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inTEST Company (NYSE:INTT) This fall 2023 Outcomes Convention Name March 28, 2024 8:30 AM ET
Firm Contributors
Deborah Pawlowski – Investor RelationsNick Grant – President & Chief Government OfficerDuncan Gilmour – Chief Monetary Officer & Treasurer
Convention Name Contributors
Jaeson Schmidt – Lake StreetTed Jackson – Northland Securities
Operator
Greetings. Welcome to inTEST Company Fourth Quarter 2023 Monetary Outcomes. [Operator Instructions] Please word, this convention is being recorded.
I’ll now flip the convention over to Deborah Pawlowski, Investor Relations for inTEST. Thanks. It’s possible you’ll start.
Deborah Pawlowski
Good morning, everybody. We actually admire your curiosity in inTEST Company. And thanks for sharing your time with us at present. Becoming a member of me on our name are Nick Grant, our President and Chief Government Officer; and Duncan Gilmour, our Chief Monetary Officer and Treasurer.
You need to have the earnings launch, which crossed the wires yesterday after market in addition to the slides that may accompany our dialog at present. The 2023 10-Okay was filed yesterday as effectively. These paperwork can be found on the Investor Relations part of our web site, intest.com. Additionally, you will discover there our restated third quarter and 9-months 10-QA. It was additionally filed yesterday. Duncan will contact on that briefly.
However if you happen to would flip to Slide 2, I’ll overview the protected harbor assertion. Throughout this name, administration could make some forward-looking statements about our present plans, beliefs and expectations. These statements apply to future occasions which can be topic to dangers, uncertainties and different elements that would trigger precise outcomes to vary materially from what’s said right here at present. These dangers and uncertainties and different elements are offered within the earnings launch in addition to in different paperwork filed by the corporate with Securities and Alternate Fee. These paperwork will be discovered on our web site or at sec.gov.
Additionally, administration will check with some non-GAAP monetary measures. We consider these will probably be helpful in evaluating our efficiency. You shouldn’t take into account the presentation of this extra data in isolation or as an alternative to outcomes ready in accordance with GAAP. Yow will discover reconciliations of non-GAAP measures with comparable GAAP measures within the tables that accompany at present’s launch and slides.
So with that, if you happen to would flip to Slide 3, I’ll flip the decision over to Nick. Nick?
Nick Grant
Thanks, Deb, and good morning, everybody. Thanks for becoming a member of us on our fourth quarter 2023 earnings name. I am happy to report that 2023 was our second consecutive yr of document income, reaching $123.3 million, whereas additionally reaching internet revenue of $9.3 million for the yr, the very best degree in over a decade.
So I might like to begin by acknowledging and expressing my appreciation to your complete inTEST crew throughout the globe for his or her excellent efforts and dedication to our technique. We consider our efficient execution of our 5-point technique is delivering progress, strong monetary efficiency and robust money technology. Our technique supplies the framework that drives innovation, deeper penetration into goal markets, geographic growth and attracts prime expertise.
By means of the yr, we have made good progress at key accounts and strengthened our channel relationships all over the world to enhance our buyer attain. Moreover, we introduced a brand new middle of excellence in Malaysia for purposes engineering, product improvement and localized manufacturing that may assist all of our divisions and permit us to raised serve prospects in Southeast Asia. We consider that as we additional deepen our presence into our key goal markets, we’re constructing larger stability, which helps to offset our publicity in a extra cyclical semi market.
Fourth quarter income was impacted by the downturn in semi back-end orders that we mentioned on our Q3 earnings name. Nevertheless, we’re benefiting from our breadth of progressive options, serving the increasing wants of our nonsemi prospects particularly within the industrial, auto/EV and protection/aero markets. Particularly, in contrast with the fourth quarter of 2022, the economic market had gross sales progress of $3.7 million as our Course of Applied sciences division realized sturdy demand for a number of of their progressive merchandise, together with our widespread EKOHEAT induction heating options. Constructing on that success, we launched the EKOHEAT 2 induction heating product line in December, providing the following technology of this know-how. We’re excited concerning the unique enhancements that we have made to this widespread product line.
