Welcome to the inTEST Corporation’s 2018 First 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 will now turn the call over to inTEST’s Investor Relations Consultant, Laura Guerrant. Please go ahead.

Thank you, Celestia, and thank you for joining us for inTEST’s 2018 First Quarter Financial Results Conference Call. With us today are James Pelrin, inTEST’s President and CEO; and Hugh Regan, Treasurer and Chief Financial Officer. Jim will briefly review highlights from the first quarter as well as current business trends. Hugh will then review inTEST’s detailed financial results and discuss guidance for the 2018 second quarter. We’ll then have time for any questions. If you’ve 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 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 demand for semiconductors; changes in the rates of and timing of capital expenditures by our customers; the success of our strategy to diversify our business by entering markets outside the semiconductor or ATE markets; progress of product development programs; increases in raw materials 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 2018 conference – first quarter conference call. We continue to make progress in broadening our presence within the markets we serve as we diversify the company into a global world-class provider of thermal solutions for industrial manufacturing and electronic test. Q1 was fueled across the board by continued demand for our broad-based solutions, a testament to the strength of our customer relationships and the depth of our product suite. We continue to benefit from the robust demand environment associated with the semiconductor industry with automotive sensors, mobility technologies and Internet of Things leading our semiconductor test business. While nonsemi business drivers included solid demand driven by automotive, telecom and defense and aerospace markets. We’re very pleased to make a return to delivering quarterly profits on a GAAP basis. Prior to the 2017 fourth quarter, we had 32 consecutive quarters of profitability reported. This trend would have continued in Q4 had the increase in our contingent consideration liability not cause a GAAP net loss. Recall that last quarter, we booked $7.5 million or $0.73 per diluted share contingent consideration adjustment related to the earnout of Ambrell, which has quickly become an integral part of inTEST. This quarter, Q1 GAAP net earnings per diluted share of $0.04 included the impact of an increase of our contingent consideration liability of $1.7 million or $0.16 per diluted share. Consolidated net revenue of $18.9 million came in at the high end of our guidance as both gross margin of 50% and non-GAAP adjusted net earnings per diluted share of $0.22 exceeded guidance. Consolidated bookings of $20.6 million declined 5% sequentially and 10% year-over-year, while consolidated net revenues decreased 3% sequentially and 11% year-over-year. For both bookings and net revenue, the year-ago comparison excludes the impact…

Thanks, Jim. First quarter 2018 end-user net revenues were $16.3 million or 87% of net revenues compared to $17.3 million or 89% of net revenues in the fourth quarter. Q1 OEM net revenues were $2.5 million or 13% of net revenues, up from $2.0 million or 11% in the fourth quarter. Net revenues from markets outside of semiconductor market were $8.3 million or 44% of net revenues compared with $11.4 million or 59% of net revenues in the fourth quarter. The significant reduction in nonsemi revenues was due to Ambrell having a large order from a customer in the semiconductor industry front-end versus our usual business in the back end. As noted earlier in the call, Ambrell’s net revenues for the fourth quarter were $6.2 million. Excluding Ambrell, our net revenues from markets outside of the semiconductor market were $3.1 million or 24% of net revenues for Q1. So clearly, Ambrell is further diversifying our served markets. Our first quarter gross margin was $9.4 million or 50% as compared with $9.7 million or 50% in the fourth quarter. The slight reduction in the gross margin, which declined 0.5%, was primarily the result of an increase in our fixed manufacturing cost, both in absolute dollar terms and as a percentage of net revenues. This increase was partially offset by a reduction in our component material costs. Our fixed manufacturing costs increased by $141,000 or 6% sequentially, and they were less favorably absorbed in the first quarter due to lower revenue levels. As a result, these costs represented 14% of our net revenues in the first quarter as compared to 13% in the fourth quarter. The increase in the first quarter of manufacturing – fixed manufacturing cost was primarily the result of increased salary and benefit expense resulting from new staff added…

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

Good afternoon and congrats on the nice quarter. Wanted to ask a couple of questions on Ambrell to lead off. First, it sounded like there was an automotive win in the quarter. And I was wondering, was that a domestic win for the – for Ambrell?

