Greetings. Welcome to the inTEST Corporation Third Quarter 2023 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Shawn Southard, with Investor Relations. You may begin.

Thank you. Good morning, everyone. We appreciate your interest, and thank you for sharing your time with 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 2023 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 intest.com/investor-relations. After our presentation, we will open the lines for Q&A. Now please turn to Slide 2, and I'll 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 and as well as other factors that could cause actual results to differ materially from what is stated here today. These risks, uncertainties and other factors are provided in the earnings release as well as in 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 reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today's release and slides. And with that, please turn to Slide 3, and I'll turn the call over to Nick.

Thank you, Shawn, and good morning, everyone. Thanks for joining us for our third quarter 2023 earnings call. The inTEST team has delivered another quarter of strong results by executing well on our five-point strategy for growth. I want to thank and recognize our team members for their commitment to our strategy, dedication to executing to the plan and their hard work delivering these results. Their exceptional performance allowed us to reach another record for quarterly revenue, achieving $32.7 million in the third quarter. This growth reflects strength in a number of our markets. Our Environmental Technologies division saw strong shipments to the defense aerospace market in the quarter versus the prior year. Sales remained robust for our induction heating solutions for front-end semi mainly supporting silicon carbide crystal growth and wafer epitaxy applications. Likewise, we saw solid shipments to the auto EV across all three divisions. I believe our focus to grow our market share through geographic expansion, market diversification, product development and deeper customer reach is reflected in this quarter's results. Our efforts in these areas are ongoing as they are key elements of our five-point strategy. As an example of our strategy in progress, let me point to the investments for growth and improved productivity we have made within the businesses we acquired in 2021. Our recently announced new facility supporting Acculogic's design, development and manufacturing of electronic circuit and EV battery test systems will position us well going forward. We believe this consolidation from three buildings to one will drive better collaboration, enhance customer service and improve operational efficiencies. Another example is the progress we're making regarding new products at videology. Since the beginning of the year, we have launched over half a dozen new cameras, including their SCAiLX platform which is the first of its…

Thank you, Nick. Starting on Slide 4. As Nick noted, revenue for the third quarter was a record $32.7 million, up 6% versus the same period last year and in line with our guidance. The $1.9 million year-over-year revenue growth reflected strong sales across most markets and technology offerings. Semi revenue was up 3% to $19.8 million. This increase was driven by front-end induction heating solutions for silicon carbide crystal growth and wafer epitaxy applications. The Fed's aerospace revenue increased 77% to $3.4 million. Moving to Slide 5. Gross margin, 46.9% in the quarter increased 170 basis points compared with the prior year period, driven by higher volume, favorable product mix, improved pricing and continued focus on productivity improvements. Compared with the trailing quarter, gross margin increased 70 basis points, primarily due to a favorable product mix. Our trailing 12-month gross profit of $60.4 million grew $7 million with gross margin of 46.6%, in line with our outlook for full year gross margin of approximately 46%. As you can see on Slide 6, our operating expenses were up $1.3 million year-over-year and increased as a percent of sales to 36.9%. The majority of this was driven by an increase in corporate development expense. Turning to Slide 7. You can see our bottom line and adjusted EBITDA results. We had net earnings of $3 million or $0.24 per diluted share, which was up from $2.5 million or $0.23 per diluted share in the prior year period. Adjusted EBITDA was $4.6 million, which improved 3% from last year, while adjusted EBITDA margin contracted 50 basis points to 14%. On an adjusted basis, non-GAAP EPS was $0.28 per diluted share, similar to the second quarter of 2022. Adjusted EPS reflects adding back tax-effected intangible asset amortization related to acquisitions, which on an after-tax…

