Welcome to inTEST Corporation's Second Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today. The replay will be accessible at www.intest.com. I would now like to turn the call over to Laura Guerrant, inTEST's Investor Relations consultant. Ms. Guerrant, please go ahead.

Thank you, Britney, and good afternoon. Joining us today from the company are Robert Matthiessen, President and Chief Executive Officer; Hugh Regan, Treasurer and Chief Financial Officer; Jim Pelrin, Vice President and General Manager of inTEST Thermal Products segment; and Dan Graham, Senior Vice President and General Manager of inTEST Electrical and Mechanical Products segments. Mr. Matthiessen will briefly review highlights from the second quarter, as well as current business trends. Mr. Regan will then review inTEST's detailed financial results and discuss guidance for the third quarter of 2012. We'll then have time for any questions. If you have not yet received a copy of today's release, please email me at laura@guerrantir.com or you can get a copy of the release on inTEST's website, www.intest.com. 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. Such risks and uncertainties include, but are not limited to, changes in business conditions in the economy, changes in the demands for semiconductors, changes in the rates of and timing of capital expenditures by semiconductor manufacturers, progress of product development programs, increases in raw material and fabrication costs associated with our products, implementation of restructuring initiatives and other risk factors set forth from time to time in the company's SEC filings, including, but not limited to, inTEST's periodic reports on Form 10-K and Form 10-Q. The company undertakes no obligation to update the information on today's conference call to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated or unanticipated events. Before I turn the call over to Bob, the company will be meeting with institutional investors in Milwaukee, August 8, and Chicago, August 9. If you'd like to meet with management, please contact me directly at (808) 882-1467 or via email at laura@guerrantir.com. And with that, let me now turn the call over to Robert Matthiessen. Please go ahead, Bob.

Thanks, Laura. Hello, gang. Welcome everyone to our 2012 second quarter conference call. While Hugh will review the financial results in detail, I would like to highlight some of our achievements. Let me start with our improved financial results for the quarter, which were driven by increased in demand for mobility products and increased overall test capacity on the part of our customers. Second quarter revenues of $13.6 million increased in all 3 of our operating segments marking the second consecutive quarter of revenue growth. Gross margin improved from 43% in Q1 to 46% in Q2, and we returned to profitability with net income of $1.3 million or $0.13 per diluted share. A substantial improvement over the Q1 net loss of $43,000 which was essentially breakeven and which was caused by one-time charges associated with our acquisition of Thermonics. In addition, our balance sheet remained strong with cash and cash equivalents increasing by $1.6 million. Total bookings for the second quarter were $11.8 million, compared with $12.9 million in the first quarter. 10% of second quarter bookings were derived from markets outside of semiconductor test as compared with 13% in the first quarter. The decline in bookings reflects the uncertainty in the global economic environment which has hampered near-term demand in overall -- in the overall industry. In response, analysts have reduced their forecast for 2012 industry CapEx, and now expect to be -- expected to be in the range of 10 -- down 10% to 15%. Against this economic backdrop, we are maintaining our fiscal discipline and cost controls, and our focus remains on leveraging our capabilities to serve our customers in our traditional semiconductor market and to further develop new markets addressed by inTEST Thermal Solutions. Though the strategic diversification -- through the strategic diversification of our Thermal…

