Intest Corp Q3 FY2020 Earnings Call

Welcome to inTEST Corporation’s 2020 Third Quarter Financial Results Conference Call. As a reminder, this conference is being recorded. A replay will be accessible at www.intest.com. I will now turn the call over to inTEST’s Investor Relations Consultant, Laura Guerrant. Please go ahead, ma’am.

Thank you, Margate, and thank you for joining us for inTEST’s 2020 Third Quarter Financial Results Conference Call. With us today are Nick Grant, inTEST's President and CEO; and Hugh Regan, Treasurer and Chief Financial Officer. Nick will briefly review the quarter’s highlights as well as current business trends. Hugh will then review inTEST’s detailed financial results for the quarter and discuss guidance for the 2020 fourth quarter. We’ll then have time for any questions. If you’ve not yet received a copy of today’s releases, they can be obtained on inTEST’s website. In addition to our press release, we have issued supplemental information in advance of this call, which can be downloaded from our website on the Investor Relations page just mentioned. The supplemental information is offered to provide shareholders and analysts with additional time and detail for analyzing our results in advance of the company’s quarterly results conference call. Before we begin the formal remarks, the company’s attorneys advised that this conference call may contain 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. In addition to the factors mentioned in our press release, such risks and uncertainties include, but are not limited to, the impact of the COVID-19 pandemic on our business, liquidity, financial condition and results of operations including as a result of evolving public health requirements in response to the pandemic such as government-mandated facility closures, availability of employees, supply chain and distribution interruptions, customers' inability or refusal to accept product deliveries and the sufficiency of our current level of working capital to address our cash requirements; indications of a change in the market cycles in the semi-market or other markets we serve, including as a result of the COVID-19 pandemic; changes in business conditions and general economic conditions, both domestically and globally; changes in the demand for semiconductors generally and as a result of the COVID-19 pandemic; the success of our strategy to diversify our business by entering markets outside the semi-market; our ability to successfully consolidate our EMS operations without any impact on customer shipment, the possibility of future acquisitions or dispositions and the successful integration of any acquired operations. Our ability to borrow funds or raise capital to finance potential acquisitions; changes in the rates and timing of capital expenditures by our customers, including as a result of the COVID-19 pandemic; success 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 our Securities and Exchange Commission filings. Any forward-looking statements made by inTEST during this conference call is based only on information currently available to us and speaks to circumstances only as of the date on which it is made. We undertake no obligation to update the information in this press release to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated or unanticipated events. During today’s call, we will make reference to non-GAAP financial measures. We have provided additional information concerning these non-GAAP measures, including a reconciliation to the directly comparable GAAP measure in our press release. And lastly, we will be participating in the following virtual investor conferences in December. LD Micro, DA Davidson and the CEO Summit. And with that, let me now turn the call over to Nick Grant. Please go ahead, Nick.

