Earnings Call Transcript - INTT Q3 2025

Operator, Operator

Good morning, everyone. Thank you for being here. Welcome to the inTEST Corporation Third Quarter 2025 Financial Results Conference Call. Please note that this call is being recorded. I will now hand it over to your host, Alex Villalta. Thank you, and you may begin.

Alex Villalta, Host

Good morning, everyone and thank you for joining us. With me on the call are Nick Grant, our President and Chief Executive Officer; and Duncan Gilmour, our Chief Financial Officer and Treasurer. The earnings release was issued this morning as well as the slides that management will use during the call. Both of these can be found in the Investor Relations section of the intest.com website. Please turn to Slide 2 for a review of 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 herein 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. With that, I'll turn the call over to Nick.

Nick Grant, CEO

Thank you, Alex and good morning, everyone. Thanks for joining us for our third quarter 2025 earnings call. We will begin today's discussion on Slide 4 of the presentation. After several months of order sluggishness as tariff and economic uncertainties complicated customers' capital investment plans, it's refreshing to see some pockets of customers break free and move forward with capital projects. We have always contended that a market recovery is a matter of when, not if. Our funnel of opportunities has been at high levels since Q1 and this quarter, the conversion rate picked up, resulting in orders of $37.6 million, our strongest level since Q2 of 2022, leading to a sequential $11.4 million increase in our backlog. Most of this improving demand is coming from customers in the automotive and defense/aerospace end markets, a clear testament to the success of our market diversification strategy. These customers are relying on our innovative and differentiated test equipment that enable better quality control in increasingly complex manufacturing processes. While this increase in orders is encouraging, conversion rates do vary by end market and many customers still remain hesitant to commit to new capital projects. This is especially true in semi. However, based on what we are seeing and hearing, it feels like we may be moving into a period of gradual recovery. Revenue for Q3 was $26.2 million, lower than Q2 and below the guidance range we provided on last quarter's call. During the quarter, our engineers encountered technical challenges in finalizing a few systems, which delayed approximately $2 million in shipments. In one case, the challenges were associated with new capabilities. In the other case, the systems were for a new customer in a new target market. These challenges have since been resolved and the systems have been shipped. We are excited about the positive impact our steadfast resolve to drive innovations and add new customers will have on our future as we execute on our VISION 2030 strategy. During the quarter, we continued to strengthen our competitive position in preparation for a broader market recovery by making more progress in penetrating targeted accounts and driving adoption of new products. We believe we have the balance sheet, the financial flexibility and capacity to support our customers as demand improves. Let me now review orders and backlog on Slide 5. auto/EV led the climb in orders this quarter, accounting for around 3/4 of the sequential growth and doubling to $14.6 million. Alfamation bookings were at an all-time record level for the business, representing strong demand for test equipment from Tier 1 electronic suppliers as they expand capacity to support 2027 model year programs and start new projects. Defense/aerospace orders more than doubled sequentially to $6.4 million, primarily due to the increased test demand for next-generation weapon systems. We continue to see success with our new products. This is especially true at Acculogic, where they have expanded their flying probe capabilities to include radio frequency and oscilloscope measurement test solutions, thereby enhancing our customers' manufacturing efficiencies. These expanded capabilities drove multiple system orders in the quarter from new customers. In addition, several defense contractors are continuing to qualify our new products. Year-over-year, orders were up 34.2%. The increase reflects the strength in auto/EV, which grew $7.4 million; industrial, which increased $2.4 million; defense/aerospace, which increased $1.9 million, life sciences increased $0.9 million and semi, which was up $0.4 million. These increases outpaced the declines in safety, security and other markets. Although we saw some pickup in semi orders, overall, the semi market remains sluggish, especially in our analog mixed signal business. Backlog at September 30 was $49.3 million, substantially above where it was at the end of the second quarter and positioning us well for the upcoming quarters. Before turning the call over to Duncan to review the financials and outlook in more detail, I want to thank the entire inTEST team for their continued dedication and commitment to our shared VISION 2030 goals. Duncan, over to you.

