Good day and welcome to the inTEST Corporation’s Third Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions.] Please note today’s event is being recorded. I would now like to turn the conference over to Shawn Southard, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone. We appreciate your time today and your interest in inTEST Corporation. Here with me are; Nick Grant, our President and CEO; and Duncan Gilmour, our Chief Financial Officer and Treasurer. You should have a copy of the third quarter 2022 financial results, which we released earlier this morning. If not, you can access the release, as well as the slides that will accompany our conversation on our website at ir.intest.com. After our formal presentation, we will be opening the line for Q&A. If you’ll turn to Slide 2 in the deck, I will first review the Safe Harbor statement. You should be aware that we may make some forward-looking statements during the formal discussions, as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed by the company with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. During today’s call, we will also discuss some non-GAAP financial measures. We believe these will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliation of non-GAAP measures with comparable GAAP measures in the tables that accompany today’s release and in the slides. With that, please turn to Slide 3 and I will turn it over to Nick to begin. Nick?

Thank you, Shawn, and good afternoon, everyone. Thanks for joining us for our third quarter 2022 earnings call. We delivered another solid quarter that we believe demonstrates strong execution of our 5-Point Strategy as we focus on growing in our target markets, delivering quality engineered solutions, and leveraging our expanding sales force. The entire inTEST team has been working hard and staying focus and I want to thank everyone for their perseverance. In our third quarter, revenue grew 46% year-over-year to another record level of 30.8 million. Organically, revenue grew at an impressive 23% year-over-year. We believe our strong results are indicative of the success of our 5-Point strategy that directs our efforts in our markets, as well as keeps us on track and well-focused. In fact, our focus is enabling us to make some excellent inroads as we increase our customer base, drive innovation, deepen relationships with existing customers, and expand our geographic reach. Demand remains strong for our innovative solutions in the front-end of the semi-market, specifically in silicon carbide crystal growth applications. Sales to this market more than doubled over the prior year. The significant growth in demand for our induction heating solutions used in silicon carbide crystal growth reflects the advantages of our technology in this application combined with the rapid expansion of silicon carbide as a more efficient and powerful semiconductor material. We continue to make positive inroads in back-end semi as well with our test and thermal solutions. Back-end semi sales were up 17% versus a year ago and up 23% sequentially. As a reminder, our test solutions in this space primarily serve analog and mixed signals semiconductor production where demand has remained elevated. Our exposure is minimal in the memory and microprocessor space, which some companies are reporting is currently at overcapacity. We continue to make excellent inroads in the EV market, both with our organic and acquired businesses. Likewise, we have expanded our presence in defense and life sciences with our acquisitions and as a whole are benefiting from the strength in these markets. Of note, we surpassed our previous backlog record with 47.9 million in backlog at the end of the quarter. With that, let me turn it over to Duncan to review the financials in more detail. Duncan, over to you.

Thank you, Nick. Starting on Slide 4. Revenue for the third quarter 2022 was 30.8 million, up 46% on 9.6 million versus the same period last year and at the top end of our guidance range of 29 million to 31 million. This revenue growth of $9.6 million comprised 4.8 million from the acquisitions made in the fourth quarter last year and 4.8 million from legacy inTEST operations, representing 23% organic revenue growth. Both legacy operations and acquisitions contributed to growth in nearly all our target markets. Our acquisitions were the main contributor to growth in the security, auto/EV, life sciences, and defense markets. And this broadening contribution is indicative of the company's strategy to diversify and expand revenue with new customers and from new markets. As Nick mentioned, we are also benefiting from secular trends in the segments of the semiconductor industry that we serve. Supply chain and logistics challenges were similar to recent quarters and we estimate this impacted Q3 2022 revenue negatively by approximately $1 million. Our teams continue to address these challenges admirably and have demonstrated great tenacity and ingenuity in order to continue to meet customer expectations. Moving to Slide 5. Gross margins were 45.2% in the quarter, tightened from the prior year and trailing periods, reflecting changes in product and channel mix. We also continue to manage through operational inefficiencies and material cost headwinds created by the ongoing supply chain challenges. The strengthening U.S. dollar has also had an impact on margin. We believe our current business mix will continue to deliver gross margins in the mid-40% range, which is consistent with our long-term plan to deliver 20% segment operating margins. As you can see on Slide 6, our operating expenses were relatively consistent with our trailing second quarter. The 2.9 million increase over…