Moreover, we noticed our fourth quarter gross sales in auto/EV elevated $1.2 million over the prior yr, pushed by our Environmental Applied sciences division, the place our course of chillers are serving particular calls for from the increasing want for inverter testing in electrical autos. Within the quarter, we additionally noticed larger adoption of our battery take a look at options for this market, supplied by our Digital Take a look at division.
Additional supporting our diversification, our fourth quarter gross sales have been up 11% within the protection/aero market as exercise on this section is on the rise because of world instability. Now we have seen rising demand from this marketplace for our environmental take a look at chambers. These merchandise present excessive accuracy take a look at functionality over a large temperature vary, supporting capability growth in numerous arsenal techniques. We have been inspired to see the fourth quarter demand persevering with in protection/aero and industrial markets, with orders enhancing 70% and 110% in comparison with the third quarter, respectively. We additionally demonstrated sturdy money technology and that’s inherent in our enterprise in each the quarter and the yr, which Duncan will cowl in additional element.
Organizationally, we proceed so as to add expertise to the crew and are happy to have just lately introduced the addition of Michael Goodrich as President of our Course of Applied sciences division. Mike joined us from Vixar Inc., a subsidiary of ams OSRAM, a producer of high-performance optical elements and options. He’s a confirmed chief of world cross-functional groups and shares a ardour for the client fostered by his deep business experience. We welcome him to the crew and stay up for his contributions to our group. Mike is only one instance of how we’re constructing our groups. All year long and throughout our group, sturdy expertise has been added in gross sales, engineering and manufacturing assist roles to help us on our transformational journey.
Turning to Slide 4. I wish to spotlight the progress we have made on our diversification entrance, which is a crucial element of our 5-point technique and one which separates inTEST from its previous. As a part of our technique, we’ve got made large strides to strengthen our presence in key goal progress markets outdoors of semi in addition to trying to diversify inside semi with a watch in direction of the entrance finish. Our efforts have resulted in rising our non-semi markets mixed share of income from round 35% in 2021, as much as 47% in 2023. And we completed this whereas additionally rising our semi income by roughly 20% over the identical timeframe.
As I discussed earlier, 2023revenue improve regardless of the second half slowdown in semi due to our rising presence in key goal markets like protection/aero, industrial safety, life sciences and the electrical car market. I am fairly happy with the diversification progress we’ve got made, which is according to the technique we laid out at our inaugural Investor Day again in 2022.
With that, let me flip it over to Duncan to overview the financials and outlook in additional element. Duncan, over to you.
Duncan Gilmour
Thanks, Nick. Earlier than I overview the outcomes for the fourth quarter and 2023 as an entire, I wish to contact on what triggered the third quarter restatements the place we at the moment are deferring $1.7 million of beforehand acknowledged Q3 income together with the related prices. Whereas we felt we had accounted for this accurately in our earlier Q3 report, subsequent session throughout the year-end audit course of finally resulted in us reaching a special conclusion.
To assist everybody’s understanding let me provide you with some extra particulars. As with most manufacturing firms, we’ve got many fastidiously chosen and certified suppliers for supplies and elements that we use within the construct of fabric for our merchandise. In the course of the yr, we had a handful of suppliers notify us of their plans to discontinue some key supplies or elements that we use inside a couple of buyer techniques. That is sometimes called a final time purchase notification or alternative.
We notified our prospects within the occasion they needed to purchase extra of our techniques to make the most of these elements. Whereas not essentially able to decide to putting orders for extra techniques on the time, a small quantity requested us to buy solely on their behalf, a certain quantity of those obsoleting elements to make sure they might be capable to order extra of our techniques sooner or later with out the necessity for design modifications because of modifications inside the detailed construct of fabric. We did this for them and have been paid in full for these purchases with full authorized possession and threat transferring to the purchasers.
