Welcome to the inTEST Corporation's 2017 Fourth Quarter and Year End Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today. A replay will be accessible at www.intest.com. I will now turn the call over to inTEST Investor Relations consultant, Laura Guerrant, please go ahead.

Thank you, Celestia, and thank you for joining us for inTEST 2017 fourth quarter and yearend financial results conference call. With us today are James Pelrin, inTEST's recently appointed President and CEO; and Hugh Regan, Treasurer and Chief Financial Officer. Jim will briefly review highlights from the fourth quarter, as well as current business trends. Hugh will then review inTEST's detailed financial results and discuss guidance for the 2018 first quarter. We'll then have time for any questions. If you have not yet received a copy of today's release, a copy can 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 our customers, our ability to finalize the integration of Ambrell Corporation into our business, the success for our strategy to diversify our business by entering markets outside the semiconductor or ATE markets, 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. During today's call, we will make reference to non-GAAP financial measures. We have provided additional information concerning these non-GAAP measures, including a reconciliation to the directly comparable GAAP measure in our press release, which is posted on the Investor page of our website. And with that, let me now turn the call over to James Pelrin. Please go ahead, Jim.

Thank you, Laura. I'd like to welcome everyone to our 2017 fourth quarter and year end conference call. While this is not my first call with the company, it is my first as inTEST's CEO. I look forward to seeing many of you as we attend conferences and meet with the investment community. Hugh will provide a very detailed breakdown of the year and quarter results in his remarks. I encourage you to review the press release as there were a couple of accounting-oriented charges that impacted results. We booked a contingent consideration adjustment and earn-out for the recently acquired Ambrell Corporation, which as you will see, has become a very strong contributor in a very short period of time. And we booked a benefit as a result of the new tax code. Like I said, these were addressed in the press release, and Hugh will review in detail. So let me start by spending a few moments outlining the significant progress we've made this past year. We continue to experience strong demand across our end markets, and by all measures, 2017 was an outstanding year, further demonstrating our strong execution and operating leverage. 2017 net revenue increased 66% year-over-year, which included the impact of the acquisition of Ambrell in May. Excluding Ambrell, net revenues grew 32% year-over-year. Our gross margin grew 70% over 2016 in absolute dollars and increased 120 basis points as a percentage of revenue. Excluding the impact of Ambrell, our 2017 gross margin was $28.1 million or 53%, which grew 38% year-over-year in absolute dollars and increased 210 basis points as a percentage of revenue. And finally, we marked the company's eighth consecutive year of profitability, a metric that we are all very proud of as it speaks to the discipline and dedication exhibited by every…

Thanks, Jim. In light of all the unusual items impacting results this quarter, I'm going to start off my remarks with a recap of our fourth quarter 2017 earnings and what drove them. We incurred a net loss of $4.6 million or $0.44 per diluted share for the quarter ended December 31, 2017. The item that caused our Q4 net loss was a $7.5 million contingent consideration liability adjustment related to the earnout that we will pay for Ambrell. As Jim noted earlier in the call, Ambrell's record fourth quarter revenues of $6.6 million exceeded our expectations and contributed to Ambrell's achieving pretax earnings of $1 million for the quarter compared to a pretax loss of $71,000 in the third quarter, which had been caused by shipping delays. Ambrell's December shipments exceeded our expectations and resulted in the 2017 payout, which we had originally anticipated would fall into 2018. With Ambrell's strong Q4 performance, we now expect to pay a $5.4 million earnout later this month related to 2017 results, and we have an additional $5.7 million accrued for the 2018 earnout. The contingent consideration adjustment of $7.5 million in the fourth quarter was equivalent to $0.73 per diluted share, and when added back to our net loss, along with acquired intangible amortization of $245,000 or $0.02 per diluted share, results in adjusted net earnings of $3.2 million or $0.31 per diluted share for the fourth quarter of 2017. Adjusted net earnings is a non-GAAP measure. Another factor impacting the fourth quarter was the effect of new tax legislation enacted in December 2017. Two aspects of the new legislation had significant impact on our reported results. The first was the rate change from 35% to 21%, which required us to revalue our deferred tax assets and liabilities to the new…

[Operator Instructions] Your first question comes from the line of Edgar Roesch with Sidoti & Company.