Thank you, Laura. And welcome, everyone. Thanks for joining us for the third quarter 2020 financial results conference call. First of all, I hope all of you and your families are healthy and staying safe. I am particularly pleased to be speaking with you all today as this is my first financial results call as inTEST CEO. And I'd like to thank the entire inTEST team for embracing me into the organization in August and for delivering solid Q3 performance. Before we go into the detail of our normal quarterly results review, I'd like to provide you with a brief update on our response to COVID-19 and how we're managing through it. We continue to closely monitor all regions in which we operate to ensure that we are fully compliant with recommended local and national health safeguards. The safety protocols implemented across the organization are being followed and have proven to be effective at protecting our employees while allowing us to support our global customer base. I think our customers and employees alike are increasingly more confident with business in a COVID world. We've been allowed to return to some of our customers' facilities on a limited basis, and this has resulted in service revenues picking up in the third quarter—a change from what we saw in the second quarter where our service revenues declined given the limited ability and travel restrictions. For the third quarter, service revenues exceeded $1.6 million, a 22% increase sequentially. It appears that we are returning to pre-COVID levels. I'd like to extend my appreciation to the entire inTEST organization for how well they have responded to the pandemic. Obviously, we're not out of the woods yet, with cases rising globally, but I'm extremely proud of the resiliency the entire team has displayed. Now let's move on to the discussion of our financial performance for the third quarter. In general, we're seeing improving conditions in those markets we serve, which is reflected in our quarterly results. Our solid third quarter financial results were in line with our expectations resulting in continued revenue and profitability growth. While COVID-19 related challenges continue to impact us overall, order flow has continued to strengthen with a continuation of the uptick in orders that we experienced last quarter. In addition, we are pleased to see good order activity from new customers as well. In Q3, consolidated bookings of $14.4 million increased 4% sequentially, and were evenly split between multimarket and semi markets. Holistically, a diverse set of end applications are driving our business growth, confirming our diversification strategy. Third quarter multimarket bookings increased 8% to $7.2 million, while semi bookings for the same period were $7.2 million consistent with those reported in Q2. Q3 consolidated revenues of $14.4 million increased 9% sequentially and were at the high end of our guidance largely fueled by thermal-related components of the semi-market as well as the mill era markets. As a percentage of overall revenue, semi comprises 51% while multimarket were at 49%. Semi revenues for the third quarter increased 8% sequentially to $7.4 million, and Q3 multimarket revenues increased 10% to $7 million. Now let's turn to the performance of our two operating business segments, along with some customer highlights. This is actually my favorite part because I love to talk about customers, and two customers as this is where I learn the most about their products and their applications and it allows me to identify areas where we can better serve them in the future. Our Thermal segments consist of our Ambrell and iTS businesses while our other segment, EMS, is where the founding business of the company resides. Thermal was responsible for all multimarket revenue as well as some of inTEST revenue from semiconductor front-end manufacturing and back-end testing. EMS customers are all semiconductor related. So let's talk about thermal where we're making inroads across multiple industries and verticals. In Q3, Thermal bookings of $11 million increased 5% compared to Q2, and thermal net revenues for the quarter of $10.7 million was up 13% over the second quarter. Let me share some details of recent successes. Our thermal semi business continues to be strong this year in both front-end and back-end, a strategic account placed additional orders for CVD applications in the quarter; there was significant quarter-over-quarter improvement in our semi lab business largely driven by a rebound in Europe. We also received a sizable COVID-19 related thermo stream order for mass production from a new customer in Europe. Now shifting to multimarket, where we are focused on unique applications and different growth markets and verticals outside of semi. We continue to penetrate the EV market which is emerging as an important new market for us and is benefiting from continued investments. During the quarter, we received a sizable order from an integrator with considerable expertise in the automotive EV industry, as well as orders from a large domestic automotive manufacturer. We also received our first order from a startup EV truck manufacturer. Our Ambrell business launched the EKOHEAT Compact Series in Q3, and I'm happy to report that we received our first order from a company that specializes in steel metal fabrication in Canada, with the unit set to ship in Q4. In iTS, we're seeing increased customer adoption of our chiller products, driving organic growth. In fact, chiller bookings and revenues both exceeded $1 million in the quarter for the first time in the company's history, with thermal bookings driven by cannabis extraction chillers from multiple customers, three of whom were new this quarter, and revenues driven by mill era chiller shipments booked in 2020 and late Q4 2019. Now let me turn to the EMS segment, which predominantly serves production tests for analog and mixed signal semiconductor applications. In the first half of the year, we saw a resurgence in order flow after hitting the bottom of the cycle trough in Q4 of last year. Q3 EMS bookings of $3.4 million were roughly flat sequentially, and EMS revenues of $3.7 million were marginally down 2%. However, we were successful in securing new customers during the quarter and broadening our geographic reach. There are some really exciting developments around automation going on in the industry, in which inTEST is taking a leading role by leveraging our technology and creating new solutions and products. One such example is the transition to automated test cell solutions, where we're making significant inroads via our automated manipulators and our intelligent docking systems. The intelligent test cell that results from the combination of these two systems is highly compelling for customers. We are developing a presence in this, and we are pleased with our customer adoption and market traction to date. With these innovative solutions, we are poised to achieve deeper penetration in our current customer base and drive growth across the industry with new accounts. Now, some highlights from EMS in the third quarter. EMS completed the installation of two automated manipulators for a medical device company that has recognized the value of back-end test automation, and what combining the manipulator with our IntelliDoc can do to optimize back-end wafer test. In fact, the customer created a before-and-after video showing the advantages of the intelligent test cell in support of their future capital budget request. Due to the success of the systems, we've received word that the capital has been approved to purchase additional systems. Additionally, EMS shipped and installed an initial system consisting of a manipulator and docking solution for a solid-state disk drive and memory application, which should lead to additional follow-on orders in 2021 from this customer. There are a couple of things I want to highlight about this success. First, the memory