Thanks, Duncan. On Slide 11, we would like to highlight the solid progress we are making towards our stated 2025 revenue goal of $200 million to $250 million. Even with our tempered Q4 guidance, we expect to have taken inTEST from less than $55 million in revenue in 2020 to over $125 million this year. We will have more than doubled revenue in three years while also driving strong earnings growth. In fact, the compound annual growth rate of our sales will be over 30% during this time frame. We continue to expect to drive organic growth with our base business in the coming years, and we anticipate future acquisitions will augment that growth, allowing us to reach our 2025 revenue goals. Our pipeline of acquisition and partnership opportunities remains active, and with over $40 million of cash on hand and a $30 million term loan facility available, we believe we have the sufficient flexibility with our capital structure to execute on our plan. Slide 12 shows how we expect our revenue growth will translate into strong earnings growth. Our plan remains the same, reiterating that our strategy is primarily focused on scaling the company and maintaining our top-tier margin profile. Let me sum up on Slide 13. As we have noted throughout our prepared comments, our five-point strategy is delivering results for shareholders. Our engineered solutions enable our customers to improve productivity, solve challenging test requirements or create more effective solutions for production of their own portfolio of products. Our technology segmented organizational structure has generated focus and we are driving greater collaboration across the company. As a good example, a couple of weeks ago, a joint sales call was conducted with teams from our Electronic Test and Environmental Technologies divisions who were working together to solve both test and thermal challenges for a new customer. It's great to see this type of collaboration in action and to be able to leverage our broader portfolio to position inTEST as a more value-added solutions provider. The inTEST team delivered an outstanding quarter operationally. We continue to unleash the potential of inTEST on our journey to becoming a supplier of choice for innovative test and process technology solutions. Despite the shift in demand last quarter, we are confident our focus is on the right target markets and applications that create a path to achieve our long-term growth aspirations. We continue our efforts in pursuing acquisition opportunities to enhance our product offerings, expand our addressable markets and deepen our presence in targeted industries. And our balance sheet is in a solid position to support our efforts. With that, operator, let's open the lines for questions.

Thank you. And at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jaeson Schmidt with Lake Street. Please proceed with your question.

Hey guys, thanks for taking my questions. Just want to start on your comments regarding sort of slowing customer demand. I know you highlighted the industrial and semi markets as sort of being the culprits. But just curious if this is broad-based or were concentrated at a few customers within each end market?

Hey, good morning, Jaeson. Yeah. I would say that it is across a number of industries and a number of customers that we've kind of seen this, I'd say, delaying of projects and we kind of highlighted a couple, like you said, I mean, in industrial and semi being noticeably there. But in general, that's why we kind of blamed it more on macroeconomic conditions out there. It's not something that a customer and they're just -- they're all kind of just getting more cautious.

Okay. That's fair. And then just following up on that. I mean, obviously, there are some delays in purchasing decisions, but are you seeing order cancellations at all?

No. We haven't had any order cancellations at all. And it's just taking longer to get these through. I can tell you, we look at our funnels and our funnels are extremely healthy. Q4 being higher than it was in Q3. So it's just timing-wise that really is dictating the cautiousness, if you will.

Okay. That makes sense. And then just the last one for me, and I'll jump back in the queue. Following up on your comments on M&A, you guys always have a pretty active funnel. But curious if you're seeing valuations starting to come in a bit or if just the number of opportunities are increasing out there?

I would say for a number of quarters now, we've seen that both valuations becoming more attractive. We're pretty disciplined in our approach on acquisitions here, but aligning better with our positions, if you will, and opportunities are pretty active out there. So we're pleased with where we are with our M&A here.

Okay, perfect. Appreciate the color, guys. Thanks a lot.

Yeah. Thanks, Jason.

Our next question comes from the line of Peter Wright with Intro-Act. Please proceed with your question.

Great. Good morning, and thank you for taking my question. Good job maintaining good operating leverage in an increasingly difficult environment.

Thanks, Peter. Good morning.

Nick, my first question -- two questions for you and a question for Duncan. The first question for you is, if you look into the crystal ball and the conversations you're having with your sales guys, do you think that the softness that you experienced in 3Q is more from the procurement departments being proactively risk off? Or do you think that they've already experienced kind of a softening in demand that they're reacting to? And that question is kind of in light of your comment that there's already been some rebooking in the fourth quarter. So I'm looking at kind of the duration risk that you see from your sales force if they have any color on that for how long this could last. The second question for you is on your new cameras. Can you share anything about the ASP or how you're looking at kind of the true value proposition, whether it be margin mix or how should we look at how the new products are creating incremental value for inTEST if there's any story there? And then, Duncan, on the operating leverage side, I see you're not reacting to the softness yet holding operating expenses where you'd expect them to be in the fourth quarter. Can you just remind us if breakeven is still $26 million-ish and what would it take for you maybe to react on that side? And then one little follow-up for you is, do you expect free cash flow to be positive in the fourth quarter? And can you give us a target for free cash flow for the year? That’s all.

