. And typical cycles, it kind of goes ebbs and flows with the node transitions, which have typically been on the 18-month kind of time frame. Of course, barring any macroeconomic changes to the situation, right? So for example, today, memory shortages, right, that maybe drive increased capacity needs. So I would say, typically, you see something on the order of 9 to 12 months of higher order capacity increases, technology changes and then you'd get into somewhat of a slowdown period. So something along those lines would make sense, but then you throw in the macro part of it, which is today's memory shortage is the AI aspect and it kind of makes it a difficult answer to really predict.

But if you just were to say like this is the average, you -- in an average scenario, a typical thing when a cycle turns, you're at the beginning of it. And generally speaking, you would see continued strength as you finish off '26 and going to '27.