Ladies and gentlemen, greetings, and welcome to the inTEST Corporation First Quarter 2024 Financial Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shawn Southard, Investor Relations. Please go ahead.

Good afternoon, everyone. We certainly appreciate your interest in inTEST Corporation and thank you for sharing your time with us today. Joining me on our call are Nick Grant, our President and Chief Executive Officer; and Duncan Gilmour, our Chief Financial Officer and Treasurer. You should have the earnings release, which crossed the wires today aftermarket as well as the slides that will accompany our conversation today. If not, you can find these documents on the Investor Relations section of our website, intest.com. Please turn to Slide 2, and I'll review the safe harbor statement. During this call, management may make some forward-looking statements about our 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 and 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 documents can be found on our website or at sec.gov. Also, management will refer to some non-GAAP financial measures. We believe these will be useful in evaluating our performance. 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. Now please turn to Slide 3, and I'll turn the call over to Nick.

Thank you, Shawn, and good afternoon, everyone. Thanks for joining us for our First Quarter 2024 earnings call. The quarter came in about where we had expected, and I'd like to thank the entire inTEST team for making it happen in a relatively tough environment. Revenue of nearly $30 million was somewhat higher than expected, while gross margin of 43.8% was lower, primarily driven by the timing of the acquisition of Alfamation. With operating expenses coming in slightly lower than expected, EPS was $0.05 and was $0.10 on an adjusted basis. Alfamation, which we owned for about 2.5 weeks in the quarter, contributed $1.4 million of the $1.9 million revenue increase over the fourth quarter of last year. However, given the timing of the acquisition and having revenue and costs misaligned in a short stub period, they were a drag on our gross margin. In a normalized quarter, we would expect their typical margins to be similar to ours. We continue to execute our 5-point strategy, which focuses our growth efforts in diversified markets and drives our strategic thinking. These efforts are helping as we manage through the tough semiconductor cycle. In fact, while they can be lumpy in their own rights, Defense, Aero and Industrial remained solid markets for us in the quarter. The addition of Alfamation, which provides us a meaningful position in the electronics and infotainment test space for the automotive industry, will provide further diversification. Importantly, we continue to generate cash from operations. Even after the Alfamation acquisition, where we used about $19 million, we ended the quarter with $27 million in cash. We believe this is adequate financial flexibility to keep advancing our transformation strategy. Turning to Slide 4, I will review the orders and backlog. As we have been communicating since last November, the first half of 2024 was expected to be weaker than the second half of the year. However, we had a measurable change in order trends at the very end of the quarter, and that has now impacted our outlook for the year. Specifically, we had about $5 million in orders we had anticipated that were either delayed or reduced in size from expected levels. Encouragingly, back-end semi was up sequentially, showing signs of stabilization, which we had noted on our year-end call. This helped to partially offset a notable decline in front-end orders in the first quarter. One bright spot to note is our backlog is at a record $56 million at quarter end. The boost is directly the result of the acquisition with Alfamation contributing $22.8 million in backlog. You may recall that we had reported their backlog at about EUR 13 million when we acquired them. However, their accounting for revenue was based on a percentage of completion methodology. After the acquisition, we have concluded that under U.S. GAAP, point-in-time revenue recognition is more appropriate. As a result of this change, acquired backlog increased to $22.4 million. Keep in mind that the accounting treatment is related to the timing of revenue recognition and does not impact our previous statements regarding Alfamation's annual revenue. While it's in its early days, the integration of Alfamation is progressing as planned. In fact, we have already jointly participated in trade shows and numerous customer interactions. We are really excited about Alfamation joining the inTEST team and all that we can do together to further our strategy. With that, let me turn it over to Duncan to review the financials and outlook in more detail. Duncan, over to you.

