Welcome to the inTEST Corporation's 2019 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. [Operator Instructions] I will now turn the call over to inTEST's Investor Relations Consultant, Laura Guerrant. Ma'am, please go ahead.

Thank you, Chelsea, and thank you for joining us for inTEST's 2019 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 the quarter's highlights as well as current business trends. Hugh will then review inTEST's detailed financial results for the quarter and discuss guidance for the 2019 second 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. In addition to the factors mentioned in our press release, such risks and uncertainties include, but are not limited to, indications of a change in the market cycles in the semiconductor and ATE markets or other markets we serve; changes in business conditions and general economic conditions, both domestically and globally; changes in the demand for semiconductors generally; the success of our strategy to diversify our business by entering markets outside the semiconductor or ATE markets; the possibility of future acquisitions or dispositions and the successful integration of any acquired operation; the ability to borrow funds or raise capital to finance major potential acquisitions; changes in the rates of and timing of capital expenditures by our customers; 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 our SEC filings, including, but not limited to, our periodic reports on Form 10-K and Form 10-Q. Any forward-looking statements made by inTEST during this conference call is based only on information currently available to inTEST and speaks to circumstances only as of the date on which it is made. InTEST undertakes no obligation to update the information in this press release 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 lastly, we'll be attending the following upcoming investor conferences: the 9th Annual LD Micro Invitational in Los Angeles on June 4; and the 11th Annual CEO Summit on July 10 in San Francisco. We look forward to seeing many of you. And with that, let me turn the call over to James Pelrin. Please go ahead, Jim.

Thank you, Laura. I'd like to welcome everyone to our 2019 first quarter conference call. We reported solid results for the quarter, which were in line with our guidance despite the semiconductor industry downturn. Consolidated Q1 net revenues of $18.1 million were down marginally compared to $18.4 million in the prior quarter, primarily attributable to the semi ATE weakness. Q1 gross margin was 49%, consistent with the 2018 fourth quarter. And non-semi revenues of $8 million for the quarter were consistent with 2018 Q4. Q1 consolidated bookings of $11.9 million primarily reflect the cyclical seasonal softening in the semiconductor industry in both the ATE market and front-end manufacturing, where over half our business is derived. Orders were also affected by reduced demand in our non-semi markets, specifically telecom optical transceivers, which we believe primarily reflects technological changes occurring in that market. These results include approximately $0.04 per share in expenses related to a potential acquisition. Recently, we were at the final negotiation stages of closing a deal with a company whose revenue profile is roughly the same as inTEST's and pulled back for various reasons. If we had acquired that company, we would be well on our way to our goal of $200 million in annual revenue by 2020. Without that acquisition, reaching our goal by 2020 is unlikely. We are now pursuing other opportunities in our pipeline which are significantly smaller in revenue, but our goal to reach $200 million remains. Our Thermal segment is the combined business of inTEST Thermal Solutions or iTS, which primarily provides solutions for thermal test applications and Ambrell, which provides induction heating solutions for use in the manufacturing sector. This diverse segment consists of a range of products addressing different applications in various industries, sold under a number of bands. Q1 Thermal segment…

Thanks, Jim. First quarter 2019 consolidated bookings of $11.9 million decreased 35% sequentially and 42% year-over-year. Consolidated net revenues of $18.1 million for the quarter ended March 31, 2019, came in at the low end of our guidance, representing a decrease of 2% sequentially and 4% year-over-year. Thermal segment first quarter bookings of $8.8 million were down 29% sequentially and 39% year-over-year. And Thermal Q1 net revenues of $12.6 million decreased 11% sequentially and 5% year-over-year. EMS segment Q1 bookings of $3.1 million were down 48% sequentially and 50% year-over-year. And Q1 EMS revenues of $5.4 million increased 27% sequentially but were down 4% on a year-over-year basis. There was very little change in the breakdown of end-user and OEM net revenues as well as non-semi revenues between the fourth quarter of 2018 and the first quarter of 2019. First quarter 2019 end-user net revenues were $16 million or 89% of net revenues compared to $16.4 million or 89% of net revenues in the fourth quarter. Q1 OEM net revenues were $2 million or 11% of net revenues, unchanged from the fourth quarter. Net revenues from markets outside of the semiconductor market were $8 million or 44% of net revenues compared with $8.1 million or 44% of net revenues in the fourth quarter. Our first quarter gross margin was $8.8 million or 49% as compared with $9 million or 49% in the fourth quarter. While the gross margin was unchanged for the first quarter as compared to the fourth quarter, we did experience a slight increase in our fixed manufacturing costs as a percentage of net revenues, partially offset by a comparable reduction in our component material costs as a percentage of our net revenue. Our fixed manufacturing costs, which were essentially flat on an absolute dollar basis at $2.7…

Thank you, sir. At this time we will open the line for questions. [Operator Instructions] And our first question will come from Jaeson Schmidt with Lake Street Capital.

