Good day, everyone, and welcome to the inTEST Corporation's 2014 Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. A replay will be accessible at www.intest.com. I would now like to turn the call over to Ms. Laura Guerrant, inTEST's Investor Relations Consultant. Please go ahead, ma'am.

Thank you, operator, and thank you for joining us for inTEST's 2014 Second 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 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 2014. We'll then have time for any questions. If you've not yet receive 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 me now turn the call over to Robert Matthiessen. Please go ahead, Bob.

Thanks, Laura. I'd like to welcome, everyone, to our 2014 second quarter conference call. While Hugh will review the financial results in detail, I'll review some of the highlights and we'll discuss our markets and what we are seeing in our customer base. As we noted last quarter, we expect 2014 to be a good year for inTEST, in fact, better than 2013, and that has not changed. Our confidence is fueled by the momentum and strength of our business, reflecting strong demand and customer adoption of our new products from a wide range of customers in all 3 of our business segments. Quote activity continues to be strong, translating into second quarter bookings growth of 24% sequentially and 15% on a year-over-year basis. Our thermal non-semiconductor related business has increased in both absolute dollars and as a percentage of revenues. Second quarter 2014 bookings derived from non-semi test increased 85% as compared to the first quarter and accounted for 28% of second quarter bookings. Second quarter 2014 net revenues derived from non-semi test show a significant improvement of 140% over the first quarter and accounted for 23% of second quarter net revenues. Recall at the end of the second quarter of last year, we've revised the non-semi-related historical bookings and revenue figures to include service, which had previously not been included. We exceeded guidance in both net revenues and net earnings and recorded our 19th consecutive quarter of profitability. Operating income of $2 million for the second quarter of 2014 increased by over 400% as compared with the previous quarter, primarily attributable to gross margin expansion. InTEST Corporation has demonstrated that during periods of cyclicality -- or cyclically declining revenues, the company is structured such that we can remain profitable. In addition, we reported a positive book-to-bill ratio for…

Thanks, Bob. Second quarter 2014 end-user net revenues were $11.3 million or 92% of net revenues compared with first quarter 2014 end-user net revenues of $8.8 million. OEM net revenues were $1 million or 8% of net revenues, down from $1.4 million or 16% for the first quarter of 2014. As noted earlier, net revenues for markets outside of semiconductor test were $2.9 million or 23% of net revenues compared with $1.2 million or 14% of net revenues in the first quarter. The company's gross margin for the second quarter was $6.1 million or 49% as compared with $4.2 million or 48% in the first quarter. The improvement in the gross margin was the result of a decrease in our fixed manufacturing costs as a percentage of our net revenues, which declined from 17% of first quarter net revenues to 12% of second quarter net revenues. And these costs we're $1.5 million for both the first and the second quarters of 2014. This improvement was partially offset by an increase in our component material costs, which increased from 33.0% in the first quarter to 35.4% in the second quarter. Our Mechanical and Thermal Products segments both experienced increases in their component material costs during the second quarter. Our Mechanical Products segment's component material costs increased from 38.7% in Q1 to 41.6% in Q2, while our Thermal Products segment saw its component material costs grow from 28.1% in Q1 to 30.5% in Q2. The increase in the component material costs in both segments was driven by changes in product mix. Our Electrical Products segment's component material costs declined from 42.1% in Q1 to 37.6% in Q2 due to changes in customer mix. I'll now discuss the breakdown of operating expenses for the quarter. Selling expense for the second quarter was $1.5…

[Operator Instructions] And your first question will come from Theodore O'Neill with Ascendiant Capital Markets.

Good quarter. And I was wondering, would you repeat that Hugh, did you say third quarter margin was going to be between 46% and 48%?

Correct. Correct, Theodore.

Okay. Now in guiding for revenue to be lower sequentially in the third quarter, is it -- can you give us an idea if it's semi or non-semi related or both?

I would say it's both. And at this point, we could -- I'm sorry for being tongue-tied, Theodore. We expect semi to remain relatively strong, our non-semi in the -- or excuse me, our semi in our thermal business was sequentially down, and we're optimistic that we'll actually see that number improving, during the quarter. But we expect both to be trailing down in -- on consolidated for total.

Okay. And I seem to recall there was either a milestone or there was some -- some kind of milestone for the nuclear products that was going to happen in the third quarter. Or is it revenue? Or am I mistaken about that?

Your recollection is correct. And it is revenue, and that's actually a fourth quarter event and not a third quarter event for us. So actually, we've got Jim Pelrin on the line. Jim, if we can just confirm that with you. I believe that you...