Thanks, Bob. Net revenues for the quarter ended June 30, 2012, of $13.6 million increased 27% over first quarter net revenues of $10.7 million, and decreased when compared with second quarter 2011 net revenues of $13.8 million. First quarter end-user net revenues were $11.3 million or 83% of net revenues, compared with first quarter end-user net revenues of $9.1 million. OEM net revenues were $2.3 million or 17% of net revenues, compared with first quarter OEM net revenues of $1.6 million. And net revenues from markets outside of semiconductor test were $1.8 million or 14% of net revenues, compared with $2.4 million or 22% of net revenues in the first quarter. The company's overall gross margin for the first quarter -- excuse me, for the second quarter was $6.2 million or 46% as compared with $4.6 million or 43% in the first quarter of 2011. The improvement in gross margin was driven by a better absorption of our fixed manufacturing costs in the second quarter, which, while fixed in dollar amount at $1.8 million, declined from 17% of revenues in the first quarter to 13% of revenues in the second quarter. The improvement in the margin caused by the better absorption of fixed manufacturing costs was offset by an increase in component material costs, due to a less favorable product mix in the second quarter. Our consolidated material cost in the second quarter of 2012 was 37.8%, compared to 36.3% in the first quarter. The material cost in our Mechanical Products segment increased from 44.2% in the first quarter to 45.8% in the second quarter due to a slight increase in the percent of manipulator products shipped in the quarter, which increased by 1% to 33% of Q2 mechanical sales, as well as a slight reduction in the net margin…

[Operator Instructions] Our first question comes from the line of Bob DeLean with Red Rock Partners.

Bob, I was curious if you can give us a little bit of color with respect to the Q3 guidance. Are you being specifically conservative based on what you're hearing forecast, or is that more of what you're hearing directly from your customers and what you're seeing in the backlog?

It's a combination of all of them, Bob. We have forecasted very -- everything really relates to the coming election. I think anybody you talk to right now is in this wait-and-see attitude and consequently, we have been very conservative with our forecasts. And in fact, our customers who forecast for us have also gotten very conservative. So I think it's a general feeling throughout, not only the semiconductor industry, but all of industry. And that's how we got to where we are.

Okay. That helps a lot. Hugh, could you give the CapEx number again for Q2?

Sure. The CapEx number was $129,000 for the quarter, and that was all related to improvements for our Electrical Products facility, the new facility in Fremont that we opened in March.

And is there a CapEx expectation for the year?

We typically are not significant CapEx -- a CapEx company. We haven't -- there's no specific plans. I would tell you our CapEx tends to run no more than $300,000 to $500,000 in the full year, and that's a year where there's actually -- tends to be a little bit more activity. We moved into new facilities in New Jersey and Massachusetts last year, so I don't anticipate any significant expenses in either the Mechanical or the Thermal division, and I believe everything that was needed in the Electrical division has been invested at this point. So it would be insignificant at best for the balance of the year.

And with respect to engineering and product development expenses, will that continue to ramp up as you go in the back half?

Well, the expenses during the second quarter were primarily in our Thermal and Electrical Products segments. I believe the projects in both of those segments are ongoing and that spending will continue. Whether we'll have the same level of spending in the third quarter relative to the second, I can't determine at this point. But the company is continuing to work on the development of the new products and we'll spend as needed and we'll retain third-party consultants as needed to complete its development efforts.

So to model at about $1 million a quarter for Q3 and Q4 is probably a decent estimate at this point?

Right. And that, Bob, primarily represents the salaries of our engineering and product development staff, as well as some cost associated with development materials and third-party consultants. It ranges anywhere from 7% to 10% depending on where we are in the cycle and what we're spending. So I've not had any indication from either of the segment general managers that their spending will be out of what I call the ordinary range in the next quarter or 2. So I would continue to expect it to run around $1 million a quarter in total.

Okay. And then, Bob, a final thing is, is Thermonics about where you expected it to be at this point in time with respect to revenue and market penetration and that kind of thing?

The short to answer is yes, but let me bring in Jim Pelrin in who is the GM of that group. And Jim, why don't you tell us what you think?

Certainly. Yes, I think it's coming along quite well. We actually hit some of our revenue targets a little bit sooner than we thought we would. We weren't sure what kind of hiccup the customers would have with the acquisition but they seem to have adjusted fine. And the business has been active pretty much throughout North America as well as the Far East, so we're pleased with that.

Our next question comes from the line of Benjamin Sexton with First Wilshire Securities Management.