Nevertheless, generally, it was requested that these supplies stay at our manufacturing amenities. And even supposing, one, this isn’t assured that we are going to ever really get future extra orders from these prospects; and two, all future orders are topic to phrases unknown presently and will probably be for extra consideration, we’ve got decided that the income from the prepurchase and sale of those final time purchase elements ought to extra appropriately be deferred till there’s certainty as to the final word buyer use for and bodily [indiscernible] of the supplies and elements.
As already talked about, the affect from the third quarter was a deferral of $1.7 million of income in addition to the related buying prices. After being tax affected, this diminished our beforehand reported internet revenue within the third quarter by roughly $700,000. On a completely diluted foundation, this diminished our third quarter EPS by $0.05 to $0.19. The deferred income and prices at the moment are on the steadiness sheet and will probably be launched if and when future orders utilizing these supplies and elements are fulfilled or when they’re bodily shipped to our prospects. The restatement has had no affect to our money steadiness on the finish of the third quarter because the associated transactions have been 100% paid for by our prospects. And with that, let’s flip to the fourth quarter and full yr overview.
Beginning on Slide 5. Income for the total yr was a document $123.3 million, up 6% or $6.5 million over the prior yr’s document. This $6.5 million income progress was pushed by a $5.5 million improve within the protection/aerospace market, a $4.3 million improve in industrial and will increase of 14% and 6% in safety and life sciences, respectively. As Nick simply touched on, the diversification of income greater than offset the [ $2.7 million ] decline in semi. Fourth quarter income was down $4.5 million year-over-year and $3.1 million on a sequential foundation. In each instances, that is primarily as a result of softness within the semi market, which was partially offset by will increase within the industrial and auto/EV markets.
Transferring to Slide 6. Gross revenue for the yr elevated 7% to $57 million. Gross margin expanded 50 foundation factors to 46.2%, reflecting the affect of upper quantity, favorable combine and ongoing pricing and value actions. For the fourth quarter, gross revenue of $12.4 million, was down $2.5 million in contrast with a yr in the past and $2 million sequentially. Margin contraction was associated to product combine and decrease quantity.
As you may see on Slide 7, our working bills for 2023 have been up $3.8 million over 2022, pushed primarily by $1.2 million of upper company improvement bills. As a % of gross sales, OpEx elevated 110 foundation factors to 37.7%. For the fourth quarter, the modest year-over-year improve included roughly $400,000 greater company improvement bills.
Turning to Slide 8. You’ll be able to see our backside line and adjusted EBITDA outcomes. For the quarter, internet earnings have been $1.5 million or $0.12 per diluted share. Adjusted internet earnings have been $1.9 million or $0.16 per diluted share. Adjusted EBITDA for This fall was $2.4 million, representing an 8.7% adjusted EBITDA margin. For the total yr, internet earnings of $9.3 million benefited from curiosity on greater money balances, which resulted in different revenue of $1.3 million. On a per diluted share foundation, internet earnings for 2023 have been up 1% to $0.79 in contrast with $0.78 within the prior yr. Adjusted earnings per diluted share have been $0.94 in contrast with $0.99 in 2022. Adjusted EBITDA for 2023 was $15.8 million, representing a 12.8% adjusted EBITDA margin.
Slide 9 reveals our capital construction and money circulate. We achieved sturdy working money technology in every quarter of the yr, together with $4.7 million within the fourth quarter, totaling $16.2 million for the yr. Capital expenditures within the fourth quarter have been $0.3 million, unchanged from the prior yr and $1.3 million for the total yr, down from $1.4 million in 2022. Given our modest capital expenditure necessities, free money circulate for 2023 was $14.9 million. Money and money equivalents on the finish of 2023 have been $45.3 million together with the $19.2 million raised by means of our ATM fairness providing within the second quarter. We paid down $4.1 million in debt throughout the yr, together with $1 million within the fourth quarter. Whole debt at year-end was $12 million.