Thank you, Nick. Starting on Slide 5. Revenue for the first quarter was $29.8 million, including $1.4 million from Alfamation, which was acquired with only 19 days or 2.5 weeks remaining in the quarter. The $2.1 million decline compared with Q1 2023 was driven by a $2.7 million decline in semi, partially offset by growth in the Industrial and Defense/Aerospace markets. Sequentially, first quarter revenue increased $1.9 million, with semi revenue up 39% off of the exceptionally low fourth quarter, while Defense/Aerospace was up 34%. Revenue from Alfamation was primarily in auto/EV, which helped offset a decline in that market within the organic businesses. Moving to Slide 6. Gross margin of 43.8% for the quarter contracted 80 basis points sequentially, driven by a 100 basis point negative impact from the stub period for Alfamation. This is just a result of a timing mismatch on recognition of revenue and expenses given the short ownership time frame in Q1. On a year-over-year comparison, gross margin contraction was a result of lower volume and product mix as well as the aforementioned impact from the acquisition. Our trailing 12 months gross profit of $55 million or 45.4% of sales is in line with our updated outlook for this year of gross margin between 44% and 46%. As you can see on Slide 7, our operating expenses were up $1.1 million versus the prior year, driven by higher corporate development expenses, incremental operating expenses inherited with the acquisition and higher professional fees. As a percent of sales, OpEx increased 610 basis points to 42.2%. Turning to Slide 8, you can see our bottom line and adjusted EBITDA results. For the quarter, net earnings were $662,000 or $0.05 per diluted share. Adjusted net earnings were $1.2 million or $0.10 per diluted share. Adjusted EPS reflects adding back tax-effected acquired intangible amortization. On an after-tax basis, our acquired intangible amortization amounted to approximately $500,000 or about $0.05 per diluted share in the first quarter. Adjusted EBITDA for Q1 was $1.8 million, representing a 6.1% adjusted EBITDA margin. Slide 9 shows our capital structure and cash flow. We had a solid quarter of cash generation, adding $2.1 million from operations. Capital expenditures in the first quarter were $300,000, unchanged from the prior year period. Given our modest capital requirements to grow the organic business, free cash flow was $1.8 million. Cash equivalents at the end of the first quarter were $27.3 million, down $18 million from the trailing quarter, reflecting the use of approximately $19 million for the acquisition of Alfamation. Borrowings increased in the quarter due to the $9 million in debt we assumed from the acquisition. We ended the quarter with total debt of $20.4 million, which we believe is very manageable and reflects a total debt leverage ratio of 1.6x. During the quarter, we repaid approximately $1 million of debt. We continue to have $30 million available with our delayed draw term loan and an incremental $10 million available under our revolver. As announced on Friday, we extended the maturity date on these facilities by 4 years to May 2031 and the drawdown period was extended 2 years to May 2026. Turning to Slide 10 as we review our outlook for 2024. For the second quarter, we are expecting revenue to be between $34 million and $36 million, with gross margin of approximately 44% to 45%. Second quarter operating expenses, including amortization, are expected to be in the range of $14.5 million to $15 million. This range reflects the incremental operating costs gained from the acquisition of Alfamation and higher total intangible asset amortization. After tax, this is expected to be approximately $1.2 million or about $0.10 per share. We are expecting EPS for the second quarter to be between breakeven to $0.06 per diluted share, while adjusted EPS should be approximately $0.10 to $0.16 per diluted share. As a reminder, we simply adjust for tax-effected amortization expense. For our full year outlook, with the addition of Alfamation and the recent order trends Nick discussed, we now expect 2024 revenue to range from $140 million to $150 million. Gross margin for 2024 is expected to be approximately 44% to 46%, with expected operating expenses of roughly $56 million to $58 million. This includes tax-adjusted intangible asset amortization expense of approximately $4.1 million. Our expected effective tax rate is now projected to be about 17% to 19%. For capital expenditures in 2024, we expect to run between 1% to 2% of sales. As usual, our guidance does not include the potential impact from any non-operating expenses such as corporate development that may occur from time to time, nor does it include the potential impact from any additional acquisitions we may make. With that, if you will turn to Slide 11, I will now turn the call back over to Nick.