There's a lot there, Peter, all right. So let's start with the demand slowing and we truly believe it is more just getting the approvals on these CapEx projects. I mentioned our funnel activities are strong, and we've seen a nice increase quarter-over-quarter. So the opportunities are there, the projects that they've got identified are there. And it's just a matter of CapEx budgets, are the projects going to meet the internal rate of returns and getting the right signatures that are slowing things there. We haven't seen our funnels decreasing, indicating a broader slowdown in demand or anything like that. Relative to the cameras, the new cameras, these cameras ASPs are very different from our other more CapEx type projects and solutions that we have out there. These things are $1,000 or less in many cases. So it does change our overall ASP. But in general, we're getting decent margins on these things. And with some of these redesigns, we've improved margins with some of our manufacturing abilities and cost components going into this thing with these new redesigned cameras in it. So Important to note is the -- this industry, this video space is constantly evolving new sensors, new components being updated, et cetera, et cetera. So we think we'll be seeing quite a more frequent product launches out of this business versus what it had done in the past in order to keep the cameras up-to-date and generating the demand for us going forward. Duncan, do you want to tackle the other?

Yeah. So I think you're in the right ballpark, Peter, in terms of your breakeven that $26 million, $27 million at top line. So that makes sense. On cash flow, really happy with the working capital improvements that the business has been driving. We're seeing the benefits of that in the quarterly cash flow number for Q3. Obviously, we're projecting a slightly softer P&L picture in Q4, but we're continuing our work on working capital efficiency, and I would still expect this to be positive from a cash perspective, although we're not guiding specifically on that number.

Wonderful, guys. Thank you very much. If I could have one last follow-up. On the videology cameras that you have, what is driving the new generations that you're producing? Is it new markets? Or is it improved manufacturing and margin profile? What is driving it?

It's all of the above. The SCAiLX product that I mentioned is really a first-of-its-kind, applicable across all markets or a lot of markets out there with the edge AI computing capabilities. So it's really unique and not targeted at just one particular application. Some of the others are more specific like our pipe inspection cameras, these are really embedding some upgraded technologies to improve performance of those cameras to help those particular customers improve their ability to identify issues in that. So it's a combination. Cost is also an area that we're driving the team to improve as well. So, yeah, all of the above.

Wonderful. Great. Thank you guys.

Our next question comes from the line of Ted Jackson with Northland Securities. Please proceed with your question.

Thanks. Good morning, Nick. Good morning, Duncan.

Good morning, Ted.

I just have one question. Everything I had on my list got checked off. But we've got a weaker fourth quarter. And again, you are correct, you are not the only company that is seeing this kind of slowdown cautiousness within their business and plenty of companies have made very similar comments and taken very similar actions with regards to guidance. But my question for you is, now that we're having this disruption in the business, if you would, with regards to the fourth quarter, does it impact -- I know you're not providing guidance for '24. But I mean, does it change the seasonality that's typical in the business? I mean, would we still expect, based upon your fourth quarter guidance to see a first quarter down sequentially from fourth quarter? That's really my only question.

I mean, I would say, I think as we've talked about before, we don't really see seasonality per se. Obviously, we're as many other companies are running into some unfavorable market conditions here. But seasonality isn't, I would say, something that is overly dramatic with our business.

Well, I mean if I look at it, I mean, the last couple of years, it seems like generally, that absent acquisitions, the first quarter has not been the stronger of your quarters. So it's all -- but you're -- so no, you're not saying that you don't have an answer for me on that.

No, I'm saying we don't see seasonality isn't a dynamic we see. Obviously, we are impacted by market conditions as every player in the marketplace is.

Okay. That’s it for me. Thank you.

Yeah. Thanks, Ted.

And it looks like we have reached the end of the question-and-answer session. And I'll now turn the call back over to the President and CEO, Nick Grant, for closing remarks.

Thank you, Shamali. Before we close, I want to express my sincere gratitude again to our global team as they continue to deliver outstanding results. And finally, we'll be participating at the Southwest Ideas Conference in Dallas on November 15 and the CEO Summit in New York on December 12. We hope to connect with some of you at these events. We appreciate you taking the time to join us on our call today and for your interest in inTEST. Thank you all, and have a great day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.