I kind of want to dig in a little bit more into the Thermal segment, if I could. What was the -- in Q1 '11, versus -- say, Q2 '11 versus Q2 '12, can you just repeat that revenue number?

Sure. Revenues for the second quarter of 2012 were $6.5 million. And for the second quarter of 2011 were $6.7 million. So they're down by about $200,000. But they're up quarter-over-quarter by about $400,000, so, just to make that clear.

Okay. And was the Thermonics -- was that accretive in the quarter?

Yes, it was. As I mentioned in my remarks, the incremental contribution on the approximately $1.4 million in Thermonics revenue during the quarter was approximately 40%.

Okay. Was the -- I guess, did the Thermal segment have any weakness that was unexpected maybe later in the quarter or were you happy where that came in?

Well, I think I can answer that. One of the things that is a little bit misleading is that predominately all of the Thermonics business is in the semiconductor world. So it's diluted our non-semiconductor numbers particularly if you're comparing them year-over-year as a percentage of revenue. Overall, the Thermal segment was a little bit softer than we would have liked it but I wouldn't say that it was soft. It seems to be moving along fairly consistently.

Okay. And the bookings mix, can you restate what the mix was between semi and non-semi?

Sure, the -- semi bookings in the quarter -- well, total bookings in the quarter were $11.8 million. Our non-semi bookings were $1.2 million or 10% of that total. So that's down from 13% in the prior quarter. And as Jim mentioned, we believe the reason for the decline in the percentages this year vis-à-vis last year is the acquisition of Thermonics primarily, but also some recent softness in 2 of the industries that we serve outside of semi test as far as...

Okay. And just touching quickly on the Electrical segment. What -- I guess that maybe was a bit above your expectations going into the quarter. Would that...

That was above our expectation going into the quarter, yes. Yes.

Were there -- was there anything unusual there or is that -- do you think that's a trend that might continue into the third quarter, or...

It's a -- that business is a little different than the others in that it's a long-term sale, and the product is very engineering-intensive. And so you work with the customer for several months before you ship the first product. Once you ship that product and if they're ramping, you get that business no matter what because it's very difficult for another supplier to break in since he wasn't part of that development cycle. And so, we tend to see a little disconnect between the general economy of the semiconductor world and the way those sales go. We could have a really big quarter in interface when the business is flat on its back only because of the timing of the project. So I'm not sure what your question was but that's how that business works.

Terrific. So do you think -- I mean, do you think it could spill into the next quarter, the strength in that market, or in that segment, or is it...

I'll let Dan Graham answer that. He's the GM.

Sure. Yes, the indications are that will in fact happen. We are currently seeing reasonably strong bookings at this point still for Electrical. And its across several fronts. Bob had mentioned earlier about the handheld mobility type products like tablet computers, smartphones, laptops. That's a very strong business right now. And there's been some pickup on the automotive Electronics segment as well which we do have some customers in that space. As you know, the electronic content of automobiles is increasing all the time so -- and automotive sales have picked up quite a bit in the last year. So generally we're quite happy with what we see going on there.

Our next question comes from the line of Chris Lahiji with LD Micro.

Can you give -- elaborate on the Nuclear segment and what type of opportunity it is and what you're doing exactly in that space?

I -- let me preface that by saying there's a lot of confidentiality involved with that project. But with that, I'll give it to Jim Pelrin to explain to you.

We have a -- we're in the midst of a multiyear development project for the nuclear industry, and its both for nuclear facilities in the United States, as well as Europe. We expect in the 3- to 5-year period that there would $3 million to $5 million, perhaps a little more, in revenue generated out of this. The development project is scheduled to be completed mid-2013, and that's about as much information as I am able to give you.

Any other questions, Chris?

And our next question comes from Ken Nagy with Zacks Investment Research.

Just curious, are we still seeing -- are you still seeing strength in Thermal in Europe, where before, market gains were offsetting weaknesses? Is that still happening or are you seeing a slowdown there as well?