Yes, it was.

And could you comment a bit on whether that was a systemwide upgrade or one location, sort of what’s the scope of the project?

It was one factory location that upgraded all their lines.

Okay, great. And has Ambrell had the chance yet to spend some time with your Asian sales force and sort of tested the waters in that market?

Yes. Ambrell – the President of Ambrell and their Chief Technology person went to Asia for two weeks – and actually, I’m sorry, 1 week, and met with 2 partners that they have. And they’re solidifying their agreements with those partners, and they expect meaningful business this year from Asia.

It’s great to hear. And having owned that business now, I guess, approaching a year, are you satisfied with the suite of products that they were offering? Or do you feel like there are some opportunities to expand a little bit?

No, I think Ambrell is an applications type of business where it’s driven by application. They have the capability from 1 to 500 kilowatts to produce induction heating systems. And it’s how those induction heating systems are applied and tuned for particular applications that win them business. They don’t really want to go beyond 500 kilowatts because that really gets up into the realm of heavy machinery, and that’s not their expertise.

Okay. And then broadening the scope a little bit. So this is a really nice start to the year, the guidance for Q2 is strong. Have you gotten any sense from your customers that maybe their equipment budgets are a bit front-end loaded this year? Or do you have any sort of commentary from them?

Well, the answer is no. Customers, as you know, are very, very reluctant to share a lot of information. They often don’t know themselves, the buyers. We believe that in some cases that could be true. But in other cases, we think that it’s – that the year is going to remain healthy and strong.

Okay. And then I’m having trouble sort of characterizing the optical transceiver market a bit. It – I know that you had the large order that you shipped in Q4, and so it was obviously down sequentially. But you gave some numbers in your prepared remarks, Jim. Could you repeat what you shipped or what that order was in that optical transceiver market in Q1?

Bear with us while we look for that. That was – actually, it was an order in the fourth quarter for $2.6 million. And that order, because it came in, in the fourth quarter, caused the downward trend in the first quarter in that business.

Yes. In the first quarter, we also had a $600,000 purchase of optical transceivers. So to answer your question, the optical transceiver market seems to come in bunches. We get fairly significant orders from a small number of customers that are spread out over quarters. I think that, that’s somewhat of a change of a maturity of the market. We were getting one- and two-piece orders from lots of different customers. And those were for their evaluation and characterization of their products. And it seems that the market has matured, and now they’re buying for their production floors and their production requirements. So it’s very difficult for us to predict what is going to happen. Certainly, two quarters out, it’s almost impossible for us. As the fourth quarter just demonstrated, we took in $2.6 million worth of business that had to be shipped immediately, which we had absolutely no foresight on.

Okay. I think that’s it from me right now. Thanks for your help.

Our next question comes from the line of Theodore O’Neill with Litchfield Hills.

Thank very much, good quarter. Follow-on question here on the auto supplier win from Ambrell. You mentioned it was a curing application. And the only curing I can think of is for rubber. What is the curing application there for the auto supplier?

Well, it’s actually – it is rubber-related. It’s actually for membrane curing, putting membranes in place, filtering membranes and curing them.

Okay, good enough. And Hugh, you have mentioned the new Ambrell facility in Rochester, $1.1 million spent in the quarter. And then is there still another $1 million left to go?

Yes. We – clearly, the facility is done. But we haven’t received all the bills yet from the contactors, so we’ve got roughly $1 million to spend in this quarter. And I would expect by the end of the quarter as well end of Q2, we will have begun to receive the first of the grants that I described as well, the $550,000, so...

Yes. I was just curious how they’re going to keep working in there if they still have $1 million worth of work to be done?

