Welcome to inTEST Corporation's 2014 First Quarter and Year End 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 call over to Laura Guerrant, inTEST's Investor Relations Consultant. Please go ahead.

Thank you, Camille, and thank you for joining us for inTEST's 2014 first quarter financial results conference call. With us today are Robert Matthiessen, President and CEO, 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 segments. Mr. Matthiessen will briefly review highlights from the first quarter, as well as current business trends. Mr. Regan will then review inTEST's detailed financial results and discuss guidance for the second quarter of 2014. We'll then have time for any questions. If you've not yet received a copy of today's release, a copy may be obtained 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 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 now turn the call over to Robert Matthiessen. Please go ahead, Bob.

Well, thanks, Laura. I'd like to welcome everyone to our 2014 first quarter conference call. While Hugh will review the financial results in detail, I'll review some of the highlights and we'll then discuss our markets and what we are seeing in our customer base. Before we begin, though, I'd like to thank everyone for the well wishes while I was out of the office recently. It's good to be back and 2014 is shaping up to be a good year for inTEST, in fact, better than 2013. As we forecasted on our fourth quarter conference call in March, we experienced seasonably lower demand in the first quarter of 2014, which we typically experience at the beginning of each year. Despite the lower demand, our Q1 results were in line with our guidance. Our net earnings of $0.03 per diluted share marked our 18th consecutive quarter of profitability. While net revenues of $8.8 million declined sequentially, as we had forecast, our quote activity has been strong translating into orders of $10.2 million for the quarter, an increase of approximately $1 million over the fourth quarter 2013 bookings. 19% of Q1 2014 bookings and 14% of net revenue were derived from non-semiconductor test. Recall that at the end of the second quarter last year, we revised the non-semi-related historical bookings and revenue figures to include service, which had not previously been included. In addition, we reported a positive book-to-bill ratio for the quarter and have a solid balance sheet with no debt. Looking forward, we continue to have a positive outlook for 2014 bolstered by our quote activity. We see revenue growth resuming in the second quarter of 2014 as Hugh will discuss when he provides our guidance for the second quarter in his prepared remarks. And overall, we expect that…

Thanks, Bob. First quarter 2014 end-user net revenues were $7.4 million or 84% of net revenues compared with fourth quarter 2013 end-user net revenues of $7.9 million. OEM net revenues were $1.4 million or 16% of net revenues, unchanged from the level reported for the fourth quarter. As noted earlier, net revenues for markets outside of semiconductor test were $1.2 million, or 14% of net revenues, compared with $2.1 million or 23% of net revenues in the fourth quarter. The company's gross margin for the first quarter was $4.2 million, or 48%, as compared with $4.7 million, or 50% in the fourth quarter. The reduction in the gross margin was the result of 2 factors: an increase in our manufacturing costs; as well as an increase in our component material costs. Our manufacturing cost increased both in absolute dollar terms from $1.4 million in Q4 to $1.5 million in Q1, and as a percentage of our net revenues, increasing from 15% of Q4 net revenues to 16.6% of Q1 net revenues. The increase in manufacturing cost during the first quarter was related to several factors including increased facility costs, due to the severe winter in the Eastern United States, where our mechanical and thermal product segments are located, as well as increased insurance costs. Our component material cost increased from 32% in the fourth quarter to 33% in the first quarter. Our Electrical and Thermal Product segments both experienced increases in their component material cost during the first quarter. Our Electrical Product segments component material cost increased from 36.9% in Q4 to 42.1% in Q1, while our Thermal Products segment saw its component material costs grow from 27.2% in Q4 to 28.1% in Q1. The increases in the component material costs in our Electrical Product segment was driven by changes…

[Operator Instructions] Our first question is from the line of Theodore O'Neill with Litchfield Hills Research.

So I got a couple of questions. On the profit margin, which is better year-over-year. If I look at 2013, your average gross profit margin for the year rose almost 430 basis points over 2012. And at the same time, the proportion of sales to OEMs dropped to 12% from 16%. Was the reduction in OEM sales component largely responsible for the rise in margins? And how do you expect that mix to change, if at all, in 2014?