We ended 2023 with $85 million in liquidity, which included the $45.3 million in money and borrowing capability of $30 million with our delayed progress time period mortgage facility and one other $10 million on our revolver. Our leverage ratio on the finish of 2023 was about 0.8x. Whereas we’re speaking about 2023, I ought to word that within the first quarter of 2024, we used about $19 million of money for the beforehand introduced acquisition of Alfamation.
Turning to Slide 10. Our fourth quarter orders of $27.5 million have been down 12% year-over-year and up 2% versus the prior quarter. For sequentially and year-over-year, we skilled sturdy demand in protection/aerospace and industrial markets in addition to front-end semi. Sequentially, orders from protection/aerospace elevated 70%, whereas industrial orders greater than doubled. Semi front-end orders have been resilient within the fourth quarter, primarily supporting epitaxy purposes. Again-end orders declined additional year-over-year and sequentially, however started to indicate stabilization.
Mixed semi orders have been down 10% year-over-year and improved sequentially by 3% to $13.3 million. Backlog at year-end was $40.1 million, 14% decrease than the prior yr, down 1% in contrast with the prior quarter. Roughly 45% of the backlog is anticipated to ship past the primary quarter of 2024.
Flip to Slide 11 as we overview our outlook for 2024. This primary quarter has had variety of transferring elements as we come to the tip of the yr, together with simply over 2 weeks of acquired operations from Alfamation, we predict income to be about $29 million with gross margin of roughly 45% to 46%. First quarter working bills, together with amortization, are anticipated to be roughly $13 million. That is considerably elevated given company improvement bills and the upper degree {of professional} charges each from the Alfamation acquisition in addition to with the restatement course of. Intangible asset amortization after tax is anticipated to be roughly $0.5 million.
We anticipate our efficient tax fee to be between 16% and 17%. We predict EPS for the primary quarter to be about $0.06 per diluted share, whereas adjusted EPS needs to be roughly $0.10 per diluted share. As a reminder, we merely modify for tax-effected amortization expense.
For our full yr outlook with the addition of Alfamation, which we acquired on March 12, we anticipate 2024 income to vary from $145 million to $155 million. Gross margin for 2024 is anticipated to be roughly 45% to 46% with anticipated working bills of roughly $57 million to $59 million. This contains tax-adjusted intangible asset amortization expense of roughly $3.5 million. Anticipated efficient tax fee is greater given the jurisdictional affect of the acquisition and is anticipated to be about 18% to twenty%. For capital expenditures, in 2024, we anticipate to run between 1% to 2% of gross sales.
As ordinary, our steerage doesn’t embody the potential affect from any nonoperating bills reminiscent of company improvement that will happen occasionally or does it embody the potential affect from any extra acquisitions we could make.
With that, if you’ll flip to Slide 12, I’ll now flip the decision again over to Nick.
Nick Grant
Thanks, Duncan. Slide 12 reveals how effectively suited to our 5-point technique the acquisition of Alfamation was. We view the enterprise as an excellent match for our digital take a look at division because it deepens our presence in key goal markets reminiscent of auto/EV and life sciences, additional diversifies us into the buyer electronics house, extends our geographic attain with a large footprint in Europe and broadens our portfolio of differentiated automated take a look at options. .
And if you happen to’ll flip to Slide 13, you may see how the extra scale offered by the acquisition furthers our progress in direction of our 2025 income purpose of $200 million to $250 million. Assuming all goes to plan this yr, 2024 income will probably be over 2.5x what we achieved 4 years in the past, whereas additionally persevering with to ship on our strong margin profile.
Slide 14 reveals the interpretation of income progress to sturdy earnings. Our objectives are to take care of our top-tier margin profile, harvest the economies of scale and leverage the range of our served markets.
We’re executing to plan as famous on Slide 15. Our 5-point technique is delivering outcomes for shareholders. Our engineered options are valued by our prospects, and we consider our diversification efforts are demonstrating outcomes with our deal with key goal market progress.
