Ladies and gentlemen, greetings and welcome to the inTest Corporation third quarter, 2024 financial results conference call at this time. All participants are in a listen-only mode, a brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference, please press star and zero on the telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, [Shanshan] Investor Relations. Please go ahead.
Good morning, everyone. We certainly appreciate your interest in inTest Corporation and thank you for sharing your time with us today.
Joining me on our call are Richard N. Grant, Jr, our President and Chief Executive Officer and Duncan Gilmour, our Chief Financial Officer, Treasurer and Secretary. You should have the earnings release that went out this morning as well as slides that will accompany our conversation today. If not, you can find these documents on the investor relations section of our website http://www.intest.com/.
Please turn to slide 2. As I review the safe harbor statement during this call management may make some forward-looking statements about our current plans, beliefs and expectations. These statements apply to future events that are subject to risks uncertainties and 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.
Also as covered on slide 3, management will refer to some non-GAAP financial measures. We believe these will be useful in evaluating our performance. However, you should not consider the presentation of this additional information in isolation or as a substitute for results prepared. In accordance with GAAP, you can find reconciliations of non-GAAP measures with comparable GAAP measures in the tables that accompany today’s release and slides. Now please turn to slide 4, Nick. I’ll turn the call over to you.
Thank you, Sean and good morning, everyone. Thanks for joining us for our third quarter, 2024 earnings call first. I would like to thank the entire inTest team for their continued efforts executing on our strategy. We are adding new customers. We continue to optimize our channels to market, and we are driving innovation to differentiate our solutions. These efforts are helping offset some of the softness in a few of our key end markets.
We are managing well through the current semiconductor cycle and benefiting more on our diversified markets including automotive life sciences and consumer electronics where our positions were strengthened by the acquisition of Alfamation, the inauguration continues to progress. Well as the teams are focused on driving product and technology synergies, leveraging our supply chain to improve cost and performance, as well as exploiting opportunities across the broader customer base.
A highlight in the quarter was achieving gross margin of 46.3% on revenue of $30 million which was impacted by $2 million in shipments being delayed into the fourth quarter. During the third quarter, acclimation contributed $5.4 million in revenue and sales to our diversified markets showed strength while semi revenue demonstrated improving trends in the back end.
In fact, sequential growth in backend semi outpaced the decline in front end the 570 basis points expansion and gross margin compared with Q2 was driven by favorable product mix, improved volume from higher margin back end semi and cost actions taken to adjust to market conditions.
Our businesses have been aligning their cost structure with current market conditions to head count reductions, less discretionary spending and insourcing activities since the beginning of 2024. Head count in our base businesses has been reduced by 10% product mix. And our cost management efforts are reflected in our sequential improvement and operating margin, expanding 60 basis points and adjusted EBIDA margin, improving 180 basis points.
Turning to slide 5, I’ll review orders and backlog orders have modestly improved through the year and the quarter orders in Q3 were $28 million including $3.9 million from Alfamation, stronger demand in Auto EV defense, aerospace, industrial and other markets outweighed the weakness in semi Encouragingly for the third consecutive quarter. Back end semi orders were up sequentially showing further signs of coming out of the trough. This improvement helped to offset the current pause we’re experiencing in front end semi backlog has improved over the prior year period and was up $5 million. Recognizing the $14.7 million contribution from the acquisition of Alfamation which had an elevated backlog at closing.
As mentioned in the past, Alfamation orders can be lumpy as timing of their large multi system projects can vary quarter to quarter compared with the trailing quarter backlog declined as we worked down Alfamation backlog with that. Let me turn it over to Duncan to review the financials and outlook in more detail, Duncan over to you.
Thank you, Nick starting on slide 6. As Nick noted revenue for the third quarter was $30 million including $5.4 million from Alfamation.
The $0.7 million decrease compared with Q3 2023 was driven by a $7.1 million sales decline in semi that was partially offset by $4.5 million of growth in Auto EV primarily from Alfamation and improved sales in industrial and other markets. Sequentially, third quarter revenue decreased $3.7 million as approximately $2 million in shipments were delayed into the fourth quarter.
As we communicated last quarter was going to be the case revenue from malformation was down compared with an unusually strong second quarter. Meanwhile, semi-industrial and other markets demonstrated improving trends.