space is not a market that we traditionally play in, and this provides an opportunity for further diversification within the same space for us. Second, this is an example of how we're making early investments in customers' production tool sets in multiple areas and are participating in their next-generation technology programs to better position us for the future. It's really great to see the effort being made to get us designed in early and to drive adoption. We will continue to diversify in this space, and expect that the new products being designed in and adopted during this year will lead to additional traction going forward. Now, let's shift gears from the business performance and let me share with you all some of my initial impressions since taking the helm of the company. As you know, I officially started on August 24 and since then I've been immersed in all aspects of the organization. I've learned a tremendous amount in a short period, and I truly like what I'm seeing and hearing. I've spent a fair amount of time talking with customers. The overwhelming feedback I receive centers around responsiveness, flexibility, deep expertise, high quality and overall reliability of our products. One customer explained a recent situation where they had a manufacturing test cell go down one evening. After contacting us, our teams worked through the night to assess the situation, implement a solution, and had them back up and running in less than 14 hours. He went on to say such a failure doesn't happen often, but when it does, he knows he can count on inTEST. Another customer described inTEST as a true solution provider and uses us as a key business partner in their forward strategy. I also spoke with a few of our larger channel partners, and it's clear that they value our product lines. A couple of them told me how, at some point in the past, they had lost the inTEST product line and tried carrying competitive lines, which simply did not compare. I could hear in their voices their commitments to inTEST. All in all, positive feedback across the board, and I can't wait until I can physically start visiting customers and seeing channel partners to further strengthen relationships. Now shifting to my observations of the operating businesses within inTEST; this is an area where I've been spending a lot of time working with the teams, learning the products and applications, reviewing the R&D projects and simply understanding the challenges the businesses are facing. Collectively, I would describe the businesses as being customer-focused, high-quality engineering organizations which pride themselves on delivering innovative solutions where others would be competitors simply cannot. While they all play in very large markets, they generally focus on high end niche segments where they can leverage their deep application expertise to differentiate themselves and command superior pricing and drive better margins. Across all of the businesses, I've seen a strong commitment to succeed and high levels of employee engagement, which has been truly fantastic. Now I'd like to speak a bit about product development efforts and what I'm seeing and sensing because inTEST's reputation is for providing solutions that others can't. Many of our shipments are highly designed custom systems and solutions, which are largely configured for unique customer needs. These are important, and we deliver them extremely well. However, I believe we could benefit more from standard products, through products that can be produced in common production flows, providing more scalability and standard product platforms. The good news is we already have some of these today. Notably, most of Ambrell's revenues come from their EASYHEAT and EKOHEAT platforms as well as our thermal stream products and iTS. These are really successful product platforms, and several are industry standards within their markets, especially for precision cooling and automatic testing and semiconductors. These are products that scale very well in production, where we offer base models with few options to leverage a common sub-assembly, which drives a lower cost. Clearly, there's an opportunity for iPS and EMS to do more platforming and standardizing like these products across their broader portfolio. Likewise, there's an opportunity for all the businesses to focus on more scalable opportunities rather than one-off as we review quote requests. Obviously, shifting more to this model is something that will take time, but I'm a big believer in pursuing customer-driven solutions that can be applied broadly and leverage standard product and components. My experience is this is a key avenue to growing the business and driving expanding margins. I expect you'll be hearing more about our efforts in these areas in future quarters. As I mentioned, it doesn't happen overnight but we are starting to address these processes now. So let me move on to business challenges. Clearly, the biggest challenge for us has been delivering sustainable growth. It would be easy to blame this on the cyclical nature of the semi ATE industry, which accounts for about half of our sales. While this is a clear obstacle to stability, there are many other contributing factors that I'm uncovering. One of them is that our businesses are primarily US-centric. By that, I mean we're manufacturing in the US to serve customers on a global scale. While this allows better utilization of our US factory, it makes it difficult to be successful today in international markets, especially when facing local competitors and rising shipping and logistics costs. Likewise, I'm seeing what I believe are global front-end gaps that we can work to address in such areas as sales coverage, key account management, and service—all of which, if addressed well, can drive sustainable top-line improvement and add nicely to the bottom line. Addressing these will require some adjustments and investments in our organization, and that always takes time. But I'm very focused on prioritizing investments in those areas that can generate a near-term impact. To help fund these investments, we've initiated some cost reduction activities in Q3, which were described in the recently published 8-K, that included right-sizing our New Jersey EMS operation and consolidation of our California manufacturing into New Jersey. What I like about these actions is that they not only provide cost reductions through footprint optimization, but they also allow us to better serve customers through streamlined operations. As a result of these actions, we will be taking some one-time charges in Q4 associated with lease impairment, restructuring, and facility improvements which Hugh will provide more details on shortly. These operational upgrades we are taking will position us for improving growth and profitability in 2021 and beyond. Finally, I know many of you are waiting to hear more on the forward strategy of the company now that there's a new CEO. I'm pleased to inform you that last month I kicked off a three-day strategic planning exercise with my senior staff to start defining where we're going and how we're going to get there. Over the next couple of months, we'll be fine-tuning our plans and developing the initiatives to drive the business forward over the next five years. Today, I've tried to share with you some of my early perspectives, and I look forward to sharing more of the outcomes of these strategic discussions with you when we report our fourth quarter financial results early next year. To summarize, I want to send a huge thank you to the entire inTEST team for welcoming me into the organization and for delivering a truly solid quarter. From this level of execution, we can build a foundation for positive change. I'm excited to be here, and I see real opportunities for all of us. I'll now turn it over to Hugh Regan, our CFO, to walk you through the details of our most recent quarter's performance. Hugh, over to you.