I am happy with your complete inTEST crew for delivering one other strong quarter and the yr as we proceed on our journey to changing into a provider of selection for progressive checks and course of know-how options. We stay very energetic in pursuing acquisition alternatives to boost our product choices, broaden our world footprint and deepen our presence in focused industries. And our steadiness sheet is in a strong place to assist these efforts.
With that, operator, let’s open the strains for questions.
Query-and-Reply Session
Operator
[Operator Instructions] Our first query is from Jaeson Schmidt with Lake Road.
Jaeson Schmidt
I do know Q1 is nearly over, however simply curious if you happen to may simply talk about, what you have seen from an order sample perspective? I do know orders have been up sequentially in This fall. Simply curious if that pattern has continued right here in Q1?
Nick Grant
Thanks for the query right here. As we’ve got laid out earlier than, we sort of anticipated the primary half of the yr was going to be slower. After which with the second half sort of ramp up as we see our again in semi and I might say issues are sort of enjoying out according to that perspective that we mentioned.
Jaeson Schmidt
Okay. That is actually useful. After which on the semi market, I do know you highlighted it is changing into a smaller piece of the pie. However simply given the volatility in that finish market, I might be curious what you are seeing from a visibility perspective there? And the way you are desirous about traits in that marketplace for the yr?
Nick Grant
I am sorry, Jaeson, you are speaking concerning the semi market or the automotive, reduce out on my finish?
Jaeson Schmidt
Oh, I am sorry, the semi market.
Nick Grant
The semi back-end market. No. Once more, we noticed — I might say, the stabilization with Q3 orders, This fall orders again in semi, comparatively stabilizing there. And we expect that may proceed with what our prospects and others are saying that back-end semi house will anticipate to see extra of a CapEx funding within the second half. So we nonetheless really feel that that is the best trajectory that we have laid out, and we’re marching in direction of right here.
Entrance-end semi, we highlighted within the name notes right here that it’ll stay resilient in This fall, these extra so geared in direction of the epitaxy utility. And I might say we’ve got fairly a little bit of exercise on that entrance as effectively. On the timing of orders, we’ll decide whether or not or not we see them in Q1 or Q2 for persevering with on that, however nonetheless energetic on the entrance finish aspect of semi on the market. And sure, what I discussed and what we have highlighted is the diversification that we have offered all through the — our efforts to broaden in different markets have actually positioned us effectively. So we’re very, very happy with that.
Jaeson Schmidt
Received it. After which only a final one for me, and I am going to leap again within the queue. I do know you highlighted form of all of the bullet factors on the Alfamation acquisition a few weeks in the past. However if you have a look at your outlook for the yr, does that assume which you could form of hit the bottom operating with Alfamation? Or are you anticipating any form of simply basic friction out of the gate as issues get built-in right here?
Nick Grant
Sure. It takes time to drive the synergies collectively that we have sort of recognized. What we do have although is a pleasant backlog coming in with semi — I imply with Alfamation there. So I really feel prefer it’s execution is a spotlight as we combine the enterprise after which attempt to construct the groundwork across the synergies that we see from the gross sales aspect, which then ought to assist us proceed to speed up the expansion going ahead there. However we do anticipate that enterprise goes to proceed to tick alongside because it has, which we laid on the market.
Operator
[Operator Instructions] Our subsequent query is from Ted Jackson with Northland Securities.
Ted Jackson
So Duncan, only a fast query for you on the — we have put — there’s like $1.3 million of deferred income on the steadiness sheet now that will probably be burned off over time. Are you able to — is there a time line you may put round that? I imply is that one thing we must always see taking place over the following 12 months to the yr, I imply when [indiscernible] one thing that we needs to be doing as modeling?
