Welcome to inTEST Corporation’s 2021 Second Quarter 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'll now turn the call over to inTEST Investor Relations Consultant, Laura Guerrant. Please go ahead, ma’am.

Thank you, operator, and thank you for joining us for inTEST’s 2021 Second Quarter Financial Results Conference Call. With us today are Nick Grant, inTEST’s President and CEO; and Duncan Gilmour, Treasurer and Chief Financial Officer. Nick will briefly review the quarter’s highlights as well as current business trends. Duncan will then review inTEST’s detailed financial results for the quarter and discuss guidance for the 2021 third quarter. We’ll then have time for any questions. A copy of today’s press release can be obtained on inTEST’s website, www.intest.com. In addition to our press release, we have issued supplemental information, which can be downloaded from our website on the investors’ page just mentioned. The supplemental information is offered to provide shareholders and analysts with additional information and detail for analyzing our results in advance of the quarterly results conference call. Before we begin the formal remarks, please note 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 risk factors set forth from time to time in our Securities and Exchange Commission filings, including but not limited to, our Annual Report on Form 10-K for the year ended December 31, 2020. Any forward-looking statement made by us in this conference call is based only on information currently available to us and speaks to circumstances only as of the date on which it is made. We undertake no obligation to update the information on this 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 refer to non-GAAP financial measures. We have provided additional information concerning these non-GAAP financial measures, including a reconciliation to the directly comparable GAAP financial measure in our press release as well as in the supplemental information and the slide presentation for this call. The release, supplemental information and slide presentation are posted on the Investors page of our website. And lastly, we will be participating in the following conferences during the third quarter: The Colliers 2021 Institutional Conference, September 9; and Lake Street's 5th Annual Best Ideas Growth Conference, September 14 through the 15. In addition, we will be hosting our first Analyst Day in November. We are targeting November 16th or 17th likely in New York City. We will have more details on the event shortly. And with that, let me now turn the call over to Nick Grant. Please go ahead, Nick.

Thanks Laura and welcome everyone. I'm pleased you're joining us for our second quarter 2021 financial results conference call. I'd like to start by welcoming our new CFO, Duncan Gilmour, to today's call. Many of you will have an opportunity to meet Duncan at the upcoming conferences as Laura mentioned as well as at our analyst event, which we're planning for November. We are delighted to have Duncan on board. Shifting now to the quarter's performance. Strong demand for our innovative test and process technology solutions across a diverse set of end applications resulted in financial results for the second quarter, which exceeded our guidance. Our growth was predominantly fueled by broad end market demand in the semiconductor industry across both of our segments, along with increasing demand for our products outside of semi as our industrial markets continue to strengthen. Once again, I'm pleased with the progress we're making to capture growth within semi, while investing for growth and developing vertical growth markets and segments outside of semiconductor markets, which over time will serve to lessen our dependency on this cyclical industry. Finally, I want to thank the entire inTEST team for delivering a truly solid quarter. Let's look first at bookings and backlog. Our consolidated Q2 bookings of $25.1 million were comparable to the bookings level we've reported in Q1, which was a near record quarter for us. Second quarter bookings continue to be fueled by the semi markets with semi bookings of $16.5 million slightly down versus Q1 and accounting for 66% of our consolidated bookings. Our EMS segment once again had solid orders and backend test and our thermal segment was also void by semi strength in front-end and lab applications. Q2 multimarket bookings of $8.6 million made up 34% of the overall bookings driven by…

Thanks, Nick. I'm delighted to be on Board and look forward to meeting the investment community as we go forward. Our second quarter gross margin of 50% came in at the middle of our guidance range and was improved from the gross margin we reported for the first quarter. Our fixed manufacturing costs at $2.4 million were better absorbed at a higher net revenue levels in the second quarter, representing 11% of net revenues in Q2 compared to 13% in Q1. Our Q2 2021 component material costs were unchanged from the first quarter at 36.2%. Selling expense grew 8% sequentially to $2.6 million in the second quarter, driven by increased commission expense on higher net revenue levels, and to a lesser extent by increased salary and benefit costs associated with headcount investments. Engineering and product development expense increased 3% sequentially to $1.4 million, primarily driven by headcount additions associated with growth investments as well as increased spending on product development. General and administrative expense increased 19% sequentially to $3.8 million for the second quarter. Restructuring and other charges were $197,000 for the second quarter, up from 55,000 in the first quarter. Non-recurring costs with a primary driver of the 750,000 total increase. During the second quarter, we incurred $424,000 of non-recurring costs of which $347,000 related to the CFO transition, and $77,000 were associated with our previously announced manufacturing consolidation of our EMS product segment. The final integration of our EMS manufacturing operation has taken longer than originally anticipated as a result of the significant increase in the business activity for the segments in the first half of 2021. During the second quarter, we delayed some integration activities and allocated our resources instead to meet customer demand for shipments of our products. We currently expect to complete the integration of…

Thank you, sir. [Operator Instructions] We'll take the first question from Mr. Jaeson Schmidt from Lake Street. Please go ahead.