Duncan Gilmour, CFO

Thank you, Nick. Starting on Slide 6. Revenue for the third quarter was $26.2 million compared to $28.1 million for the second quarter, a decrease of $1.9 million. Sales in defense/aerospace accounted for $1.3 million of the decline, followed by auto/EV, which declined $0.9 million and semi, which decreased $0.4 million. This decline was partially offset by an increase of $0.7 million across life sciences, safety/security and other markets. Compared with Q3 2024, revenue declined $4 million, reflecting lower semi, auto/EV, defense/aerospace and other sales totaling $5 million, partially offset by increases in life sciences and safety/security totaling $1 million. Moving to Slide 7. Starting with the sequential comparison. Gross profit decreased $1 million to $11 million and gross margin declined 70 basis points to 41.9%, primarily due to lower volume. Compared to the prior year period, gross profit declined $3 million and gross margin declined 440 basis points due to reduced volume and unfavorable product mix. We continue to execute tariff mitigation tactics to minimize gross margin impacts. As you can see on Slide 8, our operating expenses of $12.2 million decreased $0.7 million sequentially and $1.3 million compared to the third quarter last year as our cost reduction actions are flowing through in an effort to improve our long-term profitability. The consolidation of our Videology Netherlands facility, which we estimate will translate into annualized savings of approximately $500,000 beginning in 2026 remains on track. Turning to Slide 9. You can see our bottom line and adjusted EBITDA results. For the quarter, net loss was $0.9 million or a loss of $0.08 per share. Adjusted net loss, which adds back tax-affected acquired intangible amortization charges and restructuring charges was a loss of $0.02 per share. Adjusted EBITDA for Q3 was $0.4 million. Slide 10 shows our capital structure and cash flow. In the first 9 months of 2025, we reduced debt by $6.2 million, including the $1.2 million we paid down in the third quarter. Total debt outstanding was $8.9 million at quarter end for a total debt leverage ratio of 1.7x. Cash, cash equivalents and restricted cash at the end of the third quarter were $21.1 million, up $1.8 million from the end of the second quarter. We ended the quarter with approximately $61 million in liquidity. inTEST remains a cash-generating company that we believe has the financial resources to scale the business and achieve our VISION 2030 goals. Turning to Slide 11 and our guidance. Our long-term fundamentals are solid with inTEST maintaining its strong leadership position in specialized high-value applications and our readiness for a market recovery. As Nick said, we are seeing some pockets of renewed capital spending but many customers still remain hesitant to commit to capital projects and we do not have visibility into the timing of an overall market recovery. Therefore, we are continuing to offer guidance on a forward quarter basis only. Including the shipments, which slipped from the third to the fourth quarter and the orders in backlog that we anticipate to fulfill and ship, during the fourth quarter, we expect revenue in the fourth quarter to rebound to a range of $30 million to $32 million. We are forecasting gross margin of approximately 43% and operating expenses of $12.3 million to $12.7 million, excluding approximately $200,000 of restructuring expenses. Amortization and interest expense are projected to be consistent with Q3. As usual, our guidance does not include the potential impact from any non-operating expenses such as corporate development and incremental restructuring that may occur nor does it include the potential impact from any additional acquisitions we may make.

Nick Grant, CEO

Thanks, Duncan. Although the third quarter had its challenges, we are pleased with our performance overall. Our order book expanded, our market diversification strategy continues to take hold and our innovative new products are gaining traction as we continue to execute our VISION 2030 growth strategy. The adoption of these new products positions us well to capture new opportunities and expand our serviceable market. This quarter's increase in backlog, a little more than half of which is scheduled to ship in 2026 and our strong funnel of opportunities suggest that demand in some of our end markets is beginning to recover. Although as Duncan noted, visibility for a full market recovery remains limited. While our market conditions have been weak this year, we have not been idle. We have been strengthening our market recovery readiness, penetrating new target accounts, broadening our channel networks, expanding our manufacturing footprint to support global customer needs, while introducing new products that deliver more value to our customers. We believe we have the right technologies and that we are focused on the right markets and the right customers to scale the business as we advance towards our VISION 2030 goals. With that, operator, let's open the lines for questions.

Operator, Operator

Our first question is from Max Michaelis with Lake Street Capital Markets.

Maxwell Michaelis, Analyst

Thanks for quantifying sort of the pushouts that happened in the quarter of $2 million. I was wondering if you could kind of break out into what verticals that $2 million falls into.

Nick Grant, CEO

About $1.5 million was related to the life science markets, specifically linked to a couple of units and systems at our Alfamation business, which supports our medical technology diversification efforts. There was a slight delay in getting the systems ready by the end of the quarter, but those challenges have been resolved, and the customer's factory acceptance test is complete, with the tools shipped. The customer is satisfied and has provided us with a letter of intent for additional systems. Although it was disappointing not to have those out by the end of the quarter, we are pleased with the outcome. Additionally, in our semiconductor industry at Acculogic, we missed the shipment of one tool at the end of the quarter, but we shipped it the following week.