Thanks, Duncan. In a tough macro environment, our team is keeping their heads down and executing our plan. We have been up against some heavy headwinds in the semi market, which is about half of total sales, but less than it had been historically. Our latest acquisition will help to further advance market diversification. Nonetheless, we like our position in the semi market, which over the long run has exciting megatrends to drive growth as we leverage our know-how and innovative solutions. We continue to innovate by providing more automated technologies and through responsive solutions-oriented service. We are gaining additional traction within our existing customers while also capturing new ones. Our diversified markets are serving us well, but it's the team's effort to expand our reach and leverage unique solutions across more channels and markets that are enabling inroads with new customers and channel partners. Underpinning our 5-point strategy is the accountability and discipline required to execute well. Our teams are consistently evaluating market position, pricing, competition opportunities and the talent within as well as across our channel partners to drive growth. We are encouraged with our progress and excited about our future. With that, operator, we can open the lines for questions.

Thank you. Our first question is from the line of Jaeson Schmidt with Lake Street Capital.

Just want to start with the orders that shifted towards quarter end, curious if you expect to recognize those delayed orders later this year. And then regarding the orders that were reduced in size, is this a permanent reduction? Or do you think there's potential to recoup that full order later?

The delayed orders have shifted to later in the year, specifically moving more into the third and fourth quarters based on feedback from our customers. The reduction in order size is driven by end-user demand and will impact the remainder of the year. We actually booked these smaller orders mainly in the second quarter to support our specific customers for the rest of the year. This will be reflected in the second quarter results, although we had anticipated it in the first quarter and it did not occur as expected.

Got it. That's helpful. And then it sounds like the integration with Alfamation continues to progress as planned. But just curious if there's anything that has surprised you, whether good or bad now that you've had a little more time with the acquisition?

Yes, all positive so far. I mentioned in the pre-remarks that we had a trade show, the APEX show, and they jointly showed with our Acculogic group up in Canada there and had really good activity, good interactions between the two businesses and the teams there. Customer calls have gone fantastic with them being part of a larger U.S. company, giving some credibility to their pursuits of some projects. So all positive from that sense. Duncan, anything from your side that you came across?

No. I mean, all good so far. I mean, Nick alluded to revenue recognition, but that wasn't a complete surprise, just something that as we get under the hood, gave us more visibility into the final determination. So nothing surprising so far.

Okay. No, that's great to hear. And then just last one for me, and I'll hop back in the queue. You noted some headwinds from Alfamation regarding gross margins. Just curious if you could quantify the impact here in Q1.

Yes. I mean, it was 100 basis points of impact. So, and literally, just a case of relatively thin revenue versus the costs that had to be brought into the stub period based upon a number of business days versus a number of actual days and things like that, about 100 basis points of impact on the margin there.

Our next question comes from the line of Ted Jackson with Northland Securities.

I wanted to start with the front-end semiconductor market and simply put, it's quite open-ended regarding silicon carbide. What are your customers saying about what's driving this? In your press release, it sounded like there might be a capacity overbuild. Am I interpreting that correctly? I'm interested in your customers' perspectives on when this market might normalize, particularly at the macro level for front-end semiconductors. I'd like to hear more details on that before I follow up with another question.

Yes. Ted, on the front-end semi, as you know, we think our induction heating solutions are used in the crystal growth, silicon carbide, gallium nitride as well as in epitaxy applications. And we have seen the crystal growing business or orders, I would say, soft for a number of quarters now as that capacity as they digest the shipments that had happened out there and that where we had been seeing relative strength and holding up well was the epitaxy side of things. But then in Q1, that's really where we saw the epitaxy kind of slow, and it's really more project-driven for our end users there. Some of the larger projects they were expecting at either delayed, canceled or rescoped on the number of units that they were going to need on that. So that really was the reduction in size that we saw. Talking with our customers there, both the integrators and the end users, we really think that really starts picking up in the second half as well as what they're telling us orders. They're going to need to start placing for late in the year and really more so into 2025.

That was great color. And then on a more positive discussion, the defense business has been doing well for quite a period of time. And I wondered if you could provide a little color within that market, what are the applications that are driving it and your outlook for it?

