Welcome to the inTEST Corporation's 2019 Fourth Quarter and Year-End Financial Results Conference Call. At this time, all participants are in 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 at www.intest.com. I will now turn the call over to inTEST Investor Relations Consultant, Laura Guerrant. Please go ahead, madam.

Thank you, Ian, and thank you for joining us for inTEST's 2019 Fourth Quarter and Year-End 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 2020 first quarter. We'll then have time for any questions. If you've not yet received the 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, the potential impacts of the Coronavirus outbreak on our results; indications of a change in the market cycles in the semi market 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…

Thank you, Laura. We'd like to welcome everyone to our 2019 fourth quarter conference call. Our results for the fourth quarter are a clear reflection of the challenging headwinds our semiconductor customers continue to experience. And while consolidated net revenues were below our expectations, we did meet guidance for both gross margins of 48% and GAAP EPS of $0.07. Consolidated net revenues for the quarter were $13.6 million declined sequentially due to continued weakness in the analog production, test portion of our semiconductor business. Q4 semi revenues were down 15% quarter-over-quarter and while Multi Market revenues were essentially flat, we sustained the growth achieved in the third quarter. Multi Market revenue was driven by continued strength in the Defense and Aerospace market. As we have noted in the past, our ultimate goal is to grow Multi Market business to offset the volatility inherent in the semi market. Overall, consolidated fourth quarter bookings declined 20% sequentially, a combination of the timing of specific large orders in our thermal business and continued softness in EMS-related orders driven by excess production test capacity at EMS’ customers. Let’s now turn to our two operating segments beginning with Thermal, which consists of two businesses, ITS or inTEST Thermal Solutions and Ambrell. Q4 Thermal net revenues were $10 million compared to $10.6 million in the third quarter. It is important to note that Thermal is responsible for all Multi Market revenue, as well as important revenue from semi back-end test and front-end manufacturing. With Multi Market revenues essentially flat quarter-over-quarter, semi was the major contributing factor to the decline in the Thermal market. Thermal bookings were $8.7 million, compared with $9.5 million in the third quarter, reflecting the impact of the aforementioned order timing. There is a broad technical and geographical interest in our Thermal products…

Thanks, Jim. As we noted earlier, our fourth quarter net revenue was below our guidance range and came in at $13.6 million, down 7% sequentially. Fourth quarter gross margin was within our guidance range and that 48% was down 1% from the third quarter reflecting less favorable absorption of fixed production costs have reduced revenue levels. Selling expense declined by 4% sequentially to $2 million for the fourth quarter with reduced commission, warranty and travel expenses, partially offset by increased advertising costs in our Thermal segment. Engineering and product development expense declined 4% sequentially to $1.2 million with reductions in development materials and third-party consultants, partially offset by increased patent legal costs. For the second quarter in a row, we saw a significant reduction in the level of our general and administrative expense with Q4 G&A expense of $2.7 million, down $391,000 or 13% sequentially. Fourth quarter G&A expense came in below our guidance, primarily due to the reduced levels of professional fees and to a lesser extent to the reversal of previously accrued bonuses. We accrued an income tax benefit of $76,000 for the fourth quarter, compared to income tax expense of $147,000 recorded for the third quarter. Our effective tax rate was a negative 12% in the fourth quarter, compared to 19% in the third quarter. The income tax benefit booked in the fourth quarter was the result of reconciling the impact of the FDII deduction allowed under the new tax law which benefits companies that manufacture in the U.S. and have significant overseas sales, as well as book-to-tax return adjustment. We expect that our effective tax rate will range from 15.5% to 16.5% in 2020. For the fourth quarter, we reported net earnings of $724,000 or $0.07 per diluted share, compared to $647,000 or $0.06 per diluted…

[Operator Instructions] We will begin with our first question from Theodore O'Neill of Litchfield Hills Research.

Yes, thanks very much. Jim, the chiller business for – you added cannabis customers to, how many individual cannabis customers are buying chillers now?

Hi, Theodore. Nine in total for cannabis and several have bought multiple chillers.

Okay. And on the EV orders, do you have more than one EV customer?

Absolutely.

Is it two?

We have several. I don’t want to get – but we have several and our customers generally are integrators for EV.

Okay. So, does that mean that like – so they like – they sort of like one share the information with the other about where they should be buying the equipment?

No, we have been actively pursuing at the EV manufacturer level, who their key integrators are and then pursuing them.