Thanks Nick. Our third quarter gross margin of 45% came in just below our guidance range and was down from the 46% gross margin we reported for the second quarter, reflecting a higher level of component material costs, which grew from 33% in Q2 to 34.8% in Q3. The increasing component material cost was driven largely by product mix from higher shipments of chiller products, which Nick discussed earlier, exceeding the $1 million mark this quarter. The increasing component material cost was partially offset by a more favorable absorption of our fixed production costs due to higher revenue levels. While the third quarter of manufacturing costs increased $56,000 or 2% due primarily to increased salary and benefit costs, they declined as a percentage of revenues from 18% in the second quarter to 17% in the third quarter. Selling expenses decreased by 1% sequentially to $1.7 million for the third quarter, primarily driven by lower salary and benefit costs. Engineering and product development expenses increased 8% sequentially to $1.3 million, primarily as a result of higher levels of spending on product development materials and increased patent legal costs. General and administrative expenses increased 3% sequentially to $3 million, driven primarily by non-recurring costs related to our recent CEO transition, which totaled $248,000 in the third quarter. This amount is net of a reversal of $117,000 in previously accrued stock-based compensation. We accrued an income tax benefit of $25,000 in the third quarter, reflecting a negative 6% effective tax rate. This compares to a $13,000 income tax expense accrued in the second quarter, which reflected an effective tax rate of 7%. We expect that our effective tax rate in the fourth quarter will range between 25% and 26%. For the third quarter, we reported net earnings of $458,000 or $0.04 per diluted share, compared to $170,000 or $0.02 per diluted share for the second quarter. As previously noted, included in third quarter results were non-recurring costs associated with our recent CEO transition. When tax affected, these costs amounted to $0.02 per diluted share. Excluding these non-recurring costs, our third quarter net earnings would have been $0.07 per diluted share. Diluted average shares outstanding were $10.3 million for the third quarter of 2020. During the quarter, we issued 155,110 shares of restricted stock and had forfeitures of 52,060 shares of restricted stock and did not repurchase any shares. EBITDA was $908,000 for the third quarter, up from $672,000 in the second quarter. Consolidated headcount at September 30 was 200, an increase of three staff from the level we had at June 30. I'll now turn to our balance sheet. Cash and cash equivalents grew by $2.1 million sequentially to $9.5 million, and cash flow provided by operations was $2.3 million for the third quarter. Cash at September 30 included $1.4 million in customer deposits, which had increased to $722,000 sequentially. Cash today stands at $11.1 million. We currently expect cash and cash equivalents to decrease by year-end due to working capital demands, as well as to fund tenant improvements for our New Jersey facility, which we'll discuss later in this call. Accounts Receivable remained relatively unchanged from the prior quarter and was $9.5 million at September 30 with 61 DSO, down from 65 to June 30. Inventories declined by $1 million or 13% sequentially to $6.9 million, driven by shipments during the quarter. Inventory had increased at the end of the second quarter in preparation for shipments that were released early in the third quarter. Capital expenditures during the third quarter were $330,000, up from $110,000 in the second quarter. Included in the third quarter capital expenditures was $202,000 for tenant improvements to our Mount Laurel, New Jersey facility. We expect another $202,000 in the fourth quarter to complete these tenant improvements. Our backlog at September 30 was $8.7 million, relatively unchanged from June 30. As to guidance, as noted in our earnings release, we expect that net revenues for the quarter ended December 31, 2020 will be in the range of $14 million to $15 million, and that our GAAP financial results will range from a net loss of a negative $0.08 to a negative $0.03 per diluted share. On a GAAP basis, our adjusted net loss per diluted share will range from a negative $0.05 per diluted share to breakeven results. We currently expect our fourth quarter gross margin will range from 44% to 45%. I will note that our fourth quarter operating results may be subject to increased volatility as a result of the planned consolidation of our EMS manufacturing operations. As Nick noted earlier in the call, we expect to incur nonrecurring costs in the fourth quarter, which we expect will range from $1.4 million to $1.8 million. I will now review these nonrecurring charges, which are included in our fourth quarter guidance and summarized in our Q3 supplemental information. The goal of most of these actions is to reduce costs and improve profitability and cash flow. One of these actions is the restructuring of our EMS segment, which will involve facility consolidation. In connection with this restructure, we have recently modified the lease in our Mount Laurel, New Jersey facility to reduce the leased square footage by approximately 40% and extend the lease by 10 years. We plan to move the manufacturing operations for our tester interface products from Fremont, California to Mount Laurel, New Jersey late in the fourth quarter. The consolidation of manufacturing operations will result in the closure of our Fremont facility and the termination of certain employees at that location. This is expected to be substantially completed during the fourth quarter. As a result of this action, we currently expect to incur cash charges for severance and other one-time termination benefits ranging from $50,000 to $100,000. In addition, we expect to incur cash charges for other costs related to the facility consolidation, including moving costs and production startup costs expected to range from $300,000 to $400,000. Most of these costs are expected to be incurred in the fourth quarter. We intend to try and sublease our Fremont facility when we cease manufacturing operations there, and we expect to record an impairment charge related to the right of use asset for the facility lease, currently expecting that the charge will range from $700,000 to $800,000. As a result of these actions, we expect to generate annual cost savings of approximately $600,000 in our EMS segment. We also plan to reduce the leased square footage in our Mansfield, Massachusetts facility by 6,100 square feet during the fourth quarter. This action is related to a reduction of the administrative footprint caused by the recent CEO transition and the reestablishment of the Mount Laurel, New Jersey office as our corporate headquarters. We intend to try and sublease this space and expect to record an impairment charge related to the right of use asset for this facility lease. We currently expect the charge will range from $100,000 to $200,000. As a result of this action, we expect to generate annual savings of approximately $90,000 split between corporate and our iTS business unit of our thermal segment. We also plan to incur some other nonrecurring costs during the fourth quarter related to various items, including costs related to the renewal of our shelf registration statement, which expires later this month. If we were to exclude these nonrecurring charges, which when tax-effective range from $1 million or $0.10 per diluted share to $1.4 million or $0.13 per diluted share, our guidance for the fourth quarter of 2020 would have been for GAAP net earnings per diluted share in the range of $0.02 to $0.10 per diluted share, and non-GAAP adjusted net earnings per diluted share in the range of $0.05 to $0.13 per diluted share. Our guidance is predicated on business trends we are currently seeing as well as our expectations for the balance of the quarter. Operator, that concludes our formal remarks; we can now take questions.

