inTEST Corporation (NYSEMKT:INTT) Q2 2016 Earnings Conference Call August 4, 2016 5:00 PM ET
Laura Guerrant – Investor Relations
Robert Matthiessen – President and Chief Executive Officer
Hugh Regan – Treasurer and Chief Financial Officer
Welcome to inTEST Corporation’s 2016 Second Quarter Financial Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded today. A replay will be accessible at www.inTEST.com.
It is now my pleasure to turn the call over to inTEST’s Investor Relations, Laura Guerrant. Please go ahead.
Thank you, operator, and thank you for joining us for inTEST’s 2016 second quarter financial results conference call. With us today are Robert Matthiessen, President and CEO; Hugh Regan, Treasurer and Chief Financial Officer; and Jim Pelrin, Executive Vice President.
Mr. Matthiessen will briefly review highlights from the second quarter as well as current business trends. Mr. Regan will then review inTEST’s detailed financial results and discuss guidance for the third quarter. We’ll then have time for any questions. If you’ve not yet received a copy of today’s release, a copy may be obtained on inTEST’s website, www.inTEST.com. Before we begin the formal remarks, the Company’s attorney’s advice that this conference call may contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements do not convey historical information, but relate to predicted or potential future events that are based upon management’s current expectations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, our ability to implement and execute the 2015 repurchase plan, changes in business conditions in the economy, changes in the demand for semiconductors, changes in the rates of and timing of capital expenditures by semiconductor manufacturers, the success of our strategy to diversify our business by entering markets outside the semiconductor or ATE markets, progress of product development programs, increases in raw material and fabrication costs associated with our products and other risk factors set forth from time-to-time in the Company’s SEC filings, including, but not limited to inTEST’s periodic reports on Form 10-K and Form 10-Q.
The Company undertakes no obligation to update the information on today’s conference call to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated or unanticipated events.
And with that, let me now turn the call over to Bob Matthiessen. Please go ahead, Bob.
Thank you, Laura. Welcome everyone to our 2016 second quarter conference call. I’ll review some of the highlights, our markets and what we are seeing in our customer base and then Hugh will review the financial results in detail. We again reported strong financial results.
Second quarter revenue growth was fueled across all of our product lines, driven most notably the automotive sector of the semiconductor market coupled with demand created by next generation smartphones and gross margin and net income also increased substantially over the last quarter with gross margin exceeding our guidance range.
In our Thermal Products segment, order expansion continued throughout the quarter as well, increasing 28% sequentially, based upon strength from our Thermal Products segment, our largest and most profitable division. We have strategically diversified this segment resulting in new opportunities in industrial testing and broadening our end market penetration into applications in various growth markets including automotive, consumer electronics, military/aerospace, energy, industrial and telecommunications. In addition, new product offerings have opened industrial markets outside inTEST for both OEM and end user applications.
Thermal Products segment bookings for the second quarter were $8.2 million, a 60% increase compared with the $5.1 million for the first quarter. Q2 thermal segment revenues were $5.6 million, up 8% compared with the first quarter's revenues of $5.2 million. Business was very strong in both the North American and Asian Markets. The upsurge in optical transceiver business in Asia continued throughout the quarter, as did orders from major semiconductor companies. Both semiconductor and military/aero markets provide an increased business in North America over the previous quarter.
Thermal highlights for the quarter included a major telecom company that purchased 9 ThermoSpot systems, which is a new product; a major military/aerospace organization purchased 9 systems for expansion of an automated test cell; and three major telecom companies purchased 58 systems for 40 and 100 gigabyte production. With regard to our process chiller systems that chiller OEM purchased their fifth system and a major defense organization purchased multiple phases of a new chiller design.
Turning now to our recently reorganized EMS products division. The EMS products business experienced some softness in second quarter compared with previous quarter, primarily due to the continued consolidation wave among our customer base. Specifically, the merging of a number of major IDMs, which slowed orders during the integration process. While orders were down slightly in both mechanical and electrical, revenues were up significantly. The strength of smartphone and automotive markets were major drivers for the business and we expect the strength in the automotive business to continue throughout the year.