Hi, guys. Thanks for taking my questions. I just want to start with the supply chain. I am curious if that – those challenges had any impact on Q2 revenue or if you anticipate any impact in Q3 here?

Yes. Good morning, Jaeson. How are you doing?

Doing well?

Can you hear us?

Yes, just fine.

Okay, great. No, so supply chain, as I mentioned in the prepared remarks, obviously a challenge for our team, we're seeing daily push outs, delays and the teams have done a fantastic job, really working to bring up second sources, locate the components needed to keep the production going. So didn't see a whole lot of shipments push out of the quarter due to supply chains in Q2, but those things continue to occur on a day-to-day basis and we're managing as they arise, but so far no big impact in Q2. With that though, I would highlight we have increased lead times on our products due to the lead time push outs from our suppliers. So that is driving less book-to-bill within the quarter – or booking shift in the quarter if you will.

Okay. That's really helpful. And you mentioned some digestion here at some of your large customers in the second half, but just curious if – what you've seen in the first kind of five weeks of this quarter from an order standpoint?

Yes, you know, it is what kind of highlighted in there. We are seeing where – our semi business is kind of slowing in the first part of this quarter just because of the high demand that they've taken and then we – and the customers we've worked very, very closely with. They tell us that this – we've got to get these lines up and running and everything else before we can start with the next ones to go forward on that. So it's – as we anticipated semi is moderating and we're seeing some good activities in the multi-market space out there. We've continued to the make progress on the EV front and started the quarter here. We've got another order in that space over 200,000 that came in and we continue to drive our growth initiatives in those other areas.

Okay. And the last one for me, and I'll jump back in the queue, you highlighted replacing some incumbents within your EMS business at some accounts. Just curious if you could share any color around what's really driving that and what's really kind of getting you guys over the finish line at some of these customers?

Yes, now, I think, it's a combination of our technology. Our teams really flexibility working with them to help solve their tester prober interface solutions and our ability to be able to ship still and perhaps better lead times than our competition out there. So, we're meeting their needs and demands on multiple fronts.

Okay. Appreciate the color. Thanks a lot guys.

Absolutely, Jaeson. Thanks

The next question comes from Peter Wright from Intro-act.

Good, good morning and congratulations on a fantastic first half of the year.

Hi. Thanks Peter. Good morning

Good morning. My first question is on the backlog stretching comment. I understand clearly some of this is supply chain and transitory. But my question is, is there anything structural that you're doing that might affect how you're managing backlog whether it would be on the service side or kind of the diversity into your product food chain going forward?

Yeah, on the structural side, I would just say, as I commented with Jaeson there, we are leveraging more of our second source suppliers than we – our traditional single source ones that we've been using to support volumes. And so, managing a broader supply basis is a bit of a change. We have commented during the call relative to our consolidation kind of stretching out that consolidation activity for EMS is wrapping up this quarter. And with that, there is a lot of inefficiencies of floor layouts as you're trying to squeeze things into space and when you're dealing with the volumes they've had there. So we'll continue to optimize our footprint layouts in our factories to support growth going forward on that from a structural standpoint, but services bouncing back. Our teams are out, visiting customers again. So that's a great change to have happening. And our sales guys are doing the face-to-face calls at a much higher frequency than they've done in the past and we started back at in-person tradeshows. So a really – a lot of really positive changes happening in the third quarter here.

Wonderful.

I would also just add that with the whole global economy dealing with supply chain challenges, we are seeing some of our customers are actually ordering equipment much further in advance. So there is a little bit of an impact there where we're seeing people order perhaps a couple of quarters in advance versus what they would typically do.

Yes, now, that's a great point, Duncan. And that's a nice luxury to have that we can work with our supply chain and plan our manufacturing with these out quarter delivery.

