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

Thank you, Camille, and thank you for joining us today. 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's Thermal Products segment; and Dan Graham, Senior Vice President and General Manager of inTEST's Electrical and Mechanical Products segment. Mr. Matthiessen will briefly review highlights from the third quarter, as well as current business trends. Mr. Regan will then review inTEST's detailed financial results and discuss guidance for the fourth quarter of 2012. We'll then have time for any questions. And 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 advise 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 demand 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. And with that, let me now turn the call over to Robert Matthiessen. Please go ahead, Bob.

Thanks, Laura. Before I commence, let me extend our collective thoughts and prayers for the safety of those employees, investors, suppliers and others being affected by Tropical Storm Sandy here on the East Coast of the United States. I'd like to welcome everyone to our 2012 Third Quarter Conference Call. While Hugh will review the financial results in detail, I'll review some of the quarter's highlights and we'll then discuss our markets and what we're seeing in our customer base. We exceeded guidance for both revenue and net income and maintained profitability and achieved this against increasingly uncertain industry conditions in which a number of capital equipment suppliers and semiconductor companies delayed certain capital expenditures, especially during the latter part of the quarter. Contributing to our profitability in the third quarter was the non-semi component of our business, which grew by 7% quarter-on-quarter. Third quarter revenues were $10.8 million and net income was $664,000 or $0.06 per diluted share. On a year-to-date basis, our revenue is $35.1 million and net income of $2 million or $0.19 per diluted share. In addition, the company had strong cash generation for the quarter with cash and cash equivalents increasing by $3 million to nearly $15 million. Our cash balance now exceeds the level at December 31, 2011, before we closed on our acquisition of Thermonics, and we have no debt on the balance sheet. Total bookings for the third quarter were $8.7 million compared with $11.8 million in the second quarter of 2012. 17% of third quarter bookings were derived from markets outside of semiconductor test, which is a solid improvement from 10% in the second quarter and the highest percentage recorded this year. Our diversification strategy outside of our traditional semiconductor markets mitigates the cyclicality that is so closely tied to that…

Thanks, Bob. Net revenues for the quarter ended September 30, 2012 of $10.8 million increased (sic) [decreased] 21% from the second quarter net revenues of $13.6 million and increased (sic) [decreased] when compared with third quarter 2011 net revenues of $11.7 million. Third quarter end-user net revenues were $9 million or 83% of net revenues compared with second quarter end-user net revenues of $11.3 million. OEM net revenues were $1.8 million or 17% of net revenues compared with second quarter OEM net revenues of $2.3 million. Net revenues for markets outside of semiconductor test were $1.1 million or 10% of net revenues compared with $1.8 million or 14% of net revenues in the second quarter. Thermonics third quarter 2012 revenue was $1.4 million, which was consistent with the revenue achieved during the second quarter of 2012. The company's overall gross margin for the second quarter was $4.8 million or 44% as compared with $6.2 million or 46% in the second quarter of 2012. The reduction in the gross margin was driven by a less favorable absorption of our fixed manufacturing costs in the third quarter of 2012, which increased to 15% of revenues in the third quarter from 13% of revenues in the second quarter. While our fixed manufacturing costs increased as a percentage of revenue quarter-over-quarter, they actually declined in absolute dollar terms from $1.8 million in the second quarter to $1.6 million in the third quarter of 2012, primarily due to reductions in temporary staffing levels in our Thermal Products segment. Our consolidated material cost in the third quarter of 2012 declined to 37% compared to 37.8% in the second quarter. The material cost in our Mechanical Products segment decreased from 45.8% in the second quarter to 39.5% in the third quarter due to several factors, including a…

[Operator Instructions] Our first question is from the line of Ken Nagy with Zacks Investment Research.

Just a question. A quarter ago, you mentioned the characteristics of the Electrical division make it less volatile, specifically, it's engineering intensive and you work with the customer for a longer period of time. Is there any chance that, that, along with non-semi thermal, will insulate your sales from the weak semi capital expenditures?

We hope so. I mean, that's the point of the non-semi sales. The electrical interface sales are not that insulated because although it's a long-term issue in order to get a product in and you're pretty well insulated from competition at that point, you're still related to capacity buys, and so even though you may be the sole supplier for a given customer, if his capacity doesn't require it, he's not going to be buying any at the moment. He will buy from us when he comes back, but we are still affected by capacity in that group.

Okay, great. One more question, in Thermal, is there any new end markets that maybe you didn't see as being significant a year ago?

Let me defer to Jim Pelrin, who is the general manager of that group. Jim?