Certainly. Actually, the milestone was we were expecting initial orders in Q2, which indeed we got. We've got orders for 2 systems, and -- which will be delivered and we'll recognize the revenue in the fourth quarter.

[Operator Instructions] We'll hear from Srini Sundararajan.

Just had a question on your semi test. Between the first half and the second half, like how much was the revenue from semi test in the first half? And you were saying that will be better in the second half. So I just wanted to know how much was the revenue in the first half from semi test?

Sure, Srini. One moment. First half, semi test revenues -- bear with me, I'm just having to just add this up real quick. Let's see, first test semi revenues were $17.089 million.

Okay, okay. And you were saying that second half should be better than that, right?

We expect that second half semi revenues -- well, we don't expect it to increase. As we've guided, we expect revenues to decline in the third quarter as they would seasonally. We've not provided fourth quarter guidance yet. But historically, the fourth quarter tends to trend down from the third. So to the earlier question that Theodore had asked was do we expect with revenues declining from Q2 to Q3 for there to be declines in both semi and non-semi. And my response was we would expect both the semi and non-semi revenue to decline as we go into that quarter. We could see an anomaly. But at this point, our internal forecast is looking as both will decline slightly.

Okay. And how about your turns business? Meaning, how much of your revenues -- like how much of the orders get converted to revenues in the quarter?

Well, that depends, Srini. It can be as high as 70%. We tend to -- we can book and ship through at least the second month in the quarter and sometimes into the third month in the quarter. So that's why I'm saying it's between 60% and 70% can turn in the quarter.

And my last question is kind of like a suggestion. I think when you are saying that you have optical transceiver test business, I think calling it non-semiconductor is actually playing it down. You should actually play it up as advanced technology business because that's what it is. It is perhaps even more complicated than the semiconductor test business. So I -- probably by terming it non-semiconductor, you might be doing it a disservice, just my two cents. That's all.

Wonderful. We thank you for thoughts on that, Srini. Any other questions?

2015? I guess, I'd like to -- but I don't want you to give guidance. But anything like outstanding trends that you see, not necessarily about your business, but like -- but about the environment in which you operate in, like the ambient environment in which you operate in regarding 2015. Do you see any potential new avenues opening up or something improving from this year?

Well, clearly, we would hope to see an increase from '14 to '15. I think as we've said in the past, our visibility is very limited to 3 months, 6 months if that. So we really have no visibility into 2015 at this point. So I think we're uncomfortable trying to quantify where we would see revenues going at this point. But we believe that the direction of the trend is favorable for the semi business in 2015 relative to 2014 based upon discussions that we've had with customers and other information that we've read.

And next, we'll take a question from Marcel Herbst with Herbst Capital Management.

[Audio Gap] seems to be developing really well compared to last year. Is customer feedback and your pipeline of prospects strong enough to suggest further market share gains as we enter 2015?

Robert?

Well, that's hard for us to tell because most of our competitors are nonpublic. So we're not sure what they're doing. I would expect in certain areas, perhaps in the electrical business that we've had some gains. In the mechanical business, it goes back and forth. But we certainly have had some gains in docking. Jim, do you want to comment on the thermal business?

Well, I think that we're in a slightly different situation in the thermal business. A large part of our business is based on one product line that we kind of have a dominant market share in, and we expect to keep that. We don't expect to see any erosion there. And our entire strategy is to grow outside of the thermal -- the semiconductor business, which means grabbing market share from someone else.

Okay. And regarding your large thermal customer that plans a new manufacturing facility in the Midwest, if your products are included, when would you expect to get initial orders? And what revenue opportunity does such a new factory represents?

Well, that's a little difficult to say. We're in discussions with them right now about their requirements. They're constructing a new factory, which, quite frankly, is behind schedule. So it's been pushed out. And we really haven't gotten to the point where we can predict what their ultimate requirements will be. I would expect -- I would hope that, that will -- it will certainly become clear before the year end. I'm hoping it will become clearer by the end of the quarter, however, it may not, in the third quarter, because this particular customer is on a fiscal year that ends at the end of the third quarter. So we may have to wait to the fourth quarter to see what budget has been approved.

Okay. And on the China topic, you mentioned additional orders expected late in the first quarter or early in the second quarter from Chinese customers, which could total, you said, about 20 systems. Can you give us an update on that?

Well, we did receive orders from China and Taiwan that totaled -- in fact, I'll tell you, totaled 25 systems during the quarter. And that's one of the things that drove the non-semi business. And they were -- that was driven almost entirely by the transceiver market. Did I answer your question?