Hey guys thanks for taking my question. I just want to start, Jim, with your comments on the customers' confidence sort of softening over this past quarter. I know you mentioned a potential inventory correction. Just curious if you think customers hold in orders into Q1? Or any additional color around that would be helpful.

I'm not sure that I can say that customers have pulled in orders in Q1. I think that there was – our customers were holding a lot of inventory. And I know that they're burning off of our products, and I know that they're burning off that inventory now. And that's one of the reasons why we have soft orders.

Okay. And just given the general softness in the semi industry, just curious if you're seeing any significant changes from a pricing standpoint in any of your product lines?

No. No, nothing. Frankly, it's the quote process has been strong, but the time from quote to order has become extended and that's really what's happening.

Okay. That's helpful. And then last one from me, and I'll jump back in the queue. I know there is some onetime in nature expenses that impacted OpEx in Q1. But how should we be thinking about OpEx trending the rest of this calendar year?

I'll answer that one. Jaeson, we expect some additional deal-related expenses in the second quarter. That's what's really driving the loss that we've guided to. That we're essentially at breakeven with those revenue levels. So there might be a slight operating loss depending on where revenue finally winds up. It's really an additional $300,000 to $400,000 potentially in transaction expenses coming through. We're waiting for the final numbers to come in from all the professionals we engaged in connection with the transaction.

Okay, that’s helpful. Thanks a lot guys.

Thank you.

Thank you. Our next question will come from Theodore O'Neill with Litchfield Hills Research.

Hi. Hugh, usually when there's a breakup like that you guys get paid.

Hey, I only wish we could have. It would have softened the blow. But this is the cost of doing business. We've had this occur in the past. In this particular opportunity, unfortunately, with the softness in our business recently as well as other issues that just made this transaction not tolerable for us at this time.

Yes, that's too bad. So anyway, thank god you've diversified into the industrial side because if I look at the math here, the semiconductors bookings dropped by half sequentially.

We're very happy that we've diversified.

And I had to go back a long way to find semiconductor bookings number that low. I went to the third quarter of 2001 or the third quarter of 1998 to get to the number. And I was wondering if you could – I know part of that is your rationalization of the semiconductor side of the business. But could you also talk about that? And like if – sort of the geographic nature of the decline too?

Sure. Jim, do you want to respond to that?

Sure, sure. Well, first, geographically, the semiconductor business industry we find soft in the U.S. and in Europe. China is absolutely dead. We find China as just – there's just nothing going on there. That's affected probably the – it's affected iTS considerably because they send a lot of ThermoStreams into China, and there's been little or no activity there. It's also affected EMS because there's really only one or two of EMS' customers that are still active in China, actively putting capital equipment in China. So that's been a real blow. And we're not sure when that's going to resolve itself. But it has been like that in the fourth quarter, and our numbers were substantially stronger. So we believe that in the coming quarters, we're already starting to see some pickup in the U.S. and Europe, and we think that, that's going to carry us to much more healthier numbers, but still not at the super cycle levels when China was very strong.

Okay, thanks very much.

Thank you. [Operator Instructions] And our next question comes from Dick Ryan with Dougherty & Company.

Thank you. So Hugh, back on the OpEx question, you talked about some acquisition-related expenses flowing through Q2. How about any other cost-control measures that you guys might be implementing going forward? Or is there anything like that stacking up for Q3 or Q4?

We're going to have to take a look at that. As Jim mentioned earlier, we expect this to be short lived. So I'm not sure that we would be implementing cost controls other than possibly just delaying implementation of certain initiatives that we might have been planning that we're going to add cost such as new hires or other things.

Yes. We are – not to interrupt you.

Yes, go ahead.

But we certainly are pulling back on new hires. Critical replacements we're moving forward with, but new hires, we're holding off on.

Right, right. But at this point, Dick, we really expect this to rebound by the third – fourth quarter. And if we go longer than that or get deeper, we may take actions as we have in the past.

Okay. And Jim, you talked about optical transceivers being weak maybe due to technical changes going forward. Do you think that your industrial heating applications will still serve the direction of those new changes? And then maybe stepping back on a more macro picture, what's the pipeline for the industrial heating segment looking like now? And have you been able to expand that footprint globally at all?