Well, Europe is -- this is Jim Pelrin. Europe is always soft -- the softer of the 3 major territories. Actually Thermonics was -- had some strengths in Europe, so with the acquisition of Thermonics, our European business has been given a shot in the arm. But we are beginning to develop a lot of Sigma business now in Europe which is -- that's a long term process but that's beginning to come to fruition. We don't see the market weakening any further than it is right now.

Our next question comes from the line of George Marema.

I wanted to probe a couple of areas. The first area, I want to drill down a little more on the guidance you gave for Q3. Looking to -- sort of historically, looking at -- the bookings seem pretty good to me at about just shy of $12 million. And the guidance seems to be a little bit out of sync with that. Are you...

Let me respond to that. This is Hugh, the CFO. As we've said before publicly our bookings in 1 period tend to be a proxy-er [ph] indicator of our revenues in a future period. And when you're in a rising environment, you tend to outperform your bookings in a subsequent quarter. And when you're in a falling demand environment, you tend to underperform your bookings or achieve your bookings in the subsequent quarter. So clearly with the slowdowns that we've seen in business more recently, which has been reflected in the downtrend in bookings from Q1 to Q2 going from $12.9 million to $11.8 million, our guidance of $9.5 million to $10.5 million in revenues for the third quarter reflects the fact that the market has slowed down rather precipitously, especially in the semiconductor space. And our concern is about our customers ultimately fulfilling everything. That said, as Dan pointed out earlier we have seen -- we continue to see strength in the bookings in our Electrical segment, as well as our Thermal segment but we're -- we still believe our guidance today is reasonably accurate based upon discussions with customers, our sales representatives and others that we talked to.

Is the softness stuff that has been sort of planned out originally but sort of pushed back that could come back if the analysts' spirits change, or is that how you characterize it?

Yes. We said that -- I said before that it's now taking, especially in our Mechanical Products, it's taking longer for a purchase order to get approved. And what that means is the POs are moving further up the chain because they're watching their dollars a little more closely. So the forecast gives us products that we will sell but in some cases, it's -- the time is dragging out to get those orders.

Yes if everyone all the sudden in fourth quarter becomes happy, some of it can be pulled back in again fourth quarter?

Absolutely.

Theoretically, anyway. Okay. And then 1 other thing I want to kind of push on is on the marketing front. Any new initiatives or any rumblings of new opportunities like new OEMs or just sort of brand-new areas of market penetrations in your lines?

It depends on which group you're talking about but in the Mechanical Products segment, there's no new customers on the horizon. If you're familiar with the industry, there's fewer and fewer customers but they're larger and larger. And so, that's a business that's contracting in terms of number of customers but the size of the customers is increasing. The Electrical Products business, I think I gave you a pretty good overview of that. It's a long-term sale and again, there's no surprises there because we know all the tester manufacturers, so we know what testers we're going to go to. Now, the Thermal business is completely different. There is the semiconductor side of the Thermal business, which is well defined since we've been in it for 30 years and it's very similar to those other 2 businesses. But once you get outside of semiconductor, now, you're looking at great opportunities for growth because it's a general product, if you will. It can serve any hardware that needs thermal testing. So we see growth there. The growth in those areas will be the most exciting we believe in the future, although we do intend to keep growth growing in semiconductor, and -- it just won't be as explosive we don't think. But the thing is that the semiconductor industry has matured. When we first started in this business, we saw CAGRs of 20%, 30%, and now that business is approaching that of the general economy. You're fortunate if the semiconductor business grows by 9% a year. And so that's what we're going to be left with in semiconductor for the foreseeable future. So it's indeed prudent for us to go outside of semiconductor and not only address industries that have a higher growth rate but go into new industries which would mean market share increases for us.