Good question, Theodore. I would say that the reduction in component material costs during 2000 and -- or the improvement in the margin I would say, was driven by a number of factors, primarily changes in mix. To be honest, I'd have to go back and do a little bit more analysis to give you a definitive answer. But I think to a large degree, it's the increasing sales of Thermal Products relative to overall products, Theodore, where we have a stronger product margin or contribution margin on those products. OEM sales in our Thermal segment are basically, they don't exist. For instance, they were 0 in the first quarter and really 0 historically. It's really our Mechanical and our Electrical segments, which sell on an OEM basis to customers such as Teradyne, and others to resell those products. So -- and while that can shift period to period, we really don't see a significant difference any longer in those sales on a net margin basis because there's very little difference after the payment of sales commissions. Although, if you do see significant switches in any given period, it could have some impact on the margin and the operating expense number. But net-net, it's fine. So I don't know whether I fully responded to your question, but I hope I have.

You've given me enough to work with. That's fine. In your -- in the list of your -- in the concentration of customers, the top 10 customers in 2013 was 47% of revenue and it was the same in 2012. But the companies that were in the top 10 changed. So in 2013, you replaced Raytheon, Samsung and Intel with Advanced Semiconductor Engineering, ChainLogic and LTX-Credence. Does that imply any -- or have any wider implications for the business? Or is that just the sort of normal going in and out that you'd expect to see during any cycle?

I'll respond on that first, and then my colleagues probably will jump in as well. We do see the customers in the top 10 tend to move in and move out depending on, at least on the semi-side demand because in some periods, certain customers will be adding, for instance, Texas Instruments might be more significant one period, for instance, several years ago when they were integrating National, and we had significant orders from them versus in another periods, where they may be more satiated and not buying. On the non-semi side though, it depends on particularly who we're selling to. For instance, Emerson Rosemount is a significant non-semi customer of ours but more recently, their sales had diminished from where they were previously. But we expect them to be increasing at some point in the future. So we do see movements in and out. I don't know whether Jim or Dan would have any comments on that at this point.

Well, this is Jim Pelrin speaking. I think that -- I think Hugh was correct on the non-semi side. Raytheon is perhaps a better example. We had large bookings from Raytheon in 2012 and 2013. They weren't nearly as large and predominantly, it's because of a missile-defense program we're associated with. But in 2014, that's come roaring back. And we expect that Raytheon will be one of our top customers again.

Yes, the other thing, Theodore, is a lot of our business is dependent on our customers' customers. So we're exposed to that. The other thing, I'll go back to what Hugh was talking about, in the semi industry, that tends to be very cyclic because in Intel, where whoever will start a new project and will gear up with all new equipment for that. And it usually takes some -- they will go for 6 months or 1 year of buying, and then they'll go quite while they absorb all that and get that product running. And then you'll get another cycle maybe a year later, maybe 6 months later, you never know.

Okay. You may or may not be able to answer this, but InTEST was granted a patent 2 weeks ago for a tested vertical support system. Is this a new product area we should focus on? And if so, can you give us any information on it?

This is Dan. We continue to patent when we feel there is something significant to protect. One of our problems, of course, is that it's all too easy in the Mechanical segment, particularly for someone to try to copy. So we patent things to protect them. But given the cost of patents nowadays, we try not to go overboard on that. So it's a very --there's a long decision leading up to it normally. And in this case it's a manipulator product. I believe 2 weeks ago, I'm not 100% sure, I'd have to go research that, Theodore.

Yes, was it testing? Was the tested verticals support system that it was ordered on the 15th.

Right, that was indeed a manipulator.

Yes. Okay. And Hugh, does having a substantial portion of your cash outside the U.S. impact your acquisition path or consideration of a dividend or can you just go out like Apple and borrow at costs that are lower than repatriating funds?

Well, actually, of the total of just under $19 million of cash at quarter end, approximately $4 million is sitting overseas at this point. And we actually -- we plan to be bringing $1.5 million of that back. Actually, our Board approved a dividend from our German subsidiary. So if our German Managing Director is listening to this call, he's about to have $1.5 million brought back. And so we move cash and in that case, there's a very small difference between the German effective tax rate and the U.S. statutory rate. So bringing that back won't be a problem. But the bulk of our cash does sit here in the United States, Theodore. So from an acquisition standpoint, I don't see that, that would impact us significantly. The other $2 million roughly is sitting at Singapore. There the difference between the U.S. and Singaporean in statutory rates is much more significant. So there would be a tax hit bringing that back, and -- but by -- I think at the current time, we don't see that as an issue operationally.