Yes. No. We serve that space across all three divisions, if you will, and some of the applications being robust testing of electronics used in missiles, missile defense systems, our flying probe testers, our testing circuit boards used in various defense systems as well. So it really is a wide variety of applications there. We also do some, I'd say, more on the defense/aero side of components used in aircraft, some cameras used on planes as well. So it touches a wide variety of applications, nothing in particular. But we do see those staying pretty robust for us here and new designs on the missiles themselves or the components going into the missiles, driving higher testing needs, driving more upgrades to our products that we've served in the past. So yes, we see that will continue for quite some time.

Good. I want to hear that. And then my last question on backlog. If we take Alfamation out, your backlog was down substantially. And is that drop in backlog purely semi-driven?

Yes. I mean, a huge portion of that is semi-driven. As you can see from the kind of order activity in semi, relatively low or a low quarter revenue still somewhat holding up. You kind of do the math on that and you can see kind of backlog dropping there. So semi, certainly the bigger driver. The front-end component, as Nick highlighted, in commentary there as well as in Q&A, really being the kind of driver of that sector with respect to kind of that backlog reduction. I think the rest of the markets, you're relatively holding up kind of relatively well, but that's where we see the biggest change.

Our next question comes from the line of Peter Wright with Intro-act.

Thank you, Nick. My first question is if you could provide some insight into customer activity regarding capacity expansion. Do you believe that some of the delays are more proactive or reactive, or can you share what they're observing at this point? Additionally, regarding the conversations on capacity, have there been any noteworthy developments related to innovation, technology purchases, or new customers, whether they are accelerating or slowing down? My second question pertains to your perspective as we assess where we are in the cycle. You have made some acquisitions and might have opportunities for cost reductions. How is your investment philosophy evolving in terms of innovation and development? Are there any cost cuts or increased challenges, or are you moving forward full steam ahead?

Sure. Peter, and thanks for the questions there. So relative to capacity expansions and what we're seeing, I would say most of those really have been kind of delayed out there. Customers still have these projects on their road maps. They're in our funnels. And it's just a matter of timing before they pull the trigger and they're going to need our equipment for those things. So nothing is being mothballed or canceled. It's just purely just delay on getting CapEx spending approvals there. As we relate to new customers, this is something we've been driving across the businesses since I joined, aggressively going after new customers in the markets, going after existing customers and getting more share of their wallets. And that continues throughout. In fact, we've got an aggressive push to elevate activities in those areas, obviously, in these slower times and going after competitive accounts in that. So the teams are laser-focused on finding the opportunities and getting them closed out there. But we will continue to add new customers every quarter. And excited about the new customers we brought in with Alfamation and their customer base and trying to explore the larger portfolio of our solutions across that as well. And the last question you had, comment was on what are we doing relative to our investments in R&D. So innovation remains one of our core strategies, and we aren't slowing down in that area. In fact, pushing the teams to do more and try to speed up development around the new products. Kind of linked with that in new customers is pretty excited about the number of customers that are qualifying the SCAiLX new vision camera that we did release last year. It takes time to design in the new cameras. And so we've got a pipeline of opportunities there that should start bearing fruit later in the year. Likewise, the new bench-top ThermoStream that we launched at our ITS business up in Mansfield, Massachusetts, has good excitement there, as we launched at a trade show out in California, had over dozens of leads that came back specifically around that product. So we're chasing those down. So yes, innovation is something we won't throttle back. We believe it's going to create demand going forward for us.

If I could ask a detailed question, more of a survey type, Duncan, when you consider pricing and cost trends, given where we are in the inflation cycle, is there anything becoming noticeably more challenging or noticeably easier in managing margins?

It's all relative; compared to 1.5 or 2 years ago when things were much more volatile in terms of supply chain and inflation, the situation is certainly less extreme now. Our teams are consistently monitoring this, assessing our pricing against costs, and ensuring we are pricing appropriately while managing costs and supply chain expenses. While the challenges are more manageable now, it remains an ongoing struggle, and that's expected.

As there are no further questions, I would now hand the conference over to Nick Grant for his closing comments.

All right. Thanks, Ryan. We appreciate you joining us today and welcome the opportunity to answer any further questions you may have. On Slide 12, you can find the details regarding this call and a list of upcoming events that we will be participating in. I hope to have the chance to meet some of you at the conferences. Thank you for participating, and have a great day.

Thank you. The conference of inTEST Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.