And 1 last thing. In terms of -- I know there's no such thing as normal. But assuming things were sort of even-keeled, if you took a snapshot today, where would you guess revenues would be on a quarterly basis if things were sort of normalized? Around $15-million-a-quarter-ish size? Or how do you model that?

Well, the last 2 years prior to the acquisition of Thermonics, we did just under $50 million in both years. So based upon that, that would -- those are roughly $12 million to $13 million quarters. The acquisition of Thermonics -- Thermonics had revenue in 2011 of just over $5.4 million. We expect it to contribute in the neighborhood of $5 million in revenue in 2012 or at least, we did when we first acquired them. So one would argue that our business if it had sort of stayed level-plus, Thermonics would have gotten us into the -- we were $49 million -- $48 million last year, got us into the $52 million-$53 million range, but clearly the semi demand is off in [ph] the semi areas. So it's a great question and I would tell you somewhere between $13 million and $15 million a quarter, but the 1 thing is I've been in this business now for 16 years and it never is a level playing field, unfortunately. It's like riding a roller coaster. So I think, our goal is clearly to grow the business. We have said publicly in the past, our goal is get to $100 million in 3 years and that's through organic growth in our existing businesses plus looking to acquisitions and a significant acquisition to help us move that needle forward. We're still committed to that road and that goal, however in the current environment, we're being very conservative with our look at other companies, simply because of the risks associated with M&A and the current environment being somewhat uncertain, quite frankly.

Is your gross margin model somewhere in the mid-upper-40s, kind of looking out?

As we show in our investor presentations, we expect our gross margin to be in the mid- to upper-40s going forward. There are some periods where it could actually exceed 50% if revenues trend towards the higher end of that range we were talking about, going to the $14 million to $15 million range. Or alternatively where we had a quarter last year where -- the third quarter where our margin was over 50% and revenues were actually down in that quarter but you had a -- what I call a perfect storm of high margin products coming through. And our material cost, which can range anywhere from 30% of our revenue to 40% of our revenue had dropped to as low as 30.6%. For the most recent quarter, as we said, our material cost on a consolidated basis was 37.8%. So it's toward the high end of that range. And unfortunately, we're expect it to hold there for the next quarter at least based upon product mix. Where it will in the fourth quarter at this point, I don't have guidance on that.

Our next question comes from the line of Benjamin Sexton with First Wilshire Securities Management.

I just had a quick follow-up question. I was wondering if you guys could give me the -- like a pro forma for the Thermal segment. If you were to have consolidated the acquisition in that quarter, what would the sales have been in Q1?

Well, the -- we acquired them on January 16, so they basically were part of us for the entire quarter. Our sales in the Thermal group in the first quarter were $6.1 million, which included $669,000 for Thermonics and that did increase to $1.4 million in the second quarter. Thermonics probably would have done, if the acquisition hadn't been involved and we didn't have to shut them down and move them, which we did in the first quarter, probably would have done somewhere in the neighborhood of the $1 million to maybe $1.3 million, $1.4 million. Looking at a $5 million annual run rate, you would expect somewhere between $1.2 million and $1.4 million per quarter. One other thing just to point out though is our -- don't forget our first quarter did include all the transaction cost associated with that transaction. So that's one of the reasons it was a breakeven quarter.

[Operator Instructions] I'm showing no further questions in the queue. I'd like to turn the conference back to Mr. Matthiessen for any closing remarks at this time.

Thank you, operator. Thank you for your interest in inTEST. In closing, our confidence in our business prospects remains high. inTEST occupies a profitable niche space. We have a proven long-term history with customers across the globe and provide high-quality mission-critical products that perform in high stress environments. We will continue to work with our customers and drive innovations that allow us to continue being a leader in our target markets. Thanks again and we look forward to updating you on our progress when we report third quarter results. Good night.

Good night.

Thank you. Ladies and gentlemen, this concludes the inTEST Corporation's Second Quarter 2012 Financial Results Conference Call. We thank you for your participation. You may now disconnect.