Okay. Well, first, the optical transceiver market is actually served – we're in production test or iTS division. And that market is undergoing a change and that the products are maturing. So they are actually, they're relieving their specifications, test specifications so that they can reduce the cost of test. They don't have to test as long or to the extremes. So the demand for our solution has reduced because of that. And where it would normally pickup is with the new 400G product that's actually in development and being sold now. But they are behind the eight ball and actually miniaturizing that. It's still quite a big piece of hardware and its emitting 15 amps of – sorry, 15 watts of heat. And that's very high and that's got to be handled through chambers and devices – and methods like that not our method, because they haven't been able to reduce the size and reduce the thermal load on it. As far as our induction heating business, that pipeline is not nearly as full as it was because of the semiconductor industry. We have to remember that 32% of that business last year was semiconductor. And so they've really been hit hard by the semiconductor slowdown because they were principally in two areas in semiconductor, one was in deposition and the other was in crystal growth. And in both of those areas, their customers are working off inventory that they acquired late last year, so we don't expect orders to pick up significantly from them until probably late second quarter or early third quarter. Okay, the non-semi pipeline is actually up. The non-semi business for them is actually up compared to last year and for the fuel industrial products. So we think that the industrial market is still quite healthy.

Okay, thank you.

Okay, thank you. Our next question will come from Rob Romano [ph].

Thank you for taking my call. Jim, your previous comments regarding the acquisition, did you say the one that did not close, that would have doubled the size of the company?

Yes. That's correct.

Okay. Was that deal not closing, was that inTEST's decision?

Yes, it was. It was driven primarily because as we were going through this acquisition process, we were in the semiconductor super cycle, and we were very healthy with generating quite a bit of cash. And when we saw this downturn, and as we saw the downturn develop during Q1, we realized that we just couldn't move forward with it because we just wouldn't – it became unpalatable to the company because of that. So it's really because of the semi cycle downturn.

Okay. In reference to the $200 million, is that number now considerably lower?

No, I like to remind people that's still our goal. I don't think we'll reach that goal by 2020, but we have a pipeline of several other companies that are smaller and we are moving forward very quickly on those. Some of them are bolt-ons, some of them are small standalones, but they all meet our strategic requirements and we hope to be successful. In fact, we – our goal is to do more than one a year if we can do that possibly. If we can do three a year, we would do that. But our $200 million goal stands.

Okay. So the pipeline is still there, and even though this one didn't go through, you're still looking to potentially do a deal here?

Absolutely, we will do a deal at some point.

Okay, thank you.

Alright, I believe that there were questions submitted in advance. Mr. Regan, would you like to address those?

Yes. Thank you very much, operator. We had several people raise questions about generation of shareholder value. Jim, would you like to respond to those?

Sure. First let me say that, this is a question that the management and the Board give considerable thought to and we spend a lot of time strategizing on how best to do this. I've been with the company for 18 years, but I've been CEO for just under a year and a half. And in that time, I think, we have significantly strengthened the company and we have structured it for growth. We are taking a long-term look at value. We know that because of the markets that we're in, the cyclicality, the seasonality, we are going to have ups and downs. Our goal is to increase shareholder value over the long term. And I think if you look at what we've done over the last four or five years, our performance indicates that we've been successful at that. Historically, we've always been a small semiconductor capital equipment company, and we're still small for sure, but we really have transitioned into the broader industrial space and that's really helping to shore us up and protect us in times like this. But all of these things that we're doing, they don't happen overnight and it takes time. And we believe we're building an enterprise that's really wider and deeper than it was and it may not be immediately apparent to shareholders, but I think, the company is richer. I think the technologies and the product offerings are broader and they're servings a much greater application in a much greater number of industries. We leverage our core strength to do this. We are able to assimilate and optimize acquired businesses and get the most out of them. And, I think, that'll take us to the next level. And again, I say our $200 million goal is still our $200 million goal. I think what's changed is the time to get there because we're probably going to have to do it in smaller bites, but that's still our goal. So I think through that, there will be considerable shareholder value generated.

Thank you for that answer, Jim. We are now happy to close, Jim. Any final comments?

No. I just like to thank everyone for your interest in inTEST. And we look forward to seeing you at the conferences Laura mentioned as well as updating you on our progress when we report our second quarter results. Operator, the call has concluded.

Thank you, sir. Thank you, everyone. This concludes today's teleconference, and you may now disconnect. Please enjoy the rest of your day.