Maxwell Michaelis, Analyst

Next question. Your order growth was really solid in the quarter, particularly in Aerospace and Defense as well as automotive. You mentioned that automotive programs planned for 2027 are driving demand in that sector. How long do you expect this momentum to last? Can you provide some insight on how long we can anticipate strong automotive orders continuing?

Nick Grant, CEO

Yes, as you mentioned, the automotive programs related to the new 2027 model years really began last quarter. Alfamation had a strong performance in Q2 and continued to improve in Q3. It's encouraging that their sales pipeline remains healthy, even with a significant amount of bookings. They are actively pursuing new opportunities. Thus, we expect continued investment in new technologies related to infotainment, CCUs, displays, lighting, and so forth in these vehicles for the foreseeable future.

Operator, Operator

Our next question is from Dick Ryan with Oak Ridge.

Richard Ryan, Analyst

Nick, just to discuss the challenges again in the quarter, were they a continuation of the ones that you saw in the first quarter? Or are they kind of more one-off and those issues are behind?

Nick Grant, CEO

Yes, very different than the ones we saw in the first quarter. Those were challenges at our ITS thermal solution where we were seeing more, I'd say, repetitive challenges there for that business, and we needed to make a change, which we did. These were really 2 shipments that were tied to new technologies at Alfamation and Acculogic. And as you know, Dick, we're always pushing the envelope, working with customers to solve some of their toughest challenges. And it doesn't always lead to us being able to hit our timelines there. But the important thing is that we do solve the challenges. The customers are happy and we built that installed base to position us for future growth with these customers and that's where we're at. The timing was unfortunate but certainly something we see from time to time just because of the work we do.

Richard Ryan, Analyst

Sure. sure. Okay. Say on the semi side, you talked sluggish. Can you talk a little bit about front end, back end? I mean, I think some of the commentary for the analog side says at least that market is stable. There may not be much growth over the next couple of quarters. But then it seems on the silicon carbide side, commentary for '26 seems to be more growth oriented coming off of a transformational 2025. What are you seeing in those 2 markets from your customer conversations?

Duncan Gilmour, CFO

I mean let me just touch on that, Dick. I mean I think on the front-end side, activity pretty anemic still as I think we see across the marketplace. Although there are signs of life, I think we're starting to see a little bit more activity. As we've talked about before, customers are still interested. We still have good dialogue in terms of projects that they're still working on. But as you indicate, looking further out into later '26, into '27, things like that. So we're still very optimistic about the future in that space. But not a great deal happening right now in terms of order placement revenue generation. On the back end, things have been a little bit softer as we indicated. And I would characterize that as some of our larger customers, for example, are still struggling a little bit with the tariff situation, still struggling a little bit with where to place their chips investment-wise. So things like investment into, say, China, are perhaps a little bit slowed. So we're certainly seeing a little bit of that. And again, I think the rhetoric around analog mixed signal with a number of the larger players, a very similar story.

Operator, Operator

Our next question comes from Ted Jackson with Northland Securities.

Edward Jackson, Analyst

I wanted to discuss what occurred during the quarter and what may have changed recently compared to when you started the quarter. Timing issues like this are not unusual. However, I was somewhat surprised that the guidance for the fourth quarter did not reflect a more significant adjustment, considering that you are carrying $2 million in revenue from the third quarter into the fourth. The upper end of your range at $32 million aligns closely with consensus expectations. With this in mind, did you experience any downturn in the economic environment? Was there a shift in any aspect of the business as we transitioned from the last quarter to this one compared to three months ago? That would be my first question.

Nick Grant, CEO

Yes. The main issue relates to the new technologies we discussed. Once our teams successfully implement these for the applications, developing subsequent tools becomes less risky and challenging. Consequently, it becomes a straightforward process. We are confident that the initial difficulties we faced in the life sciences market, which led to some shipment delays, have been addressed, and subsequent shipments will proceed much more smoothly. Furthermore, regarding the technology, particularly our RF probes and the new probes launched for customer applications, there was a slight delay of a few days due to timing. The key takeaway is that we ensured everything was done correctly, and our team achieved that. This positions us favorably, and Acculogic's business has garnered multiple new orders for their RF and oscilloscope products this quarter from new systems. The technology is truly appealing in the market, and we are eager about that. For Q4, regarding the range we provided, our teams are quite confident in the numbers they aim to achieve this quarter. We clearly communicated any risks or delays but chose not to include those in our forecast. We are currently observing items we can deliver with minimal risk, and any additional success will be considered a bonus. Our team has clearly understood the message.