Moving to slide 7, gross margin of 46.3% for the quarter expanded 570 basis points. Sequentially driven by favorable product mix with improved volume and high margin backend Semi Solutions and cost actions. As Nick noted on a year over year comparison, gross margin was nominally unchanged on lower revenue on a trailing 12-month basis. Our gross profit was $53.3 million or 43.7% of sales. The decline reflects the weakness in higher margin semi sales.
As you can see on slide 8, compared with the prior year, our operating expenses were up $1.5 million, reflecting the inclusion of Alfamation operating expenses as partially offset by cost reductions and corporate development costs.
Sequentially, operating expenses were essentially flat turning to slide 9. You can see our bottom line and adjusted EBITA results for the quarter net earnings were $495,000 or $0.04 per diluted share adjusted net earnings were $1.2 million or $0.10 per diluted share adjusted EPS reflects adding back tax affected, acquired intangible amortization on an after-tax basis. Our acquired intangible amortization amounted to approximately $721,000 or about $0.06 per diluted share in the third quarter adjusted EBITA for Q3 was $2.4 million representing an 8.1% adjusted EBITA margin slide 10 shows our capital structure and cash flow.
During the quarter, we generated $4.2 million of operating cash capital expenditures in the third quarter were approximately $500,000 and the resulting free cash flow was $3.7 million. We ended the quarter with total debt of $16.1 million. This reflects a total debt leverage ratio of 1.8 X.
During the quarter, we repaid approximately $5.3 million of debt and repurchased approximately 141,000 shares at an average price of $7.38 for a total investment of a million dollars cash and equivalents at the end of the third quarter were $18 million down $2 million from the trailing quarter, reflecting net debt repayments and repurchase shares.
We continue to have $30 million available with our delayed draw term loan and an incremental $10 million available under our revolver turning to slide 11. As we review our outlook for 2024, we have tightened our full year outlook and now expect 2024 revenue to range from $128million to $131 million gross margin for 2024 is expected to be approximately 42% to 43% with expected operating expenses of approximately $53 million.
This includes intangible asset amortization. Expense of approximately $3.3 million or $2.7 million on a tax adjusted basis. Our expected effective tax rate remains at about 17% to 19%.
The implied fourth quarter results from the tightened guidance implies revenue of $34million to $37 million with gross margins of approximately 42%. Operating expenses including amortization are expected to be approximately $13.5 million total intangible asset amortization is expected to be approximately $900,000 and approximately $700,000 after tax or about $0.06 per share.
Based on the midpoint of our revenue guidance range, we are expecting EPS and adjusted EPS for the fourth quarter to be approximately $0.08 and $0.14 respectively. As a reminder, we simply adjust for tax affected amortization expense.
We still expect our capital expenditures in 2024 to run between 1% to 2% of sales.
As usual. Our guidance does not include the potential impact from any non-operating expenses such as corporate development that may occur from time to time. Nor does it include the potential impact from any additional acquisitions we may make with that. If you will turn to slide 12,
I will now turn the call back over to Nick.
Thanks Duncan.
While we have limited visibility beyond the fourth quarter, we believe we are seeing signs of stability in our targeted industries. The order pipeline has increased, reflecting some gradual improvement with back-end semi demand and larger automotive projects, we believe once we are past the elections and moving into the new year CapEx projects will likely increase across a number of industries.
The front end semi market which for us are silicon carbide and gallium nitride applications is currently paused. While the longer term picture for these power semiconductor materials is encouraging. There is a need for the market to improve efficiencies with the existing production lines, consume existing inventory and adapt to the changes in demand.
We are especially excited about the evolving gallium nitride opportunity as that technology delivers higher efficiency. In many high power applications, we continue to optimize our go to market by adding or upgrading channel partners that can drive higher sales while expanding our geographic coverage throughout the US and around the world.
In Southeast Asia. Our new Malaysia facility is coming along nicely and we’re already seeing the benefits from the engineers we have hired.
In fact, our environmental technologies division has recently received their first order for a new product that was designed by their team in Penang.
This modified thermal test solution was something that was on our new product road map for some time. But until now, we did not have the bandwidth to complete it. It’s great to see the team members making an impact in their first few months of being on board. I look forward to many more future successes from the team.
As noted in our five point strategy. Innovation is one of the keys to our success in our electronic test division, our automated manipulator with our in teledoc solution was recently installed at a key customer in Europe as an integrated solution that we expect could lead to many future opportunities.