We can now take our first question from Jaeson Schmidt from Lake Street.

Hey, guys, thanks for taking my questions. Nick, just want to make sure I heard you correctly. It seems that the order momentum has been sustained here in Q4 so far. Just curious if you could sort of comment on what you're seeing from order patterns in October and November.

Yes, hi, Jaeson. And thanks for participating this morning. Yes, order patterns throughout Q3 we saw an improving trend. Likewise, our opportunity funnels that we're pursuing have continued to show positive trends through October and into November. I believe the world is figuring out how to operate in this COVID world, and we're seeing improvements across most of our industries.

Okay, that's helpful. And then you highlighted the EV market and that opportunity. Just curious if you could comment on why you're seeing so much success and why you guys tend to win designs there.

We got in early. We partnered with a major player in the EV space, and from that, we've developed robust solutions for their production of motors, their steering columns, and various other applications. We've proven that we've got the right products and the ability to deliver the products to meet their growing needs, and others across the industry are seeing this as well. We see this as a key focus area for us moving forward; the dynamics in the EV market should be positive for years to come.

Okay, and the last one for me, I’ll jump back into the queue. Are you seeing any component or supply constraints? And with all the moving parts of the facility moves, are you expecting any sort of correction in Q4? And is that accounted for within your Q4 guidance?