Hi. Congratulations on the quarter.

Thanks, Ed.

I wanted to circle back to something you - I think I heard you say - Jim, did you mention that Ambrell had done some business in Q4 that was semiconductor-related? Did I hear you right on that?

Yes, you did. Yes, you did. Ambrell does business primarily in the front end of the semiconductor market, not test related.

Okay…

And those numbers, just to offer them because I doubt Jim has them in front of him, of their $6.6 million in revenues, only 200,000 were semi. They had much more - they had stronger semi bookings, about 677 out of $6.2 million. And you may recall that we reported recently a very strong semi-related order for them in the first quarter from Axtron [ph].

Got it. Thank you. And then looking at the 2018 outlook a little bit, the impact of these onetime orders, could you speak about the pacing a little bit? Because you certainly gave a very strong Q1 revenue outlook. Where would we see the year-over-year impact of that Japanese customer having been so strong in 2017? Where would we see that most, which quarters?

Well, I think that, that - they would probably occur most in the second and third quarter, although it's difficult to say. This particular Japanese customer was equipping a new production facility, and they came throughout the year, really. But that's completed now, and so we don't expect significant business from them for quite a while.

Okay. Got it. In the optical transceiver business, your outlook is for just down a little bit, you think, revenues to that business or...

Again, we had very significant orders from a couple of optical transceiver manufacturers. The nature of that business is that they respond to demand. They all vie for similar large orders, and the one that gets them, they have very, very rushed delivery schedules. So they often have to add equipment very quickly and get it up and in production very quickly. And that's what happened. And they came to us. Well, they came to the market and we won that business. But again, that's done now. So we have to wait for the next wave or, in fact, we have to wait for different customers.

Understood.

Okay. The two customers that did order were not typically strong customers with us in the past, so they had won some significant business.

Okay. And maybe were they possibly smaller players in that industry?

Yes, absolutely.

Okay. Thank you. And then if you could give us a little update, I think Ambrell was working its way into a new facility. Maybe I'm behind on that. But is that in progress at this point?

It's in progress. It's almost to completion. They are scheduled to move in April 30 into their new facility. It's being finalized right now. And everything is going on very well. And we don't expect any significant business interruption from it.

Okay. Terrific. Let me back in queue, if I have any further questions. Thank you.

Thank you, Ed.

Your next question comes from the line of Dick Ryan with Dougherty.

Thank you. So Hugh, did you give Ambrell's annual number? I know you've owned it since May, but did you give their overall 2017 number?

We - I'll give it to you now, which was $21.8 million is where they came in for the year. With us - that's an annual figure, Dick. With us, during our ownership, it was only $13.6 million. Their second half of the year was clearly stronger than their first half of the year.

If I recall, when you acquired them, I think you gave some guidepost for Ambrell in 2018 of, I don't know, $22 million, $23 million. Am I correct in that? And is that changing with this commentary?

No. We're still expecting them to do, say, between $23 million and $24 million next year, so maybe a little bit better than what we had originally said to you. They're solidly booking at a $2 million a month rate for the last seven or eight months now. So we're comfortable with that guidance.

And operational issues that occurred in kind of Q3, are they behind you now?

Very much so. As a matter of fact, as you know, I was not speaking to an earnout when we had this call three months ago for the year. And that was because we have had the poor results in Q3 with the operating loss. And while we expected the Q4 to be better, we did not expect it to be turned around as much as it was. I mean, them shipping $6.6 million is a phenomenal turnaround and really delivered very strong results. I mean, we went from the 750 - $75,000 loss to a $1 million profit in that operation in one quarter. So that's what really drove the significant consideration - contingent consideration adjustment in the fourth quarter that drove the operating loss.

Okay. And Jim, when you look at that business had been historically kind of sticky with current customers, it sounds like you're talking about some new wins and/or some customers moving up the priority list, I guess, if you will. But how is the pipeline of opportunities for Ambrell looking?

