Ladies and gentlemen, greetings, and welcome to the inTEST Corporation Third Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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 morning, 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 that went out this morning as well as 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 as I 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, 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, as covered on Slide 3, management will refer to some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. You can find reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides. Now please turn to Slide 4. Nick, I'll turn the call over to you.

Thank you, Shawn, and good morning, everyone. Thanks for joining us for our third quarter 2024 earnings call. First, I would like to thank the entire inTEST team for their continued efforts executing on our strategy. We are adding new customers. We continue to optimize our channels to market, and we are driving innovation to differentiate our solutions. These efforts are helping offset some of the softness in a few of our key end markets. We are managing well through the current semiconductor cycle and benefiting more from our diversified markets, including automotive, life sciences and consumer electronics, where our positions were strengthened by the acquisition of Alfamation. The integration continues to progress well as the teams are focused on driving product and technology synergies, leveraging our supply chain to improve cost and performance as well as exploiting opportunities across the broader customer base. A highlight in the quarter was achieving gross margin of 46.3% on revenue of $30 million, which was impacted by $2 million in shipments being delayed into the fourth quarter. During the third quarter, Alfamation contributed $5.4 million in revenue and sales to our diversified markets showed strength, while semi revenue demonstrated improving trends in the back-end. In fact, sequential growth in back-end semi outpaced the decline in front-end. The 570 basis points expansion in gross margin compared with Q2 was driven by favorable product mix, improved volume from higher-margin back-end semi and cost actions taken to adjust to market conditions. Our businesses have been aligning their cost structure with current market conditions through headcount reductions, less discretionary spending and in-sourcing activities. Since the beginning of 2024, headcount in our base businesses has been reduced by 10%. Product mix and our cost management efforts are reflected in our sequential improvement and operating margin expanding 60 basis points and adjusted EBITDA margin improving 180 basis points. Turning to Slide 5, I'll review orders and backlog. Orders have modestly improved through the year and the quarter. Orders in Q3 were $28 million, including $3.9 million from Alfamation. Stronger demand in automotive EV, defense aerospace, industrial and other markets outweighed the weakness in semi. Encouragingly, for the third consecutive quarter, back-end semi orders were up sequentially, showing further signs of coming out of the trough. This improvement helped to offset the current pause we're experiencing in front-end semi. Backlog has improved over the prior year period and was up $5 million, recognizing the $14.7 million contribution from the acquisition of Alfamation, which had an elevated backlog at closing. As mentioned in the past, Alfamation's orders can be lumpy as timing of their large multisystem projects can vary quarter-to-quarter. Compared with the trailing quarter, backlog declined as we worked down Alfamation's backlog. 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 6. As Nick noted, revenue for the third quarter was $30 million, including $5.4 million from Alfamation. The $0.7 million decrease compared with Q3 2023 was driven by a $7.1 million sales decline in semi that was partially offset by $4.5 million of growth in automotive EV, primarily from Alfamation, and improved sales in industrial and other markets. Sequentially, third quarter revenue decreased $3.7 million as approximately $2 million in shipments were delayed into the fourth quarter. As we communicated last quarter was going to be the case, revenue from Alfamation was down compared with an unusually strong second quarter. Meanwhile, semi, industrial and other markets demonstrated improving trends. Moving to Slide 7. Gross margin of 46.3% for the quarter expanded 570 basis points sequentially, driven by favorable product mix with improved volume and high-margin back-end semi solutions and cost actions, as Nick noted. On a year-over-year comparison, gross margin was nominally unchanged on lower revenue. On a trailing 12-month basis, our gross profit was $53.3 million or 43.7% of sales. The decline reflects the weakness in higher-margin semi sales. As you can see on Slide 8, compared with the prior year, our operating expenses were up $1.5 million, reflecting the inclusion of Alfamation's operating expenses as partially offset by cost reductions and corporate development costs. Sequentially, operating expenses were essentially flat. Turning to Slide 9, you can see our bottom line and adjusted EBITDA results. For the quarter, net earnings were $495,000 or $0.04 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 $721,000 or about $0.06 per diluted share in the third quarter. Adjusted EBITDA for Q3 was $2.4 million, representing an 8.1% adjusted EBITDA margin. Slide 10 shows our capital structure and cash flow. During the quarter, we generated $4.2 million of operating cash. Capital expenditures in the third quarter were approximately $500,000 and the resultant free cash flow was $3.7 million. We ended the quarter with total debt of $16.1 million, reflecting a total debt leverage ratio of 1.8x. During the quarter, we repaid approximately $5.3 million of debt and repurchased approximately 141,000 shares at an average price of $7.38 for a total investment of $1 million. Cash and equivalents at the end of the third quarter were $18 million, down $2 million from the trailing quarter, reflecting net debt repayments and repurchased shares. We continue to have $30 million available with our delayed draw term loan and an incremental $10 million available under our revolver. Turning to Slide 11, as we review our outlook for 2024, we have tightened our full year outlook and now expect 2024 revenue to range from $128 million to $131 million. Gross margin for 2024 is expected to be approximately 42% to 43% with expected operating expenses of approximately $53 million. This includes intangible asset amortization expense of approximately $3.3 million or $2.7 million on a tax-adjusted basis. Our expected effective tax rate remains at about 17% to 19%. The implied fourth quarter results from the tightened guidance implies revenue of $34 million to $37 million with gross margins of approximately 42%. Operating expenses, including amortization, are expected to be approximately $13.5 million. Total intangible asset amortization is expected to be approximately $900,000 and approximately $700,000 after tax or about $0.06 per share. Based on the midpoint of our revenue guidance range, we are expecting EPS and adjusted EPS for the fourth quarter to be approximately $0.08 and $0.14, respectively. As a reminder, we simply adjust for tax-effected amortization expense. We still expect our capital expenditures in 2024 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 12, I will now turn the call back over to Nick.