Yes, a good question. As for supply chain challenges, our team has done a great job in Q2 when COVID hit, ensuring we had a robust supply of components to continue delivering solutions for customers. So right now, we aren't experiencing any supply chain challenges, and we have accounted for the consolidation into New Jersey in our Q4 guidance.

We can now take our next question from Theodore O’Neill from Litchfield Hills Research.

Thank you, and congratulations on a good quarter. Nick, you covered enough here this morning that we could spend hours on the phone, but I did want to talk—ask about the product development idea here that you'll move to more standard platforms. I know in the semiconductor side of the business, it's notoriously customized equipment for those customers. How are you thinking about what you can put in place to standardize some of that?

Yes, no, I think we've got a really good start. We've launched our automated LS series manipulators a few years back, gaining traction at a slow pace relative to market adoption. But we now have enough success with that and our recently launched intelligent document system combined. This provides accuracy that can't be achieved by manual approaches in the past, so customers are seeing the benefits of improved accuracy, as well as reduced footprint for their facilities. The EMS team has been tasked to look across their broader portfolio and develop an approach more applicable in this area.

Okay, and in following up on the EV question, do you have to work with each individual EV maker? Or is there some integrator that you're working with?

Many of them work through integrators. We're working closely with both; we are trying to get ourselves established with the end users, EV makers to qualify operations and processes, and we're also engaging with the integrators that are building the plants and operations. It's a two-pronged approach.

We can now take our next question from Peter Wright from Intro-act.

Thank you for taking my questions. Nick, where do you see the lowest hanging fruit in your perspective of deeper versus broader? You discussed your service model, and with COVID easing, how much room is there really to improve that business?

Some of the low-hanging fruit, I believe, lies in our service revenues, which are roughly 8% to 10% of our total revenue. The opportunity to do more in this area is plentiful, from service coverage to warranty agreements and ongoing maintenance. More to come in service as we finalize our strategic plan. We also have gaps in global sales coverage that we need to improve, and exploring the biggest market opportunities will help us benefit by having a presence there.

Happy to do that, Nick. Peter. Yes, you're correct. We are seeing a slight improvement in operating profitability quarter-over-quarter, primarily due to stronger expense control across the organization. There's a slightly better margin profile as a result of that.

Wonderful. And then my last follow-up is on the order pickup. If you were to characterize the pickup in bookings, do you think that some of it is catch-up from below COVID lows? Or do you see this as fresh demand?

It's a combination. We're getting some tailwinds with our current customers as they get more comfortable in this COVID world, but we are also focusing on expanding to new customers and driving diversification, which will fuel our growth moving forward.

We can now take our next question from Dick Ryan from Colliers.

Thank you. Nick, are you planning to offshore some manufacturing over time? If so, how would you accomplish that?

It's my job to ensure we're not missing out on global growth opportunities. We need to have a presence in certain large markets around the globe to better serve customers. We're currently defining whether that's organic or inorganic, exploring all avenues.

When looking at acquisition opportunities, would it be on the industrial side or on the semi side?

I see opportunities for both industrial and semi. We have strong products and customer relationships, but we can better serve our customers with broader portfolios in both parts of our business.

Thanks, everyone. I will now turn the call over to you for any questions that were submitted in advance. The first question came in: Is there a role for inTEST associated with cold chain challenges in the delivery of a vaccine for COVID-19? Can inTEST help keep the vaccine at very low temperature once closer to the point of vaccine delivery through your Thermonics-chillers? Is this an area where inTEST can add value?

Yes, the vaccine activity is ever-changing, and ultra-cold transportation is critical. We do ultra-cold extremely well, and we're exploring this, but it's simply too early to know with any clarity how we'll play or where we play.

Okay, thanks very much. The second question is, what is your China exposure?

China accounts for roughly 8% of our top line, which is down 200 basis points year-over-year, largely driven by tariffs. We did receive notification from the Department of Commerce for shipments going to SMIC and SMEC here in Q4, which will require us to apply for a license, and we are proceeding to do so.

Perfect. So there are no further questions. I’ll now turn the call back over to you for closing remarks.

Thanks, Laura. Thank you all for your interest in inTEST this morning. We appreciate your listening in. If you have further questions, don't hesitate to call me, Hugh, or Laura. We look forward to seeing you all at the online virtual conferences Laura mentioned earlier, and look forward to updating you on our progress when we report the results for the fourth quarter. So stay tuned, stay healthy and stay safe. Thanks, everyone.

Thank you. That concludes today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.