In addition, our automated manipulator has been coupled with the latest test technology and is in the test phase at a large intelligent computing company and initial feedback is very positive. It’s our know how and expertise that differentiates us and opens up these type of competitive displacement opportunities.
Our process technology eco heat two induction heating system is being leveraged in next gen solutions for a number of key customers with its industry leading internal control and power delivery system which by the way leverages silicon carbide technology. Our eco heat two can lower system operating costs provide increased uptime and has built in performance diagnostics for asset health monitoring.
Despite the headwinds we are experiencing in some of our key markets. We are not sitting still. We are driving innovation. We are constantly working to optimize our go to market approach. We are capturing price for our value-added solutions and we continue to evaluate acquisitions that can complement or enhance our existing technologies.
In short, we are executing on our strategy with that operator. Let’s open the line for questions.
Operator
Thank you.
Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two. If you would like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Ladies and gentlemen, we will wait for a moment while we poll for questions.
The first question is from the line of Jaeson Schmidt with Lake Street Capital Markets. Please go ahead.
Hey guys, thanks for taking my questions. I just want to start on the order. Push outs. You highlighted, curious if those are concentrated at a couple of customers or if it is just more broad based and then I guess relatedly what end market is that related to?
Yeah, good morning, Jaeson. So, the roughly $2 million that we referenced in pushouts from Q3 to Q4 really were shipment delays that didn’t reach a customer by the end of Q3 and basically, arrived in early Q4 out there. So, that, that’s roughly the $2 million that we’ve referenced there with that said, you know, we have seen customers push out at front end semi, we continue to work with customers in that space on shipment that they placed orders. We’ve had in our backlog for a while on that. So just a comment, accommodating them, there is more so on the front side.
Got you and then related to the front end semi market, I know a high level, there are some kind of longer term tailwinds but just curious how you guys are thinking about when to expect a pick up there or is just visibility too clouded at this point?
Yeah, you know what we’re hearing from our customers and actually working with a number of them on their next gen solutions there is that they’re anticipating in second half of 2025 is when deliveries, additional deliveries would be needed at this stage, obviously, that can change, but that’s kind of the time line we’re hearing from the, from multiple customers in that space.
Okay. That’s really helpful. And then just the last one for me and I’ll jump back into Q I mean, really nice gross margin performance. I know you highlighted sort of the account reductions and in sourcing and some just improved efficiencies. Just curious how much of this could potentially be permanent. I have you. I mean, when the demand profile picks back up is this sort of the new level for gross margin?
Yeah, I mean, it’s tough to break down all the elements. Jaeson as you know, certainly the biggest driver of that very strong gross margin, but we also see the benefit of the cost initiatives that Nick highlighted, I mean, very roughly, but it is hard to discern there’s probably a better percentage point of benefit from, from cost actions and things like that flowing through that number with the majority of the uptick being being the mix factor with the higher back end semi that we highlighted.
Okay. No, I appreciate that color. Thanks a lot, guys.
Thanks Jaeson.
Operator
Thank you. The next question is from Ted Jackson with Northland Securities. Please go ahead.
Good morning. I’ve only got a couple of questions. Actually, a couple of mine were hit just now. First of all, just when you made a comment about the head count reduction being down 10% in your base businesses, can you just define what the base businesses are?
Yeah, it’s, our collective companies outside of Alfamation at this stage, they’re all part of our, our base businesses. Now, some of those five companies, you know, are not being impacted severely as the other. So I would say, you know, collectively the 10% there, but it’s more weighted towards businesses that are seeing the downturn in the front-end semi space and, and the more industrial slowdowns that we’ve seen taking some actions.
Okay. And then, you know, with the reduction like that, how do we see that playing through into the financials? I mean, we can, I mean, I haven’t gone through it, and we really dug and try to put my fourth quarter together again. So maybe, I mean, I assume we’ll see some of this in the fourth quarter. Does it play out like almost immediately? Is it something that we’ll see an additional impact as we get into the first quarter of 2025?
Yeah.
And just to provide a bit more clarity. Last quarter, we talked about a more specific action about $1.2 million of annualized benefit around 12 head count. I think we, we referenced which took place towards the end of last quarter starting to flow through this quarter and an ongoing, a little bit of severance, for example, associated with that, you know, relatively minor action, the total head count that Nick is referring to is really over the course of the last 9 months or so.
