Welcome to the inTEST Corporation's 2019 Third Quarter Financial Results Conference Call. At this time, all participants are in listen-only mode. Later, we’ll 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, madam.

Thank you, Sergei, and thank you for joining us for inTEST's 2019 Third Quarter Financial Results Conference Call. With us today are Jim 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 fourth 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. In addition to our press release, we have issued supplemental information in advance of this call, which can be downloaded from our website on the Investor Relations page. The supplemental information is offered to provide shareholders and analysts with additional time and detail for analyzing our results in advance of the company's quarterly results conference call. 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…

Thank you, Laura. We'd like to welcome everyone to our 2019 third quarter conference call. As we noted in our last call, we have been referring to our business somewhat differently. It enables us to more crisply define the company's product mix and our strategic direction which encompasses maximizing semi-related opportunities as well as growing our semi business outside of semiconductor markets, both organically and through acquisition. Our historical roots are in the more cyclical semiconductor market or semi as we refer to it, which is an important part of our business. Multi Market refers to the many other large diversified and growing markets for our precision equipment. Despite continued challenging headwinds in the sectors we serve, we increased revenues during the third quarter, expanded our gross margin and EBITDA, delivered profitable results and continued to generate cash. Continued net -- sorry consolidated net revenues of $14.6 million were up 2% sequentially and within our guidance range. While semi revenues were down Multi Market revenues increased over the prior quarter driven by defense aerospace as well as industrial customers, serving to reinforce our long-term strategy of building our less-volatile, Multi Market-related revenues. As noted, shipments to Multi Market customers were significantly higher in the third quarter, and constituted 51% of net revenues versus 47% in the second quarter. While we of course watch this mix, Multi Market revenue growth is our real goal, regardless of the results from the semi industry. Gross margin remained strong, in spite of semi-related weakness, increasing from 47% last quarter to 49% for the third quarter, which was at the high end of our guidance. With our continued focus on operational efficiency, as well as cost controls, we delivered net earnings per diluted share of $0.06, also at the high end of our guidance. And…

Thanks, Jim. In line with our guidance, third quarter net revenues were $14.6 million, up 2% sequentially and down 27% versus the third quarter of 2018. Third quarter gross margin was 49%, up 2% from 47% reported in the second quarter, reflecting an improved product mix as well as reduced fixed production costs. By closely controlling OpEx production costs, we're able to sustain better margins even in difficult times. Selling expense declined to $2 million from $2.1 million in the prior quarter, primarily driven by reduced commission expense. Engineering and product development expense increased to $1.3 million from $1.2 million in the second quarter, a 4% increase which reflected increased legal costs related to our patents as well as higher levels of spending on product development consultants and materials in both segments. We saw a significant reduction in the level of our general and administrative expense with Q3 G&A expense of $3.1 million, down $624,000 or 17% from the prior quarter which included $351,000 of acquisition-related expenses as well as $223,000 of consolidation-related expenses. We currently expect G&A expense in the fourth quarter to be in the range of $3.0 million to $3.2 million. We accrued income tax expense of $147,000 for the third quarter compared to an income tax benefit of $113,000 recorded in the second quarter. Our effective tax rate was 19% in the third quarter compared to 38% in the prior quarter which had been unusually high to bring our year-to-date effective tax rate to 11 -- to 18% approximately the same level we expect our effective tax rate to be for the balance of 2019. We reported net earnings of $647,000 or $0.06 per diluted share compared to a net loss of $187,000 or $0.02 per diluted share for the second quarter. Diluted weighted average shares…

Thank you, sir. [Operator Instructions] And our first question comes from the line of Theodore O'Neill of Litchfield Hills Research. Please go ahead.

Yes, sure. Good morning and thanks for the good quarter.

Good morning, Theodore.

Good morning, Theodore.

Good morning. So, my first question is you can't just put the word cannabis in your press release without giving us a little more detail on what's going on there. A – Jim Pelrin: Sure. As you're -- we are probably aware there's a very, very large and growing demand for CBD oil and CBD oil is extracted from hemp. To be clear not marijuana but hemp, which is also cannabis. And there -- so there's a fast-growing demand. There are lots of small growers and processors that are popping up, no pun intended to actually capitalize on this emerging demand. So that's the use.

And how is it being used? I mean can you give us a little more detail on the product specifically and how it's being used? A – Jim Pelrin: Well sure. You mean CBD?

No the...

No, no, no. CBD. Your equipment. A – Jim Pelrin: The extraction yes. It's chemical extraction. It's our chiller product line. It's our emerging chiller product line. And what happens is they heat the product and then they cool it. And they condense out at specific temperatures the CBD oil. And that's how they are able to capture it.

So it's like a still. A – Jim Pelrin: Well kind of kind of.

Okay, okay. My other question was about the gross margin which came in better than I would have expected. Can you give us a little more color on other -- which products or customers that help you get a good margin in the quarter?