Thanks, Duncan. While we have limited visibility beyond the fourth quarter, we believe we are seeing signs of stability in our targeted industries. The order pipeline has increased reflecting some gradual improvement with back-end semi demand and larger automotive projects. We believe once we are past the elections and moving into the new year, capital expenditure projects will likely increase across a number of industries. The front-end semi market, which for us serves silicon carbide and gallium nitride applications is currently paused. While the longer-term picture for these power semiconductor materials is encouraging, there is a need for the market to improve efficiencies with the existing production lines, consume existing inventory and adapt to the changes in EV demand. We are especially excited about the evolving gallium nitride opportunity as that technology delivers higher efficiency in many high-power applications. We continue to optimize our go-to-market by adding or upgrading channel partners that can drive higher sales while expanding our geographic coverage throughout the US and around the world. In Southeast Asia, our new Malaysia facility is coming along nicely, and we're already seeing the benefits from the engineers we have hired. In fact, our Environmental Technologies division has recently received their first order for a new product that was designed by their team in Penang. This modified thermal test solution was something that was on our new product roadmap for some time. But until now, we did not have the bandwidth to complete it. It's great to see the team members making an impact in their first few months of being on board. I look forward to many more future successes from the team. As noted in our 5-Point Strategy, innovation is one of the keys to our success. In our electronic test division, our automated manipulator with our IntelliDOCK solution was recently installed at a key customer in Europe as an integrated solution that we expect could lead to many future opportunities. In addition, our automated manipulator has been coupled with the latest test technology and is in the test phase at a large intelligent computing company and initial feedback is very positive. It's our know-how and expertise that differentiates us and opens up these types of competitive displacement opportunities. Our process technologies EKOHEAT 2 induction heating system is being leveraged in next-gen solutions for a number of key customers. With its industry-leading internal control and power delivery system, which, by the way, leverages silicon carbide technology, our EKOHEAT 2 can lower system operating costs, provide increased uptime and has built-in performance diagnostics for asset health monitoring. Despite the headwinds we are experiencing in some of our key markets, we are not sitting still. We are driving innovation. We are constantly working to optimize our go-to-market approach, we are capturing price for our value-added solutions, and we continue to evaluate acquisitions that can complement or enhance our existing technologies. In short, we are executing on our strategy. With that, operator, let's open the line for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. The first question is from the line of Jaeson Schmidt with Lake Street. Please go ahead.

Hey, guys. Thanks for taking my questions. I just want to start on the order pushouts you highlighted. Curious if those are concentrated at a couple of customers or if it is just more broad-based? And then I guess relatedly what end market is that related to?

Yes. Good morning, Jaeson, so the roughly $2 million that we referenced in pushouts in Q3 to Q4, really were shipment delays that didn't reach a customer by the end of Q3 and basically arrived in early Q4. So that's roughly the $2 million that we've referenced there. With that said, we have seen customers push out that front-end semi. We continue to work with customers in that space on shipments that they placed orders we've had in our backlog for a while on that. So just accommodating them there, more so on the front-end side.

Got you. And then related to the front-end semi market, I know at a high level, there are some longer-term tailwinds, but just curious how you guys are thinking about when to expect a hiccup there or is just visibility too clouded at this point?

What we're hearing from our customers, and as we collaborate with several of them on their next-generation solutions, is that they are expecting the second half of 2025 to be when additional deliveries will be required. This timeline may change, but it's what we are hearing from multiple customers in that area.

That's really helpful. For my last question, I want to commend your strong gross margin performance. I know you mentioned the headcount reductions, insourcing, and improved efficiencies. I'm curious about how much of this might be permanent. When demand increases again, will this be the new level for gross margin?

Yes. I mean, it's tough to break down all the elements, Jaeson. As you know, mix, certainly the biggest driver of that very strong gross margin, but we also see the benefit of the cost initiatives that Nick highlighted. I mean, very roughly, but it is hard to discern. There's probably about a percentage point of benefit from cost actions and things like that flowing through that number, with the majority of the uptick being the mix factor with the higher back-end semi that we highlighted.