Ken, I would -- there is one market that seems to be growing for us, though it's very, very early days and that's really in the oil industry for downhole testing. They require a higher temperature, and we have fashioned some products specifically for that market and we've met with some success.

Our next question is from the line of Bob DeLean with Red Rock Partners [ph].

I'm not sure if your earnings are a trick or a treat. I guess that's what happens when you release on Halloween. .

We could tell you they're neither/nor. They are what they are.

Are you guys in costumes over there?

Not today. We were just cleaning up from the storm damage, to be honest.

Yes. Well, maybe you can start with that. Talk a little bit about, obviously, the tragic circumstances. And with respect to your facilities, do you look at, is there going to be some downtime here? Where are you with respect to the storm damage?

Our New Jersey operations were closed for Monday and Tuesday because this operation was basically in the line of the storm. Our Massachusetts operations were closed yesterday. None of our facilities were damaged. Everyone is back to work today and operational on the Eastern seaboard. So we were not as impacted by this as many other companies are.

Okay. With respect to the competitive environment, Bob, you mentioned orders are really tough to come by right now, and I'm guessing some of your competitors are not as strong in the balance sheet department as you guys are. Can you talk a little bit about that? Are those competitors in trouble? Will there be some consolidation opportunities there? How is the difficulty in getting orders affecting margins, that kind of thing?

Yes. Most of our competitors -- in fact, all of our direct competitors are private. And so we don't really have their financials in front of us. However, we expect they're suffering like everybody else in the industry. I think the good thing is we actually have shown profit this quarter where most of our peers in the business have shown losses. And the fact that we have no debt is quite helpful. We know that some of those that we compete with do have some debt they have to contend with. So I would say, in that respect, in the respect of balance sheet and our health, we're in good shape. Of course, we're all looking at this downturn at semi, which is serious. It's the worst it's been in 3 years. And I think it's a combination of the normal cyclicality of the business, we usually see it tailing off near the end of the year with Q1 coming back. That, combined with the political season, is just like a double whammy. I think everybody is sitting and waiting, that's pretty much the opinion we get from our customers. They're sort of just on the edge of their seats to see what the tax weather is going to be in the coming year. And so everybody is sort of holding up before they move forward. We're hoping that there's a great loosening up as soon as the politics are behind us, whichever way they go.

And Bob, when things get tough like this, is there -- do you have to sharpen your pencil on pricing? Or are most of your customers sticking with you anyway, based on relationships?

It's not so much on pricing. I mean, that's an ongoing thing, it really isn't related so much to the ups and downs. And I think that -- the other thing you mentioned, is there a chance for consolidation? Yes, I guess there is, although, we're not looking to expand our business in semi, per se. We would rather expand outside of semi. And so we still keep our thrust in that area. But all in all, we have tried to keep ourselves in a healthy financial situation going into this, knowing that we were going into a downturn and we feel pretty confident that we'll see improvements as we move into Q1. So I think we're in pretty good shape.

That's helpful. Just one other thing. Hugh, do you have a kind of a gauge of where you're going to finish the year with respect to inventories and the cash balance?

As I said earlier in the call, I expect the cash balance to increase from where we are today, probably no more than $1.5 million or $2 million in total in the year end. And inventories, I would expect -- they were down about $0.5 million quarter-over-quarter. Business has ramped down, so I would expect inventories to remain at the level that they are or trend down a little lower.

[Operator Instructions] Our next question is from the line of Michael Bertz with Kennedy Capital.

I just have a question in terms of how you look at the mix of business as it stands now versus last year and how you think -- it can change, obviously, with the non-semi side picking up a little bit, going forward let's say in the next year. So irrespective necessarily of volume, but more pertaining to mix and how that looks to impact margin. I mean, it's down significantly year-over-year. I'm willing to think there's a lot of mix-involved impacts there, but how does that leverage look to work as you think about how business can develop into 2013?