Yes. I mean it really was our EMS segment Theo that really had a phenomenal quarter. Component material cost in that segment went from 36% in Q2, declined 31.4% in Q3, primarily due to a very favorable product mix much less manipulators and clearly more docking. In addition, as a result of the improvement in revenue quarter-over-quarter, the slight improvement in revenue for that group we actually saw a better absorption of fixed manufacturing cost. And that helped their margin in EMS go from 47% to 53% in the quarter which then had a profound impact on our consolidated margin clearly as well.

Okay. Thanks very much. A – Jim Pelrin: You’re welcome.

Thank you, Theo.

Our next question comes from Jaeson Schmidt of Lake Street Capital Markets. Please go ahead.

Hey, guys. Thanks for taking my questions. Just want a quick question on linearity of orders. And more specifically, when you look at your Q3 combined with your Q4 outlook, do you think any orders were pulled into the Q3 quarter? A – Jim Pelrin: This is Jim, Jaeson. I don't think so. I think there is -- as we have defined -- described in the past there was some lumpiness to our Multi Market sector with certain orders. As the semiconductor industry begins to emerge if I can use that expression from the doldrums and it's still very sluggish mind you, we are finding that there are -- there is some large orders that are placed in one quarter where they would normally be repeated in the next subsequent quarter and they're not. It's usually perhaps a quarter or two later that they get repeated. And that's -- that really is in reference to certain OEMs. In fact, that's what happened in the second quarter. We received some fairly large orders from three or four different sources in our Thermal group for semi-related orders. And they didn't repeat in the third quarter which is really responsible for the decline in semi-related orders in the third quarter.

Okay. That's helpful. And then on operating expenses, how should we look at OpEx ramping or needing to ramp in 2020?

We're -- it all depends clearly on the slope of business in 2020. At this time we don't see the semi market expanding significantly. We still think that they're going to be in a weakened state for most of the year as demand starts to grow back. So at this point, I would see OpEx holding at its current levels. And clearly the reduced G&A level that we had guided to I expect to last for the near term.

Okay. Perfect. I’ll jump back in the queue. Thank you.

Thank you, Jaeson.

[Operator Instructions] And our next question comes from Dick Ryan of Dougherty. Please go ahead.

Thank you. So Jim you mentioned in EMS kind of business orders relating to 5G. Can you expand on that a little bit? And I know I think last year optical transceivers had a good year. What's the outlook for that as well?

Sure Dick. Regarding 5G, that's a very difficult for -- one for us to quantify, because often we don't know, particularly with EMS, we have no idea what our equipment is being used for. We know the tester and we know the peripheral that it's connecting, but we don't know what they're running through there. And occasionally there will be a bias, what -- and that happened in this past quarter, which we were told was specifically, because the customer got an order for -- a large order for 5G related chips. And so when we get that information, we pass it along, but it's very difficult for us to really quantify 5G -- the totality of 5G specific applications for our product. I -- that's really all I can offer there. As far as optical transceivers go, that's still -- it's awaiting deployment of 5G, which really hasn't happened. There is still a problem with heat dissipation. Some are going to a silicon photonic technology, which reduces the heat, but that's really in its infancy as far as we can see for optical transceivers for 400G. So we're continually talking with our transceiver customers. We don't expect any -- we don't know of any large buys that are going to occur in the near future.

Okay. So Hugh in the Q4, how do you see the Multi Market versus semi mix kind of flip-flop from Q2 to Q3? How do you see that in Q4?

I would say at this point, we probably see it being consistent with the level that we saw in Q3, and unless we see a significant change on…

No. I think Multi Market will exceed semi in Q4.

All right. So you actually see it right.

As it is in Q3.

Correct. Correct. So, being consistent as they say.

Yes.

Right. Thank you.

Okay. And Jim it looks like auto is kind of poking its head back up. Can you talk a little bit what you're seeing on the auto side?

Yeah, it is in pockets. There – again, it is almost order driven at our customer level. There are pockets of auto particularly at the analog and mixed-signal chip testing. There's pockets of it that pop up and we jump all over that. And we often win business there. In general auto is not dead, but it's certainly not as strong as it was last year or the year before. And we don't see -- in the next quarter, we don't see that changing much.

Okay. And Hugh, how did the customer concentration look in the quarter?

Actually a slight improvement from the prior quarter. Top 10 were 36.2% of business in Q -- for on a year-to-date basis at 9 30.

Okay.

And only one customer over 10%. TI is normal for us at 11%.

Yeah. Okay. Great. Thank you.

You’re welcome.

Thanks, Dick.

Thanks, Dick.

Thank you. As there are no further questions in the queue, I would like to turn the call back over to Mr. Pelrin for any additional or closing remarks.

Well, thank you for your interest in inTEST. We look forward to updating you on our progress when we report our fourth quarter results. Operator, this concludes the call.

Thank you, sir. That will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.