Thanks Duncan. Orders for the quarter were up 55% to 32.7 million over last year's third quarter as overall demand for our products and solutions remain strong. In fact, this is the fourth quarter in a row that we've had a book-to-bill ratio over 1. Year-over-year, demand was strong across nearly all of our end markets, especially in semi, defense, security, and life sciences. Orders for the semi market were up 44% year-over-year to 19.2 million. Nearly half of the increase over last year was related to silicon carbide and other front-end applications. Back-end orders remain strong achieving 27% year-over-year growth. As I mentioned earlier, we are especially encouraged with the benefit of the secular trends in the particular segments of the semiconductor industry in which our technologies are applied. Demand for our products from the defense and space industries has been strengthening where we have broadened our exposure to both of these industries with our acquisitions. Defense Aerospace orders were up 66%, sequentially. Security also had strength in the quarter and is a relatively new market that we gained through the acquisition of image and data capture technologies. As to our record backlog, we expect to convert approximately 55% to sales in the fourth quarter, which represents about 80% of our expectations for the quarter. That leaves over 20 million of backlog that we expect to convert in 2023. Historically, only about 20% of our backlog extended beyond the current quarter. The longer-term backlog represents customers securing our production capacity and rapidly growing markets such as silicon carbide crystal production. Let's look at the fourth quarter expectations on Slide 10. We've been executing the plan and we have a fairly solid line of sight to the year-end at this point. For the fourth quarter of 2022, we expect revenue…

Thank you. [Operator Instructions] Today's first question comes from Jaeson Schmidt at Lake Street. Please go ahead.

Hey, guys. Thanks for taking my questions. Just want to start with that backlog number because really impressive how that continues to grow? Is the end market mix within that backlog fairly similar to your current revenue composition?

Hey, good morning, Jaeson, and thanks. So, yes, the backlog mix is very similar to what we delivered in Q3 and that's why you kind of look at the Q4 forecast and it's in-line, you know to the, what we were able to deliver in Q3. Duncan, any comments?

Yes. I would agree. It's generally representative of what you're seeing. If anything, there might be some slightly longer-term components the front-end semi space, which has been exceptionally strong, but for the most part, representative of our actual results.

Yes. And again, the record levels we're at now, quite a change from when I joined the company. And the reliance we were on booked ship in a quarter. So, it's great to have this backlog level and visibility looking out a couple of quarters.

Okay, got it. And then in your prepared remarks, Nick, you mentioned gaining new customers due to your 5-Point Strategy, just want to be clear, are these customers that you know are simply more engaged with like, sort of legacy inTEST customers that you're prioritizing or just, sort of the new customers you've been able to gain given the broader product portfolio from the acquisitions?

No, that's a great question. And you're exactly right. Expanding our customer base is one of our key strategies and we're making a number of efforts across all businesses. So, it's really a mix there, Jaeson, that we are penetrating some accounts that were legacy inTEST accounts that may have shifted away and then are coming back to us. So, we see that across some of the businesses there, but we're also going aggressively after new customers, new markets and new applications with technology. So, that's helping to drive expansion there. Duncan, anything you want to…

I would also say the nice thing that seeing is, we're seeing new customers across all of our businesses. I mean directionally looking at maybe 25, 30 new customers in the quarter, but that split – nicely split across our three operating segments.

Okay. Got it. And then just the last one from me and I'll jump back in the queue. Just looking at gross margin, it seems to be a slight down shift from, kind of your expectations in Q2 and fully recognized there's a ton of dynamics going on. Can you just help us understand, sort of what is the most impactful? Obviously, the supply chain. Duncan, I think you mentioned some FX headwinds, but earlier this year, there seemed to be some slight headwinds from sort of the acquisition integration. I just want to make sure I'm clear that it's less the acquisition and more just, sort of the macro dynamics out there?

Yes. I mean, I think there's four main elements, Jaeson, and I'd rank them in order as product mix is still a big driver just depending where that, kind of falls out. Secondly, we talked a little bit about customer mix and what we mean there is just how much we sell, selling maybe through distribution versus kind of direct, you might have noticed our operating expenses we’re actually a little bit lower than we anticipated and what you're seeing there is some of that channel mix. So, we sold a bit more through distribution than expected. The flip side of that is the operating expenses were a little bit lower. So, from a bottom line perspective, that item is neutral. Supply chain talked about you're continuing – although the global macro supply chain seems to be moderating, we're a bit more localized and the impacts we're seeing really much the same as in prior quarters. So, still kind of working through those inefficiencies. And then FX is probably the least impactful of those, but a real item. I mean, most of our revenues are actually USD, but we have enough where we had a small maybe 30 basis point impact on margin just from the strong U.S. dollar.

Okay. That makes a lot of sense. Appreciate that color. Thanks guys.

Thanks Jaeson.

Thank you. And our next question today comes from Peter Wright at Intro-act. Please go ahead.

Great. Congratulations on another record quarter, guys. Thank you for taking my questions.

Thanks Peter.