Okay. No, I appreciate that color. Thanks a lot, guys.

Thanks, Jason.

Thank you. The next question is from Ted Jackson with Northland Securities. Please go ahead.

Good morning. I've only got a couple of questions. Actually, a couple of mine were hit just now. First of all, just when you made a comment about the headcount reduction being down 10% in your base businesses, can you just define what the base businesses are?

Yes. It's our collective companies outside of Alfamation at this stage. They're all part of our base businesses. Now some of those five companies are not being impacted severely as the others. So I would say, collectively, the 10% there, but it's more weighted towards businesses that are seeing the downturn in the front-end semi space and the more industrial slowdowns that we've seen taking some actions.

Okay. And then with the reduction like that, how do we see that playing through into the financials? I mean, are we getting, I mean, I haven't gone through and really dug and tried to put my fourth quarter together again. So I mean, I assume we'll see some of this in the fourth quarter. Does it play out like almost immediately? Is it something that we'll see an additional impact as we get into the first quarter of '25? Color there, please.

Yes. And just to provide a bit more clarity. Last quarter, we talked about a more specific action about $1.2 million of annualized benefit around 12 headcount. And I think we referenced which took place towards the end of last quarter, starting to flow through this quarter and ongoing a little bit of severance, for example, associated with that, relatively minor action. The total headcount that Nick's referring to is really over the course of the last nine months or so as demand has softened in a number of businesses. We've obviously adjusted direct labor, operational expenses as we've seen that demand soften. It hasn't really been one action per se. It's been activity that's been occurring over the course of the last nine months. And when we look back, we have reduced headcount in the base businesses, as we mentioned, by that 10%. But it's been a gradual process, and we've been seeing those benefits slowly creep through the numbers, so to speak. We're certainly seeing here in Q3 with the margin being strong, the impact of that, and we'll continue to see that going forward. I would reemphasize, though, a lot of that margin uptick is driven by what was a favorable mix in Q3 versus very unfavorable mix in Q2 as a comparison.

Okay. My next question, just maybe front-end has been hit on, but just maybe a little more color around the back-end. I mean, you've commented for several months, I guess, at this point that you have seen the back-end stabilize and improve. And maybe some color in terms of when you look at that business and the incremental strength that you're seeing in it, is there anything to note in terms of kind of end market that's strengthening or is it geography, underlying drivers like reshoring, you see just anything thematic within what's happening in that business that's worth calling out?

Nothing in particular, I would say, worth calling out. It is a gradual improvement. It's not like an L-shape taking off, if you will. But we are seeing more and more requests for quotes. Our pipelines are growing. Some CapEx projects are signaled to be cut off, I mean, they kicked off here very soon. So, yes, we feel pretty good about that back-end showing that gradual improvement now on the flip side, front-end is, for us, very anemic right now.

No. Well, hopefully, that will turn around in the near future for you, too. Last question, more of a thematic inquiry. Can you talk a bit about Alfamation and help everyone, including myself, understand it better? It's still a significant part of your backlog and you're working through it. I know it has considerable exposure within the automotive sector, and what happens there is linked to new models and refreshes of cars. Could you provide some insight into the cycles that affect Alfamation's revenue growth? Are there any model releases that you are particularly excited about? Or is there anything we should be aware of regarding new model refreshes or design wins within a specific vertical? It might even include areas like commercial or heavy equipment as they begin automating and integrating more electronics. Please sketch out some themes that drive the growth of that business, and that's it for me.

Yes, I'm very excited about the Alfamation segment of the inTEST family. Most of our testers are used in the automotive industry, which has experienced some restructuring over the past few quarters due to a slowdown in electric vehicle models and a shift towards internal combustion engine hybrids. However, for Alfamation, this is not a concern; it mainly depends on which programs advance. It's encouraging to see a positive trend in the pipeline at Alfamation with an uptick in projects. The automotive industry is experiencing a significant transformation regarding onboard computing, moving from multiple systems in different infotainment areas to a centralized system that manages the entire vehicle. This infrastructure shift among various original equipment manufacturers is beneficial for us and creates a need for new testers focused on these onboard computing systems. Additionally, the evolving electronics that need management will also necessitate testers for monitoring and quality assessment. There's a lot happening in the automotive sector with new technologies and features, leading to many testing opportunities for us. Overall, we are optimistic about the future of Alfamation, though we acknowledge that order timing can be unpredictable.

Okay. Thanks very much. You guys have a great day.

Thanks, Ted.

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

Thank you, everyone. We appreciate you joining us today, and thank you for your time, and we welcome the opportunity to answer any further questions you may have. On Slide 13, you can find the details regarding the replay of this call and a list of upcoming events we'll be participating in. I hope to have a chance to see some of you at an upcoming conference. Thanks again for participating and have a nice day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.