Okay. So, Hugh, the margins came in little bit better than you would have expected at this level of revenue. Can you comment on the mix in the quarter?

Yes, Theodore. It was actually a little bit more favorable than we had expected and that’s one of the reasons that the margin was a little bit stronger than expected. Unfortunately, with the revenue decline, our fixed operating cost trended up as a percentage of revenue. So, all in all, we came in a little better than expected, but that was simply because of a more favorable mix than we had originally expected.

And what is this FDII tax benefit that you booked in the quarter?

Yes, I – we’ve been explaining FDII for a long time to a lot of people. Under the new Tax Reform Act, one of the benefits that President Trump gave to companies that manufacture in the United States and have significant foreign imports, is reducing the tax rate on sales made offshore to effectively to about – I believe it’s about a 15% effective tax rate for the – or actually 13% effective tax rate for those sales that go offshore. So, significantly below the 21% at the corporate tax rate. And when you – or about 60% of our shipments go offshore on an annual basis, so that has a profound impact. This FDII deduction was really made for companies just like inTEST Corporation that has significant offshore sales and manufacturing in the United States. So, going forward, we expect our – as I mentioned in the call, our effective tax rate to range 15.5% and 16.5%.

Great. Thanks very much.

You are welcome.

Thank you. [Operator Instructions] We will move to our next question from George Melas of MKH Management. Go ahead sir, your line is open.

Oh, it’s me? Okay. Thank you. Good morning, Jim and Hugh.

Good morning, George.

Good morning, George.

Good morning. Good morning and so, I am bit confused here. Okay. Thanks for the color that you guys gave during your prepared remarks. Jim, can you talk a little bit more about thermal on the semi side? And it seems like, the bookings there were – was fairly soft. And maybe what are some of the dynamics there? Is that also a question of excess capacity or there is some other dynamics going on?

Well, there is two components to semi thermal bookings, George. One is, inTEST – sorry, ITS’ Thermostreams product line is a sells to labs. They sell to qual labs, engineering labs for product design and that generally – it certainly does not have the same swings that the rest of the semiconductor business has when – as it oscillates. It has some peaks and dips, but nothing like rest of the business. And our Ambrell unit sells to front-end semi equipment manufacturing, which has been very soft for us in 2019. We see – we believe we see that energizing a little bit now. But it was very soft in 2019 and that’s for vapor deposition and crystal growth.

Okay. And Ambrell, they sell primarily to OEs and you have three of those. Is that correct or…?

They sell primarily to OEMs. They do sell some to end-users, as well, particularly in the crystal growth end.

And then the weakness there is both with OEs and with sort of direct customers?

Yes, the market was just, as you know, the market was just down.

Okay, great. And it seems like, you’re making some pretty good progress into the other markets besides semi. I know that a few years ago, that was just struggled and it seemed like you guys have done a really good push there. Can you talk a little bit more about that, and what are sort of resources you are devoting to that and how do you see things? And also maybe just mentioned the optical transceivers if there were any sales in the quarter related to that?

Sure, well, let me take the optical transceivers first. The sales were very meager and we expect sales to continue to be very meager in that business. There has been a technological shift in that business where they are no longer testing at temperature extremes, particularly on the low end. The technology of the product has changed. In fact, all of the high speed optical transceivers, 100G and above are operated hot and are tested at room and hot only. They are not tested at cold. So, we see that business – we had very little business in 2019 and we don’t see that changing going forward. As far as the rest of the Multi Market business, we have seen a big upswing in Mil Aero and also we are through - our industrial markets through Ambrell has been very strong. And that market has energized. We expect going forward good results from both Ambrell, as well as ITS’ Multi Market through – predominantly through the Mil Aero sector.

Okay. And how are you approaching that sector? Is it directly to customers? Or what’s kind of the structure of the market or your go-to-market strategy there?

Well, again, we are very application-driven. So, we try to touch as many customers as we can. Both business units have a comprehensive sales channel with direct sales supporting a host of distributors and reps and we have a very active - a very active machine to create leads. It’s typical that we would get – for a Multi Market we would get leads in the thousands in any given year.

Okay. Okay. Thanks a lot, Jim.

Okay.

Thank you. [Operator Instructions] It appears we have no further questions. Mr. Pelrin, I will turn it back to you.

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

Thank you. This concludes today's call. Thank you all for your participation. You may now disconnect.