A couple of questions. First question is, kind of taken on the back of Jaeson’s question, the backlog does continue to provide you guys with more visibility, Nick, I'm hoping you could help us understand as you're tracking ahead of, kind of your plan if you look at – if I was just to linearize kind of the growth expectations of what you’ve guided to on a target model in 2025. How do you think we get there? If you can reflect on, kind of cyclicality versus, kind of secular growth, do you think your business now is diversified as such that you can continue to, kind of grow this business year-on-year to hit that target. And if so, helping us understand kind of what that mix is? Looking within the customer mix? Is it new geographies? Is it new product mix? Is it new markets? What continues to drive this continual record quarter-after-quarter numbers out of you guys?

Yes. No, great question there. And as you know, we are a very different company than we were in the past. So, the backlog is really comprised of our efforts and focus on our targeted key markets that we believe have these strong secular tailwinds, as well as the markets that we have the right technology and can bring innovation to create further demand of our products. Markets like the automotive/EV, like the silicon carbide, like Medical Cold Chain that we’ve acquired and brought into our business. And security is another area with the acquisition. So, these are markets that we believe positions us well to drive growth and we're demonstrating that across our businesses quarter-after-quarter here. And so, I really do believe it's the strategy paying off that's driving this because this is where we wanted to go and this is where the business is heading.

So, it does seem when I look at, kind of the makeup of the segments that you have. It's not that this record quarter is driven by everything running red hot. You've got some businesses that are still ebbing blowing and just the diversity of your business is driving more stable growth, more secular growth as opposed to cyclical growth going forward, is that a fair takeaway?

Yeah, no, absolutely that is one of our strategies. It was to drive diversification and we're having really solid success in that area and that helps the ebb and flows, if you will, by being in the right industries and the right segments of those industries that can drive growth for us on that. So, the diversification is absolutely part of it.

Great. And my other question is, on gross margins. If you can help us understand the impact, four of the 5-Point Strategies I get very clearly. The one that I've got a question on is, kind of service and support and kind of your efforts there on monetizing service. Any update there? And then kind of a second part to that gross margin question, given inflation is high-single digits, can you help us understand, kind of how much your prices have moved this year and kind of any color on expectations going forward there?

So, let me touch on service and then I'll let Duncan address some of the pricing questions there, but service, we are making some good in-roads here. One of the focus areas we initiated this year was really to drive master service agreements across some key accounts. And really pleased with the results to date. Listen, within the quarter, we had one of the businesses capture over a $1 million of service revenue from master service agreements. These are multi-year agreements out there. Obviously, those revenues will be recognized over time on that, but really making some progress on that front and also challenging the teams to position us better from driving that customer satisfaction, having inventory closer to customers etcetera. So, seeing the needle move there, which is great. Duncan, you want to touch on…

Sure. Pricing, I mean, as you may have heard inflation is still out there. The battle connect continues in terms of keeping up from a pricing standpoint. We do look at this pretty closely in terms of understanding our margins and making sure we're not leaking and assessing your product mix versus are we pricing aggressively and so on. And I'd say, the teams certainly are driving hard to keep up with that. Another thing I'd highlight is that, as I mentioned actually earlier, we do invoice primarily in USD even to our overseas customers. So, that actually gives us a bit of a competitive – from a competitive standpoint and that's kind of challenging from a pricing standpoint given the strength of the U.S. dollar. So, that's something we certainly also have to take into account in some of the foreign markets, but it's still a very dynamic environment out there, Peter, from a pricing standpoint and we continue to chase that as hard as we can and that will continue.

That's fantastic color. Thank you, Duncan. One last follow-up Duncan for you, cash generation. Very strong across the stack, two places where that cash is residing right now through the year, maybe a little more. Any color on, kind of inventory, working capital inventory and accounts receivable? Are you comfortable where those are? How should I think of free cash flow generation in the next immediate period ahead of us?

Yes. No, absolutely. So, it was nice to see we did generate 1.4 million cash from operations in quarter. The investment in working capital moderated in Q3. We still did drive dollars into working capital. Inventory is where we've disproportionately invested. As I said, we continue to have to, kind of manage through supply chain challenges. I would expect our investment in working capital to continue to moderate going forward even though we continue to grow. So, what we saw in Q3, which was positive cash from operations, I would expect to see that that kind of dynamic continue as we're able to, as I said, reduce our investment in working capital, which really as you mentioned has been the main, kind of drain on cash dollars during the first three quarters of the year here.

Yes. And I would just add Peter that inventory is in one area that as Duncan highlighted, we've been investing, but we are comfortable that we don't see any kind of obsolescence issues or anything like that with the products that we're bringing in-house given, you know it really is to support our backlog and our commitment on lead times to customers.

I should also mention on the receivable side, which you also touched on. I mean, we're not seeing any challenges around collections, any concerns there either. So, yes, the money has gone into working capital, but we feel okay about that.