[Operator Instructions] And we'll take a question from Les Sulewski with Sidoti & Company.

So first, I wanted to know if there was any seasonality that came into play in this quarter that perhaps saw some orders that flowed in from first quarter to this one?

I wouldn't say that we had pushout from Q1 into Q2. We may have experienced some pull-in from Q3 to Q2, similar to what Teradyne had said in their press release. Although I'm not aware of any specific instances of that. But I've got my colleagues that run all 3 business segments in the room. So I'm not aware, Dan or Jim, that you had any pull-in this quarter of significance. And if they did, they would be speaking up now. So Les, I mean, the seasonality we see, clearly is in our third quarter guidance, where we are seeing the normal third quarter somewhat not slow down, but demand slightly diminishing from the level seen in the level of the second quarter, and we would expect that to continue into the fourth quarter as it has for a number of years.

Okay, that's helpful. The other thing is, do you see -- do you have any visibility on what your customers are putting the orders in? Is it more of replacement orders, specifically in mechanical and electrical? Or is it for new equipment?

I'll defer to Dan Graham on that.

It's actually a mix, Les. There's new capital, of course, that gets approved for expansion of the existing facilities. But there's also people who are rearranging things, sending equipment off to subcontractors in China, for example, and they ship some things out and then they need new docking and manipulators to go along with it. So it's surely a mix.

Okay. And then, Dan, perhaps if you could, can you talk a little bit more about some of the new products coming in, maybe get into what's typical lead time for testing before it becomes commercialized?

Well, the new products on the mechanical side are predominantly in the docking. There's been a move in recent quarters to want more automation, more push button-type automation. So we developed IntelliDOCK. We expect to receive some significant orders in the third quarter for that product. We're also -- on the electrical side, we have developed a new family of interfaces for the FLEX, the Teradyne FLEX family of testers. Of course, there are 3. That's a very important testers. It's a dominant one in the market right now. So we're just really starting to roll that out. We've shipped the first units, but we expect to continue to build on that. Does that answer your question, Les? Or there was something else, right?

No, that's helpful. Is there perhaps some pricing issue that maybe you take a little bit of a lower margin initially. And then as costs perhaps get a little bit better maybe pricing gets increased later on. Is that typically how it works with some of the new product rollouts?

We try not to do that.

Yes. Well, Les, I'll tell you pricing is always very competitive. We face stiff competition from the customers -- or the companies we compete with. So we find our customers are always trying to get us to reduce the price that we sell products to them at. And we're battling to maintain margin. So -- but the good news is we're developing new products all the time, which enables us to try and maintain the margin profile with our customers.

And our next question will come from William Jones with Morgan Stanley.

Robert, in the past, you have shared in the presentation or 2 a goal to get to $100 million with the help of some acquisitions. And I have not heard acquisitions mentioned for a while. Where does the company stand in that space?

We are actively pursuing that. We have several targets that we're interested in at the moment. And hopefully, one of them will pan out. So yes, that's still a major part of the plan.

This year? Or who knows?

That's a who knows. I would hope this year, but it's getting kind of late for this year to get any kind of a reasonable deal done, I would think.

Right. I mean, Bill, this is Hugh Regan. We -- as we maintain in our public documents and as we stay on the road, we continue to evaluate opportunities. But our lawyers always caution us to not say more than that. So when we do it, if something we're to report, we'll be happy to announce it. But at this point, we just continue to look at opportunities.

And we'll take a question from Marcel Herbst with Herbst Capital.

Just a quick a follow-up on the offshoring of manipulators that you mentioned here of the pilot program going. How would you expect that will impact gross margins?

Positively.

Yes. We are -- this is our first order. As Dan mentioned earlier, we have preliminarily seen based upon quotations from the spender that we will have some significant reduction in component material costs related to these products. But clearly, on the first units, we're incurring additional cost of moving -- we have staff -- as a matter of fact, we have a staff person on its way to China, as we speak; and then on to Malaysia and additional tooling costs. So it will ultimately improve the margin. But in the near term, to be honest with you, I don't anticipate an improvement until we actually begin to move the production offshore. This is what we call a trial run at point -- on this particular unit -- this run of 5.

And this is Dan Graham. We're of course moving carefully because we've heard a lot of horror stories about quality issues that come up through this sort of thing. So we've done a lot of work to try and prevent that from happening.

And seeing no other questions at this time, I would like to turn the conference back over to Robert Matthiessen for any additional or concluding remarks.

Thank you, operator, and thank you for your interest in inTEST. We look forward to updating you on our progress when we report our third quarter results in October. Good evening.

And with that, ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.