Our next question is from the line of Les Sulewski with Sidoti & Company.

Well, it's pretty clear to see that the semiconductor industry's ramping up and we can see it in your numbers. And then, perhaps the focus on the non-semi thermal business and Jim, you mentioned on your last call that you are a newcomer in this space and then you see some customers having trouble funding certain projects. I mean, what other headwinds are you facing in the non-semi thermal space?

Well, I would say that one of our key areas that we need to improve in is just our overall visibility in the non-semi space. We're not very well known. And we have several programs ongoing right now, and we've invested a lot of money and we'll continue to invest a lot of money to enable our potential customers to find us. Because what we do is highly specialized, so it's not easy for us to target a customer group and say that they will have the kind of need that we can fulfill. So predominantly, I would say that, that's the key to our future success and growth.

Okay. And then is there any value proposition in the LED market?

Well, we're active in the LED market. We sell to most of the people within that market now. So we're pretty well known there.

Okay. And Hugh, what was the percentage of revenue from servicing on the non-semi side?

Service revenues in the first quarter were just under $1 million. So they would represent about 11% of consolidated revenues in the first quarter.

About 11%. And do you recall, what it was first quarter of last year?

Yes. One moment. First quarter last year service revenues were -- bear with me one moment. Service was just under $890,000. So as a part of first quarter revenues last year, they would have been a little less than 10%. So there up as a percentage of revenues and in absolute dollar amounts.

[Operator Instructions] Our next question is from the line of Srini Sundararajan with Summit Research.

I think the question that I had was relating to like, as to what proportion of your business is turns business. That is which -- what is the progression of business that gets ordered and shipped in the same quarter?

Srini, that ranges, but typically I would say on average, orders can be placed through as late as definitively the end of the second month of a quarter and shipped in our Mechanical and our Electrical Product segments. And in our Thermal Products segment, I would say it depends on the nature of the product being ordered. If it's an existing ThermoStream combination, I would see no problem with that being shipped even probably later into the third month of the quarter. But if it's something that we're designing for a new customer in the non-semi space, the lead time is a little longer on that. So that would probably be -- probably earlier in the quarter to cut off. And in our -- again, in our Mechanical and Electrical sides you can go a little in to the third month of the quarter. Again, it depends on if we manufactured it for the customer before and we have the material readily available, the order could be turned around relatively quickly. We say anywhere from 4 to 8 weeks to turn an order. And -- but it can be, on average, probably closer to 4 to 6.

Okay. And on the second quarter, is it right of me to assume that it's being -- it's more profitable than one would expect? And is that because of the mix?

The second quarter? Our forward guidance? I would say it's not really more profitable than we would expect. As I said earlier in my comments, we're looking at a gross margin of between 46% and 48%. To be honest, as our revenues increase you would expect our margin to be moving closer to 50%. For instance in the fourth quarter, we had on revenues of $9.3 million, we had a 50% gross margin and the reason for that was our material cost. Our component material cost was in the low 30s, about 32%. This most recent quarter, as I said earlier in the call today, it was 33%. We are currently forecasting a less favorable mix in the second quarter, which will drive that margin potentially down to as low as 46%. And that really, as I said is the function of either product or customer mix in any of our given segments. So to be honest, we could be more profitable on those guided, an $11 million to $12 million if we had a more favorable product mix. We could see easily 50% or even in excess of 50% if we had a more favorable product mix. And that's because our fixed manufacturing cost, which range between $1.4 million and $1.6 million a quarter, depending on what we're doing as the percentage of revenue clearly goes down as our revenues go up.

[Operator Instructions] There are no further questions. I'd now like to turn the call back over to Mr. Matthiessen. Please go ahead.

Well, thank you for your interest in inTEST. On another note, inTEST will be ringing the closing bell of the New York Stock Exchange on Friday, May 2. In addition, we will be participating in the CEO Summit at SEMICON West in San Francisco, in July. We look forward to these events and to updating you on our progress when we report our second quarter results in July. Thank you, and goodnight.

Ladies and gentlemen, that does conclude inTEST Corporation's 2014 First Quarter and Year End Financial Results Conference Call. We'd like to thank you for your participation. You may now disconnect.