The pipeline is very strong, Dick. Ambrell has made a strategic decision, which we wholeheartedly support, to aggressively go after new emerging opportunities, new emerging markets like the electrification market and some other markets. And that's just beginning to show some fruits now where they've been investing in this throughout 2017. And in 2018, already they're beginning to get some orders from that. In addition, they have added some new OEM customers, which are very important. So they're definitely expanding their customer base.

Okay. And Hugh, maybe just a couple of housecleaning. Do you have stock-based comp and depreciation for the quarter?

Yes. Stock-based comp - bear with me, Dick. Stock-based comp for the quarter was $54,000. And depreciation for the quarter was 217 and amortization, as I said, was 245.

Okay. And concentration of customers, how did that look in Q4?

Actually, we saw that come down a little bit. Top 10 were 45.5%, down from about 48% last quarter. Two customers over 10%, Texas Instruments at 11% and Hakuto, our Japanese distributor, also at 11%.

Okay, good. Appreciate. I'll get back in the queue with a couple more. Thank you.

Thank you.

And at this time, Mr. Regan, if you received any question in advance that need to be addressed right now.

Okay. I think we did have a question that was delivered in advance, if I remember correctly. Hold on. Bear with me. I have it in an e-mail. Let's see. Well, a question that have been given to me is, why is the contingent liability - why is it more than $4.1 million in Q3? I think as I had explained in the call earlier, we had made a significant - or we had to - the significant adjustment to the contingent consideration adjustment at $7.5 million in the fourth quarter was driven by Ambrell's strong results during the fourth quarter, the $1.1 million - or the $1 million of income that they had, as well as the outlook for 2018 where we expect them to ship $24 million and have very strong EBITDA for next year. That's actually it, operator, for questions at this point. I would ask to see if there's any more questions in the queue.

[Operator Instructions] You have a follow-up question from Dick Ryan with Dougherty.

Great. Thank you. So Jim, you were talking about some aggressive pricing going on with your sales force. What end markets are those? And is that kind of one-off sort of occurrence? Or is it some lingering competitive issues there?

Dick, the aggressive pricing was - referred to really the one large order that we took in the optical transceiver market from one customer. We were up against a competitor that went in with - also went in with aggressive pricing. So we had to package some aggressive pricing with some other benefits, warranty and this and that in order to secure the order. And in the end, we won out. As much for our ability to deliver that number of machines, they needed those machines in four weeks. And we won out based on our ability to deliver it and the long time record of performance for our machines.

Okay. And Hugh, in the commentary for 2018, how do you see just maybe optically first half versus second half?

A good question. I see the second half possibly a little weaker than the first half. Jim, would you agree?

Yes. That's kind of typical in our business. We've gone into the New Year with a strong backlog, and bookings have been encouraging long-term for the first half. I say long term because short term, it's been slow to gain some momentum, but it's really started to pick up of late. So I would say that if we had to characterize it, the second half would probably be slightly weaker than the first half. But of course, that's subject to change, as you know.

Okay. Thank you.

You're welcome.

Your next follow-up question comes from Edgar Roesch with Sidoti & Company.

Thanks and hi. Just wondered - I was wondering if you could add a little bit of color on the automotive side. It sounds like a nice driver. I think of that as primarily benefiting your iTS business ex-Ambrell, but I would ask the question instead of guessing about it.

No. In fact, it's benefiting all of our businesses. Most - many of the test floors that EMS is, is very prominent in are our testing, chip sensors and other devices, processors, power supplies that ultimately go into automotive application. Likewise, the iTS business is also on the semiconductor side, testing lots of product destined for the automotive industry. And iTS also tests lots of modules and subsystems that go into the automotive industry. And of course, Ambrell is on the production floor, the manufacturing floor for the automakers. So all of our businesses are touched by this.

So Ambrell has more exposure than just sort of one prominent electric car manufacturers? Is that right?

Yes, absolutely. Absolutely.

Okay. Thank you, gentlemen.

Thank you, Ed.

At this time, there are no further questions. I would now like to turn the call over back to Mr. Pelrin for closing remarks.