Yes, that – no, it – as you know, bills get paid after the fact. So I would expect actually probably the bills have already been paid because, as you know, we’re reporting a little on a delayed basis, but – well, they haven’t quite yet, because I – the cash is where it is. But my expectation is they’re probably in our payables bins to go out in the next week or two. So...

Okay. That’s it from me. Thanks very much.

You’re welcome

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

So Jim, on the last call, I think you mentioned some pricing pressures. I think it was particular to the optical transceiver. Is that still an issue to deal with? Or what are you currently seeing? What the pricing environment...

Oh, that’s an ongoing issue where – wherever there’s important business, we have to be prepared to offer our customers very competitive pricing. For the smaller quantity business, it’s not so much of an issue. But certainly, for the large, large unit orders, it certainly is.

Okay. And on the last call, Hugh, you gave some year-end guidance, low $70 million revenue. Since you didn’t touch it, I’m assuming you didn’t – you’re not backing away from that. But are the dynamics still in place? EMS down maybe 10%, Ambrell up 10% or so and the rest of Thermal down a little bit. Is that still the same dynamic?

Yes, we’re still comfortable with that – those – that annual guidance range that we have provided earlier. It did – as I mentioned in the call last time, it’s not something that we’re going to be speaking to on a regular basis, but we are still comfortable with that.

Sure, okay. And what was stock comp in the quarter?

Stock comp was – bear with me one moment, just over $103,000.

Before we repoll, we received a question in advance. So Hugh, perhaps we can address that at this time.

Sure, sure.

The question, can you provide a broader picture of the company’s acquisition strategy, specifically an overview of your short, intermediate and long-term visions for acquired growth with, perhaps, more color on both the size of the deals and funding mechanisms?

Sure. Jim, should we split this question in half? And do you want to talk about short, intermediate and long-term vision for acquired growth, with me addressing size of deals and funding?

Sure. That would be fine. Well, as I have said in the past, inTEST has to be an opportunistic acquirer. We have to look at the deals that are available to us that are in our criteria, which is predominantly, we’re looking in the thermal market for companies that manufacture products with an active thermal component. Our sweet spot, if you will, is $15 million to 20 – to $40 million in revenue. But that’s not to say that for the right opportunity, we might buy a smaller company with the right growth opportunity or a very much larger company. And we have, in fact, spent some time thinking about how we would fund a large acquisition, should that come to be. And Hugh is prepared to speak about that.

Great. And in that regard, as Jim mentioned, we’re looking at opportunities that have revenues that range from $15 million to $40 million. As far as multiples of revenue deals are being done at – between 1time and maybe 1.25 times revenue, anywhere from 6 times to 10 times EBITDA multiples. So we’re looking at a wide range of potential evaluation opportunities. And then, in some cases, we’re looking at some larger opportunities as well, seeing sort of what the maximum is that we could look to do. The bottom line is that the company is going to need to – in order to successfully execute this strategy, we are going to need to raise capital. Our expectation is at least once during the next two to three years in order to successfully grow from $75 million, which is where we are today to $200 million, which is where we would like to be by 2020. So that’s what we see at this point. And whether we go in small transactions where we may be able to fund the growth through cash on hand plus some leverage versus a larger transaction which require equity financing is unknown at this point. But as we move forward and look at opportunities, the company is well positioned to take advantage of either smaller opportunities where it could book to cash in leverage or to larger opportunities where it would require some equity financing as well. Laura, that’s it on that one. I don’t know whether we have any further questions from other investors.

[Operator Instructions] And at this time, there are no further questions. I would like to turn the floor back over to Mr. Pelrin for closing remarks.

Well, thank you for your interest in inTEST. We’ll be attending a number of investor conferences in the second and third quarters. We’ll be at the B. Riley conference in Santa Monica on May 23 and the LD Micro Conference in Los Angeles on June 4. In addition, on July 11, we are participating in the CEO Summit taking place in San Francisco in conjunction with SEMICON West. We look forward to seeing you and to updating you on our progress when we report our second quarter results. Operator, the call is concluded.