As demand has softened in a number of businesses, we’ve obviously adjusted direct labor operational expenses, you know, as we’ve seen that demand. So it hasn’t really been 1 action per. It’s been, it’s been activity that’s been occurring over the course of the last nine months. And when we, when we look back, we have reduced headcount in the base businesses as we mentioned by that, that 10%. But it’s been a gradual process and we’ve been seeing those benefits slowly creep through the numbers, so to speak.
We’re certainly seeing here in Q3 with the margin being be, be being strong, you know, the impact of that and we’ll continue to see that going forward. I would reemphasize though a lot of that margin uptick is driven by what was a favorable mix in Q3 versus very unfavorable mix in Q2. As a comparison.
Okay. My next question, I just maybe front, it’s been hit on but just maybe a little more color around the back end. I mean, you commented for, you know, several months, I guess at this point that you have seen the back and stabilize and improve and maybe some color in terms of when you look at that business and the the, you know, incremental strength that you’re seeing in it. Is there anything to note in terms of kind of in market that strengthening or is it a geography underlying drivers like reassuring? You see, I’m going just anything thematic within what’s happening in that business that’s worth calling out.
You know, I I nothing in particular I would say worth calling out. It is a gradual improvement. It’s not like an L shape taken off if you will, but we are seeing more and more a request for quote, our pipelines are growing. You know, some projects CapEx projects are signaled to be cut off. I mean, they kicked off here you know, very soon. So, yeah, we feel pretty good about that back end showing that gradual improvement. Now, you know, on the flip side, the front end is for us very anemic right now.
No. Well, you know, hopefully that’ll turn around in the near, in the near future for you too. Last question. And just more of just kind of a thematic kind of color thing. Just talk a bit about Alfamation and kind of help everyone including myself, understand it better. You know, it’s, it’s still a good chunk of your backlog you’re working through it. I know it’s a business that has a lot of exposure within the auto world and that what happens within that is tied to the kind of new models, model refreshes of cars and stuff? You know, I was wondering if you could maybe provide, you know, a little kind of color in terms of where we are in terms of some of the cycles that, you know, impact ations revenue growth.
Like is there, you know, is there anything in terms of, you know, some model releases that you all are excited about? And you know, I mean, or is it you kind of get where I’m going with this just like, is there, is there anything to hang a hook to hang a hat on in terms of, you know, like that’s that we should start, we should be thinking about, you know, like a new model refresh or a new design win within a particular vertical or, you know, I mean, it could even be getting into, you know, like commercial or heavy equipment as they start automating it and there’s more electronics going into it. But just maybe sketch out some themes that drive the growth of that business and that’s it for me.
Yeah. Sure. So, very excited. Still. You know, they have Alfamation part of the inest family here. They, and your majority of their, testers go into automotive, the automotive industry, kind of doing a little bit of a reshuffling the last couple quarters here. As you know EV model is kind of being slow and moving more towards the ICE hybrid type the vehicles.
And but for alation, it’s agnostic for them, it’s just a matter of, you know, which programs go forward from that. So, encouraging is the pipeline at the alation and really seeing some nice pickup on projects there and, and this, this whole shift around the computing and vehicles, the onboard computing systems moving more to a centralized computing system versus you know, the computers within the different infotainment systems.
What have you having one managing the entire car is a design shift that the infrastructure shift that is kind of underway across numerous OEMs out there which is good for us, and you know, will require new testers from around these on-board computing systems as well as the changes in the electronics that are being managed. You know, we will also require change testers to, to monitor them and evaluate quality. So yeah, I mean, there’s a lot going on in cars.
I think everyone’s well aware of that and new tech, new features. And you know, so there’s a lot of testing opportunities for us and so we feel very positive about the future for information. Just timing wise as we pointed on orders can be lumpy.
Okay, thanks very much. You guys have a great day.
Hey, thanks Ted.
Operator
Thank you, a reminder, to all participants that you may press star and one to ask question.
Ladies and gentlemen, you may press star and want to ask a question as there are no further questions. I would now like to hand the conference over to Richard Nick. Grant for closing comments.
Thank you,
We appreciate everyone joining us today and thank you for your time and we welcome the opportunity to answer any further questions you may have on slide 13. You can find the details regarding the replay of this call and a list of upcoming events we’ll be participating in.
I hope to have a chance to see some of you at an upcoming conference. Thanks again for participating and have a nice day.
Operator
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