But that – and so that's the heart of the question is, do you think that that's structural, do you think that that's permanent? Or do you think that that is more transitory related to kind of the short-term supply chain disruption?

Yes, I would think it's more of the latter. As lead times return back to normal for the products in this other supply chains, they'll move back to a more traditional approach of the business.

Fantastic. Two other things caught my attention in your comments. The first one is on the leading ATE player for your auto manipulator. Can you help me understand what this means to your smart cell? And is it kind of a bundled cell potential that is there? Is it – is – are they the end customer? Or are they more of a distribution partner? If you could add just a little bit of color there that would be helpful. And then the other one that caught my attention was on the defense and aero side. Can you share the driver there? And is there anything that makes you feel that that might be sustainable for the next couple quarters as well? Thank you.

Yes. Yes, thanks, Peter. So on the LS ATE manipulator, our automated manipulator, we're working diligently with our network – our partners out here the ATE test equipment manufacturers to try to get this visible to as many of their customers as possible and working to get these into their labs, their application labs that they have. So, we've had success in Q2, penetrating one in the U.S. here, which basically all customers that come in to see their test equipment and demonstrate it there, will have the opportunity to see our automated manipulator working with those if the application supports it then. So it's just driving more of visibility and awareness and having our partners, not the end customers, but the test equipment manufacturers help to drive more adoption out there for us. On the second part of the question, the – I am sorry, what was – I slipped on that one, what was…

The defense/aero up 97% is the driver something with visibility for…

Yes. Sorry, Peter. Thanks. The defense/aerospace, as I mentioned in Q1, we really saw a slowdown as things was kind of – with the new administration coming in, getting tied up giving through approvals and all that stuff. And that really kind of opened up in Q2 here. Although a number of our projects that we've been working on and tracking are still waiting on final approvals, but we just saw a nice pickup of orders in Q2. And as Q3 represents the end of the fiscal year for that defense space, I expect we'll – that will continue here as folks work to spend the funds they have available this year and develop the new budgets for 2022.

Thank you so much and congratulations.

Thanks Peter.

[Operator Instructions] We'll take the next question from Dick Ryan from Colliers.

Thank you. Hi, Nick. Back on the semi side, Q3 a little bit of digestion, and then I think Duncan mentioned some of these customers are stretching out order, their orders beyond the current quarter. Can you maybe just high-level handicap how you see the second half building from or comparing to the first half, I mean, if does that drive just in period extend into Q4? Or do we start seeing semi coming back then?

Great question, Dick. And as you know, we have much more visibility in the quarter versus the next based on the activities, but what we know is for our customers to receive the equipment, get it installed, get the lines up and qualified, it's usually a two month period working with them in that timeframe. So it really depends on their – how quickly they're able to bring the capacity up and online. If it can maintain that two months, then there is a possibility Q4 bounces back, if it drags given the number of projects that have been ongoing here in the first two quarters of the year, in the Q4 it might be start of 2022 when things start really coming back, because as I said, there's a lot of positives, there's a lot of demand drivers out there. And we really just see it as a resource constraint, so to speak right now as, as they try to get their lines up and running.

Okay. You mentioned service that I think that's been a focus to increase that contribution going forward. What level is service at now and where do you think you can take that contribution too?

As I've highlighted, services is one of the growth areas that we've got to do better at. And in Q 3, we actually saw it, get back to approximately a $1.5 million in the quarter, which is not the level that we want to end up here as we want to try to drive this service revenue closer to 20% of our – of our overall business. But it is a – a bounce back to pre-COVID levels if you will, back to Q1 of 2020, where we were running before that. So it was difficult to do a number of our service initiatives during the COVID restrictions, travels and everything we want to try to do out there. So hopefully now that back up and running, we'll be able to put more focus on service growth.

Okay, thanks. Maybe a couple for Duncan. On OpEx, how should we look at OpEx for the second half of the year, Duncan?

I think, I think as Nick talks about, and I touched on a little bit as well, we certainly will continue to invest in head counts, in selling and marketing in particular, as well as R&D engineering. So I would kind of anticipate that continued investment and perhaps mid- to high-single digit kind of increase in our kind of ongoing can expand your in those categories. So building in I kind of have drag on EPS if you will to fact that, and I think is, yes, it does make sense. We need to make sure we make these investments for the long-term kind of growth to deliver on the long-term growth strategies. We also will see spending on trade shows, marketing, creeping back up again, as we get back out there as, as the world hopefully opens up a little bit. So really between the headcount investments and the trade show and marketing, I would expect to see that mid-to-low kind of single digit kind of sequential quarter kind of increase in our spending rate.