Well, when you look at the 2 years side-by-side, clearly, we're a little less profitable this year because of product mix and we had a more favorable mix last year. For instance, in our Mechanical segment, higher levels of docking hardware were sold last year, more manipulators were sold this year. In our Thermal Products segment, we integrated the acquisition of Thermonics, which had a somewhat dampening effect on the margin there, a slight dampening effect on the margin there. In our Electrical Products segment, we had some significant business with an OEM customer that caused our margins to come under more pressure in that particular operation. So I mean that, from a high level, what really drove reductions in margin. That, as well as in our Mechanical segment, people are ordering in smaller quantities, which has caused us to procure material in smaller quantities, which has increased our costs slightly. We -- our non-semi business was down this year in both absolute dollar terms and as a percentage of our revenues. Our Sigma business tends to be one of our strongest margin businesses, just like our docking hardware. So that business being down has had a dampening effect on some of our profitability and our margin. We're optimistic that as those markets begin to see some rebound in demand and as we focus more on them -- as Bob talked about earlier, our focus over the last 2 to 3 quarters has been more in our Thermal Products segment on integration of the product line and refocusing on the sales channel, and I would anticipate that in early 2013, we will turn our attention more clearly towards growing again in those markets outside of semi tests that we have experience in, in '10 and '11 and '12, but unfortunately down somewhat in '12. I believe that answered your questions, but I don't know whether you had other aspects that I didn't get to.

No, you had fine, in terms of thinking about '12 versus '11. And I guess if I was to then come back again and say, as you think about next year and sort of what kind of boundary ranges you can look at -- and I don't mean to put too fine a point on like, what kind of business do you think, margin-wise, it can be? Are we thinking that a lot of the kinds of things that you're supplying are really going to be mid-40s kind of businesses versus -- into the 50s? I understand there's a mix of a lot of different product lines that you have, or is it something where, structurally, you're a little bit depressed on volume and again, like smaller purchases and that kind of thing, and so mix is not really favorable right now, but really on a -- I don't want to say a cross-cycle basis, but if you think about sort of what that business should look like, should it have a 5 handle on it or not, I guess, is the question.

Yes, we see the fourth quarter product mixing more favorable than the first, second and third quarter of this year, so we do see that moving positively. I really only have 1 quarter of visibility into that. I must tell you it's a function of what our customers are ordering. We had 3 quarters of what I would call less favorable product mix for the first 3 quarters of this year. For instance, a year ago, the third quarter of last year had an unbelievable product mix where material costs was 30.6% and we had a material -- and a gross margin of 53%. So it really is a function of the mix in any one period as well as, as you talked about earlier, our sales volume and our ability to cover our fixed costs better. At these lower revenue levels, our margins are going to tend to run more into the mid-40s, simply because our fixed operating costs become a higher percentage of our overall cost of goods sold. As you get back into the $12 million, $13 million quarters and above, those costs are better spread and we see the margin improving. So as we get back to growing our business outside of semi too, we would expect the margins to improve overall, because as I mentioned before, our Sigma products do have a better margin profile than any of the other products in the Thermal Products segment, and as they go to increased sales in that area, we would expect an improvement in margin there. And in our Mechanical Products segment, we'll have to wait and see as what happens there with docking versus manipulator sales. And Teradyne and other testing manufacturers clearly have given some negative guidance for tester sales, which is one of the reasons we see a more favorable product mix for us in the fourth quarter because more docking sales than manipulator sales. But I would expect next year that as you see business rebound, you'll see tester sales come back, which will mean manipulator sales will come back. And it's a function of when that's going up, what else are we selling and in what proportionate share to get to our ultimate margin? I would say, bottom line, we expect margins not to fall below the mid-40s and go into the upper 40s or low 50s, depending on where revenue goes next year.

Okay, fair enough. And then one last question in terms of as you guys look at the different areas of your business and you said you focused a little bit internally on some things and yet you're still looking to sort of pursue other different product niches, or these kinds of things. What kind of investments do you see that you need to make over the next year, and how should we think about the impacts that, that will mean for OpEx over that time frame?

Well, from an OpEx standpoint, I don't know that the capital expenditures will be up materially as much as it would be investments in people to potentially go into some of these other markets. As Jim and his staff further assess what are the strongest growth opportunities for us, he may choose to make some investments in staff and/or additional sales reps in certain parts of the world to better address those markets that we wish to grow in.

Okay. But if I was to think, just to clarify, if you're kind of going to bounce along in the low -- or high single-digit to low double-digit kind of quarterly revenue range, that OpEx probably isn't going to grow that much.

Operating expenses would be relatively -- we expect to be reasonably flat, clearly, up to the extent that we choose to add some staff. But we're in the process of doing our 2013 budgeting at this point, so we've not completed that process yet, so I'm really not in a position to give any guidance of any substance into 2013 on those numbers.

[Operator Instructions] And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Matthiessen for closing remarks. Please go ahead.

Thank you very much, and thank you for your interest in inTEST. In closing, our confidence in our business prospects remain high. inTEST occupies a profitable niche space, and 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. Thank you, again, and we look forward to updating you on our progress when we report our fourth quarter results. Good night.

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