Although Q2 Mechanical Products segment bookings of $2.4 million were down 8% from the $2.6 million reported in Q1, mechanical sales of $2.7 million grew 38% over the $1.9 million reported last quarter. Similarly while Q2 Electrical Products segment bookings of $2.0 million were down 5% compared with $2.1 million in the first quarter, electrical revenues of $2.2 million increased 46% over Q1’s $1.5 million.
EMS highlights for the quarter included a major Japanese IDM, who purchased six sets of docking and interface hardware for the initial rollout of a new tester platform, a major subcontractor in Southeast Asia purchased 7 new wafer sort interfaces, and a new customer in New York State purchased Intellidock docking hardware. And a major IDM approved the inTEST design final test interface to test package automotive radar.
In summary, key drivers for inTEST are the embryonic growth of the Internet of Things, the surging use of sophisticated electronics and automobiles, continued growth of telecommunications and Internet backbone, and a drive for improved semi-device packaging. By continually responding to the changes in our industry, we are optimally positioned to meet the needs of our customers as their technological roadmaps evolved.
Our long-term objective is centered on diversified growth through acquisition. This has not changed. As we noted in our press release, we began due diligence on an acquisition opportunity in the second quarter with whom we had executed an LOI late in the first quarter of 2016. We had essentially completed our due diligence and deal documents on the transaction, which have been scheduled to close on August 1st, 2016.
Two weeks ago, we were informed by the target that they had reconsidered and no longer wished to sell their company. We will continue to look for strategic opportunities as we continue to execute on our differentiated product strategy. We believe the conditions for our long-term success remained firmly in place.
And with that, I'd like to turn the call over to Hugh.
Thanks, Bob. Second quarter 2016 end-user net revenues were $9.7 million, or 93% of net revenues, compared to $8.2 million, or 94% of net revenues in the first quarter. OEM net revenues were $770,000, or 7% of net revenues, up from $493,000, or 6% for the first quarter. Net revenues from markets outside of semiconductor tests were $2.5 million, or 24% of net revenues, compared with $2.6 million, or 30% of net revenues in the first quarter.
The Company’s second quarter gross margin was $5.3 million, or 51% as compared with $4.1 million, or 47% in the first quarter. The improvement in the gross margin was primarily the result of both a decline in our fixed manufacturing costs as well as a more favorable absorption of these manufacturing costs. Our fixed manufacturing cost declined by $95,000, or 7% sequentially, due to reduced salary and benefit costs as well as lower levels of facility related costs. This reduction accounted for approximately 25% of the gross margin improvement.
The balance of the Q2 2016 gross margin improvement was the result of better absorption of our fixed manufacturing costs due to the sequential growth in revenues with our fixed manufacturing costs reducing from 16% of revenues in Q1 to 12% in Q2. Partially offsetting this decrease was a slight increase in our consolidated component material costs, which grew from 33.8% in the first quarter to 34.6% in the second quarter. The increase in our consolidated component material costs was the result of an increase in our component material cost in our Thermal and Electrical Products segments.
Our Thermal Products segments component material cost increased from 30% in the first quarter to 32.4% in second quarter, while our Electrical Products segment saw its component material costs increased from 33.2% to 36.8% sequentially. These increases were both the result of our less favorable product mix and customer mix in the second quarter as compared to the first. These increases were partially offset by a reduction in our mechanical products segments component material costs, which declined from 44.3% in the first quarter to 37.5% in the second quarter.
The reduction in our Mechanical Products segments Q2 component material costs was the result of a more favorable product mix with lower margins manipulated products reducing from 43% of first quarter segment revenues to 27% of second quarter segment revenues. Selling expense was $1.5 million for the second quarter compared to $1.3 million in the first quarter, an increase of $136,000, or 10%. The increase was primarily driven by higher levels of commission expense resulting from the increased revenues. In addition, there were increased costs for advertising and travel.