That's fantastic. Good growth business, guys. Congratulations.

Thanks Peter.

Thank you. [Operator Instructions] Our next question today comes from Robert Marcin with Marcin Asset Management. Please go ahead.

Hey, gentlemen. Congratulations on another excellent quarter.

Hey. Thanks, Robert.

As you guys have started planning for next year, is there any particular businesses or new products or geographies, the things that Peter was talking about in more detail that set us up for our organic revenue growth for 2023?

Great question there. And we've talked about this in the past as kind of a three horse race between our segments there. All three in attractive growth areas – growth markets out there Some seeing some really strong success with the front-end silicon carbide, I would say, our process technologies is positioned extremely well there. The environmental technologies making some nice inroads in our life sciences efforts there. And when I look into our electronic test, our electric vehicle exposure, and battery testing areas, they're really positioning us well. So, I do expect all three to continue to drive growth for us here, going forward, but as one, I'm going to exceed the others substantially. I don't see that right now.

Okay. Thank you. What inning would you say the silicon carbide capacity build-out is in? I know people are really pushing hard to grow capacity. The major semiconductor IDMs are really pushing hard, and even Wolfspeed is having some problems. So, there's – it's not simple nor easy. Do you think this is in the first or second inning or in the fourth inning?

Yes. Another great question. And you're right. It's not easy. It's a very controlled environments required to grow these silicon carbide crystals out there, which is why our technology is being preferred out there, but from what we're hearing from our customers, this is very early innings here. Some were talking about demand continuing to drive capacity expansions through the end of the decade. So, yes, it feels like we're in the early innings for sure.

All right. Thank you.

Absolutely.

And ladies and gentlemen, our next question comes from Gregory Weaver at Invicta Capital. Please go ahead.

Hey, good morning, gentlemen. Just Duncan on the channel mix you referenced, what products typically are heavier in the distribution channel?

Yes. So, in particular, some of our thermal stream products, which are back-end semi coming out of our Environmental Test segment, those are heavily skewed towards distribution. Also, some of the North Sciences products, one of the new acquisitions, the new product lines there. Again, that's a very heavy, kind of distribution, kind of business, which we expect to kind of grow over the course of the next few quarters. I mean, I think those are the primary…

I would add our image capture is also an area that we've been developing that go to market and adding more distribution through for those cameras and video solutions out there as well. So, yes, those three are the primary product families, if you will, that are going through the distribution.

Got you. Okay, thanks. And on the auto/EV segment, you had a prior couple of quarters some pretty strong growth and it's backed off some here, any color on the volatility there or is it just kind of inventory at your end customers, or…?

Yes. No, it's more of – yes, exactly that. They've got to get the – their line’s up and running the expansion, which relies on a lot of external pieces of equipment on that side of it. So, your comments is spot on. It is a lumpy – kind of a lumpy business, but our activity there remains strong. And it's just more of a timing.

Got you. And last one here is, again, good to see more of the silicon carbide talk here. You inferred that you're booking out into 2023 at this point for especially the silicon carbide, could you maybe give us a little color? Are the customers concerned about capacity or supply on your end? And is there any limitation on growth that they're concerned about?

More so, what we're seeing is they want to secure the long-lead time items. Some of these things have flipped out six months for electronic components and other products that are going into our solutions in that. So, we're seeing them placing orders to ensure that we get those things in the pipeline and commit to that inventory.

Okay. Is that – so listen, is that then inbound to you or you telling them, hey, you better give me more visibility if you want me to buy this stuff?

I'd say, it's a combination. They're talking to us about what their plans are and we're telling them to support them on that that we need to make sure we've got this pipeline material flowing and it's a joint discussion and decisions being made.

And any kind of generic color on in terms of the diversity of the business there, in terms of the number and customers that are pulling now and kind of maybe reorder activity and such?

Yes, that continues to expand and I believe we added three more new customers in the last quarter or at least the last two quarters in that space. And yes, so the investment in this part of the market is in its early stages and we'll continue to benefit from that.

Great. Thanks. Good quarter.

Thanks a lot, Greg.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Nick Grant for closing remarks.

Thank you, [indiscernible]. In summary, we're making excellent progress with the execution of our 5-Point Strategy and I'm grateful to the entire inTEST team for their resiliency and persistence to exceed customer expectations. It is this dedication that enabled us to deliver our strong first half results. First, I should say nine months results. You can note on Slide 14 that we'll be presenting at the Southwest Ideas Conference on November 16 and at the CEO Summit in New York on December 13. Perhaps we'll see some of you all there. We really appreciate you taking the time to join us on our call today and your interest in inTEST. Thank you all and stay safe.

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.