Duncan Gilmour
Sure, I believe that the deferred income might be nearer to about $2 million by way of what’s on there. And we’re speaking about — we’re estimating that simply over sort of 2 years sort of timeframe, about 40% or so inside 12 months and the remaining sort of after that, as indicated within the sort of ready statements, that will get launched as and after we obtain future orders from prospects or there’s readability from the client that they simply wish to obtain the uncooked supplies and elements, et cetera. So our greatest estimate in the intervening time is that sort of 40%, 12 months, 60% sort of past is the way in which we’re it.
Ted Jackson
Okay. After which we had a pleasant dialogue from you all as regards to the semi market, which was very informative. However can we speak a bit about industrials and what’s driving your enterprise there? I imply it is really simply — I imply merely put, it is carried out effectively sort of all through the previous 2 years from a reported ranges additionally on an ordering degree. What’s driving that progress? And the way do you — and what do you see would be the similar driver to drive the expansion going ahead?
Nick Grant
Sure. Effectively, we’re serving the economic throughout all of our companies outdoors of the EMS enterprise there. So we do have loads of merchandise that with the place we targeted on focused purposes that we consider are the best progress avenues, and it has delivered for us there. After which our innovation of recent merchandise that we proceed to launch and convey the market is opening up extra alternatives in that industrial house. So sure, it is not like we’re one-trick pony in that race within the industrial, we’re masking it at a a number of fronts. So we’ll have success in some areas one quarter and different areas the opposite. However general, collectively, we’re transferring the needle on that industrials as you level out.
Ted Jackson
Should you transfer away from sort of your merchandise, which it is good to have a range by way of the merchandise you are promoting into the Industrial section, are there explicit industrial markets which can be extra essential to you than others?
Nick Grant
Effectively, I used to be going to say the place we noticed some traction final yr in that house was with our inexperienced initiative and our induction heating options, which went extra into the ability utility house and a few oil and gasoline purposes the place induction heating was most well-liked versus torch flame use on the market in that. So — and it is a a lot greener resolution for purchasers on the market. So we proceed to see that, obtained a pleasant pipeline of recent ones across the inexperienced initiative that we’ve got there. In order that’s one instance, one product that is working effectively. However once more, these merchandise like induction heating options, cameras, chillers, can be utilized in all kinds of purposes on the market, and we’re actually going after as many as we will discover.
Ted Jackson
Okay. After which I am going to step again in line after this query. However I am simply sort of sticking into the completely different verticals and finish markets. On the order aspect, the safety enterprise, the orders have been — I imply, they fell off a cliff, and I am sort of curious as to what is going on on inside the safety enterprise? What was making the large drop within the fourth quarter? And the way can we take into consideration that in 2024?
Nick Grant
Sure, it is all timing. These are identification cameras, visitors administration cameras. And the order — the purchasers will place a big order at any given time for a number of quarters — 3, 4 quarters out. And relying on when these hit, it’s going to transfer the needle, however as a result of they’re small numbers nonetheless. And so do not learn into an excessive amount of of issues cratering. It is simply extra of a timing on orders are on the market.
Ted Jackson
Would you anticipate to see the enterprise — I imply, I do not know, I imply, you had a very good yr in ’22, and this yr was clearly down a bit from that. I imply do you anticipate that enterprise to develop in ’24 from fiscal ’23?
Nick Grant
Completely. We proceed to pursue alternatives, launch new cameras on this house. And sure, we’d anticipate to proceed to drive progress throughout that vertical.
Operator
Now we have reached the tip of our question-and-answer session. I wish to flip the decision again over to Nick Grant for closing remarks.
Nick Grant
Thanks, Sherry. Earlier than we shut, I wish to as soon as once more categorical my honest gratitude to our world crew as they proceed to ship excellent outcomes. And eventually, we will probably be collaborating within the LD Micro 2024 Invitational Convention in New York on April 9. We hope to attach with a few of you there. We admire you taking the time to affix us on our name at present and on your curiosity in inTEST. Thanks all, and have a terrific day.
Operator
Thanks. This may conclude at present’s convention. It’s possible you’ll disconnect your strains presently, and thanks on your participation.
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