Engineering and product development expense was $982,000 for the second quarter compared to $991,000 for the first quarter, a decrease of just below 1% sequentially. The decrease was related to reduce salary and benefit expense, which was partially offset by increases in product development costs in our Thermal Products segment and increased patent costs in our Thermal and Mechanical Products segment.
General and administrative expense was $2.1 million for the second quarter compared to $1.6 million in the first quarter, an increase of $500,000 or 30%. As Bob previously noted, our second quarter G&A expense included $456,000, or $0.04 per diluted share, in acquisition related expenses. First quarter general and administrative expense included $99,000 worth of restructuring costs related to a reduction of force completed in our Mechanical Products segment in early January.
When adjusted to remove these items, second quarter G&A expenses increased $143,000 or 9% from the first quarter. This increase was the result of higher levels of stock-based compensation expense related to restricted stock awards granted to our three independent directors, which fully vested upon their reelection to our board at our June 29, 2016 Annual Meeting.
Other income was $18,000 for the second quarter, compared to $28,000 for the first quarter. The reduction in other income is primarily the result of reduced foreign exchange translation gain in the second quarter as compared to the first quarter. We accrued an income tax expense of $263,000 in the second quarter, compared to $43,000 accrued in the first quarter and our effective tax rate was 35% in both quarters. At June 30, 2016, our deferred tax assets were $1.1 million and our remaining net loss carry forward was $1.4 million for domestic primarily California and $2,016 for foreign related to our German operation.
We expect our tax rate for the balance of 2016 to be in the range of 34% to 36%. Second quarter net income was $486,000, or $0.05 per diluted share, compared with first quarter net income of $81,000, or $0.01 per diluted share. Diluted average shares outstanding were 10,311,000 at June 30. We initiated our stock buyback on December 1st. And during the quarter ended June 30, 2016, we have repurchased 76,037 at a net cost of $297,000, or $3.91 per share. As of June 30, 2016, we have repurchased accumulative total of 232,059 shares or just over 2% of our outstanding common stock at a net cost of $919,000, or $3.96 per share.
We had suspended our stock buyback in May 2016 as we commenced significant due diligence on an acquisition opportunity that have been expected to close on August 1, 2016. We currently expect to resume repurchasing our shares upon the filing of our 10-Q on or about August 2, 2016. Amortization and depreciation expense was $144,000 for the second quarter and EBITDA was $882,000 for the second quarter, up from $273,000 in EBITDA for the first quarter. Consolidated headcount at the end of June, which includes temporary was 117, and an increase of 2 from the level we had at March 31st.
I'll now turn to the balance sheet. Cash and cash equivalents at the end of the first quarter was $25 million, up $52,000 for March 31. We currently expect cash and cash equivalents to increase for the balance of 2016 excluding the impact of any potential acquisition. Accounts receivable increased by $1.4 million to $6.7 million at June 30 driven by higher levels of shipments during the second quarter. Inventory decreased slightly by a $140,000 to $3.3 million at June 30. Capital expenditures during the second quarter were $126,000, up from $38,000 in the first quarter and represented new computer hardware related to a company wide system upgrades and additions to our leased product inventory in our German operation.
Bob provided a consolidated segment and revenue and booking data earlier on the call and the backlog at the end of June was $5.7 million, up from $3.5 million at the end of March. In terms of our financial outlook, as noted in our earnings release, we expect that net revenue for the quarter ended September 30, 2016 will be in the range of $9.5 million to $10.5 million and that net earnings will range from $0.03 to $0.07 per diluted share. We currently expect that our Q3 2016 product mix will be consistent with Q2 and that the third quarter gross margin will range from 48% to 51%.
Operator that concludes our formal remarks. We can now take questions.
At this time, we have no questions. I’ll now turn the floor back over to Mr. Robert Matthiessen for any additional or closing remarks.
Thank you for your interest in inTEST and we look forward to updating you on our progress when we report our third quarter results in November. Have a good evening.
Thank you all for joining.
Thank you for your participation in today's conference. This does conclude today's call. You may now disconnect.
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