Duncan Gilmour, CFO

Yes. I would also add, a lot of the strong order activity in Q3, which was great to see, testament to the work that the teams have all been doing. A lot of that is for delivery in Q1 and beyond 2026. So a lot of that is slightly longer lead time stuff that isn't necessarily turning in Q4 here. So I think that's another piece of the puzzle in terms of putting together those components.

Edward Jackson, Analyst

You see what I'm getting at is like, so you had $2 million that slipped out that you were expecting to come in the third quarter. So your third quarter instead of being $26.2 million, it should have been $28 million. And then if you take that out, that would mean that your fourth quarter guidance is at best flat. See where I'm going with this. And...

Nick Grant, CEO

I see where you're going.

Edward Jackson, Analyst

I have a question regarding your guidance. My impression is that it seems a bit disappointing compared to what we might have expected from our last call. I’m curious if this change is due to some dynamics or if you are just being more conservative with your projections and budgeting. I mention this because, frankly, the tone of this call has been the most positive I've seen all year. You clearly seem more optimistic about your business now than you were three or six months ago, which feels inconsistent with the guidance provided. I’m trying to understand this better.

Duncan Gilmour, CFO

Yes. I mean I think, Ted, obviously, the tone is positive. The orders were extremely encouraging. Quite honestly, there were literally 2 or 3 systems that make up the $2 million, it's a very small number of tools, which -- and quite frankly, the story behind those misses is a very positive one in terms of the new technologies, the new capabilities, they just took a little bit longer to turn around as well as on the automation side, into the life sciences, penetrating new markets. So although disappointing that it was a revenue miss, the fact that it was literally slippage of a few days, a few weeks, very positive aspects. In terms of this sequential revenue, I think we were looking at revenue growing Q2 versus Q3 versus Q4. The $2 million slips, we would have been in the low 28s, flattish with Q3. Had all of those systems gone out the door, then we would have been looking at, say, around $30 million instead of a $30 million to $32 million. So not a spectacular ramp. I think we have indicated the recovery is going to be gradual here. We do feel most of our markets are at a relatively low point. We don't see a spectacular ramp back up. So I think we feel somewhat in line with what we had painted. We're always disappointed when the numbers -- we'd always like the number to be higher, I suppose, is one way to look at it.

Edward Jackson, Analyst

Don't we all. Okay. Then my next thing, let's go into something a little different. So when you look at the book-to-bill ratio across your various segments, I would like to discuss industrial. No one mentions it anymore, but you've actually achieved a book-to-bill ratio greater than 1 for four consecutive quarters and five out of the last six. Regarding industrial, I know it hasn’t been problematic for you; can you share what's happening within that segment?

Nick Grant, CEO

Yes, you're correct. The industrial segment hasn't been our most challenging area, and it remains stable. However, we have several projects in the pipeline for the industrial side that are currently delayed as customers are cautious with their capital expenditures. It could certainly be better, but our teams are doing their best to capitalize on opportunities. We do think that industrial has eased back somewhat. As we mentioned, the semiconductor sector is still sluggish for us. On a positive note, the defense and aerospace sectors are performing exceptionally well, and we're seeing strong activity and orders in those areas, along with our automotive programs and life sciences initiatives. The diversification we pursued is really paying off, as we expect the semiconductor market to rebound, and our industrial base to strengthen as the economy improves. We are optimistic about our position moving forward and it’s encouraging to see several of our target markets performing well.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Nick Grant for closing remarks.

Nick Grant, CEO

Thank you, David. 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, please note that in addition to the details regarding the replay of this call, we will be participating in 2 conferences before the end of the year. We hope to see some of you there. Coming into this call, I understand there were some website technical challenges for a few folks there. Our team has been working to get that resolved and we'll continue to do so as quickly as possible if it's not already completed. So thank you again for taking the time and you all have a great day.

Operator, Operator

This concludes today's conference. inTEST thanks you for your participation. You may disconnect your lines at this time.