Okay. And the housekeeping one, I don't know if I saw what stock-based comp was in the quarter?

Yes, Nick is that a $450,000.

Thank you, which is a little bit higher than the run rate so there was a charge in there tied to some notification of awards. So there's probably a 90,000 or so in there that is a non-recurring element of that.

Thank you.

Thanks Nick.

The next question comes from George Melan of MKH Management.

Good morning guys. How are you doing?

Very well, thank you. Congratulations on a remarkable quarter. I've just have a question and it's sort of a general question on product development and how do you think about it? And do you have some, do you keep internally track, do you have some metrics that would have percentage of revenue from product introduced in the last two years or three years or? So that's sort of one part of the question. And the other one is product, I mean, I look over the last five years and product development spend has gone up just a little bit on a regular basis, but I'm wondering whether you actually planning to increase that more to sort of to drive into new markets?

Yes. Great questions, George. And product development is, as an area that we absolutely plan to put more focus and more costs towards. Unfortunately the way the businesses had been structured is the R&D teams and the engineering teams really support the day-to-day operations for a couple of the businesses, primarily ITS and EMS in the sense that these are very more custom driven applications for specific challenges customers have relative to interface docking even cooling ultra-low temperature refrigeration, et cetera. So the engineering is quite often pulled off of the R&D initiatives to support day-to-day manufacturing. But this is an area that we putting more investments than we've hired more resources in this area and also leveraging outside resources to help drive innovation and product development at a faster pace. And I'm working with the businesses to implement a vitality index, which will be measuring each of – each of the businesses for just as you said, a percent of new products on the sales going forward on that, and that is being defined and kind of captured out there. And it's a bit difficult when you're doing custom for everything, what we really do defined as a new product, or, but as we move to more standard products, standard configurations, we'll be able to capture that in much cleaner. So more to come on that and hopefully be able to share more in our November Analyst Day. Relative to the spend, we absolutely as I mentioned what I want to do more, and even though the dollars are up slightly, we're not spending at the pace that I would like or had planned here. We've got a number of investments in our growth initiatives in the second half that should pick-up the spend there. Duncan, any comments on the spend piece?

No, no. I mean, I think you're exactly right. We do intend, as we talked about, continuing to invest both headcount and kind of other spend there. And then also just to echo your remarks on the reporting. I mean, looking into that stuff tracking, reporting that stuff, demonstrating our success, it's definitely something we want to kind of look into and trying to build more metrics around.

Great. Great. I appreciate the color that is not easy to define exactly what's new in the world that's still customer. Great. Thank you very much. Looking forward to the Analyst Day.

Excellent, George. Thanks.

We will take a follow-up question from Peter Wright from Intro-act.

Great. Thank you. A quick one, your cash is running higher than I would have expected at the beginning of the year. Do you guys have kind of a target or guesses to where cash might be at the end of the year and in light of that, any color that you're willing to share with us on the activity on the – on the potential acquisition side or just activity there in general? Thank you.

I mean, I can talk a little bit about cash and then, I'll kind of throw a little bit to Nick on the second part there. Yes, I mean, Q2 was a very strong cash quarter. I would expect Q3 to not be quite as strong, but still fairly strong, to be honest, with respect to converting income into cash. So, we'd expect our cash offers to continue to grow over the course of the next couple of quarters here.

Yes, absolutely. Thanks, Duncan. And then on the acquisition front as I've communicated and part of our strategy is strategic acquisitions and partnerships, and we are very active on that front out there and nothing to report yet, but when the time's right, we'll be happy to share and communicate our activities in these areas.

Thank you so much.

We got it, Peter. Thanks.

[Operator Instructions] It appears there are no further questions at this time. I'd now like to turn the call back to Mr. Nick grant for closing remarks.

Thank you, operator, and thank you all for your interest in inTEST. We appreciate you listening in, and I want to thank the entire inTEST team once again for delivering another solid quarter. We are laser-focused on capturing growth and driving investments, which will position us well long-term. If you have any further questions, do not hesitate to reach out to me, Duncan or Laura. And we look forward to updating you on our progress and report our results for the third quarter in early November. And seeing you at the events Laura mentioned during the beginning. Stay safe and healthy everyone. Thank you,

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.