inTEST Corporation (INTT) Q3 2026 Earnings Report, Transcript and Summary

Greetings. Welcome to InTest Corporation Third Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Sanjay Hurry, Investor Relations. Thank you. You may begin.

Good morning, everyone, and thank you for joining us. With me on the call are Rich Rogoff, President and Chief Executive Officer; and Duncan Gilmour, Chief Financial Officer and Treasurer. Our earnings press release was issued this morning as well as the slides that management will reference during today's call. Both can be found in the Investor Relations section of the intest.com website. Please refer to Slide 2 for a review of the safe harbor statement. During this call, management may make some forward-looking statements about their 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 detailed in the earnings press release as well as in other documents filed by the company with the Securities and Exchange Commission. These documents can be found on the InTest's website or on 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 the company's 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. With that said, I will now turn the call over to our first speaker, Rich Rogoff, President and CEO. Please go ahead, Rich.

Thank you, Sanjay. Good morning, everyone. On today's call, I will review our third quarter performance, including the record orders we preannounced on October 5. Duncan will then take you through the financial results and our outlook for the fourth Quarter. I will come back to discuss how we are positioning InTest for 2027 before we open the call to questions. To begin with, the semiconductor demand we told you to expect arrived in the third quarter. Let me frame our performance around 2 points. First, demand is here and it extends into 2027. Orders were a record at $49.4 million, exceeding our revenue by 41% and up 31% from a year ago. The driver was a record $23.9 million in back-end semiconductor orders, nearly 4x the level of a year ago. Non-Semi orders of $24.3 million rose 44% from the second quarter. Year-over-year, they were lower than a strong prior year quarter that was driven by Auto/EV. Backlog at quarter end was also a record at $59.7 million, up 32% since June and approximately 60% of it is expected to ship in 2027. Second, we continue to grow. Revenue of $35.1 million came in at the high end of our guidance range, up 34% from $26.2 million a year ago. This was our third consecutive quarter of year-over-year growth above 25%. Gross margin of 47.7% was above our guidance and driven by favorable mix. Turning to Slide 5. Total Semi orders were $25.1 million, representing about half of the quarter's total orders and more than double the Q2 level. Back-end test accounted for almost all the Semi orders. Customers in the mixed signal, analog and high-power device markets are adding back-end test capacity, fueled in part by the demand for power conversion and communications devices. Our newer products played a meaningful role in capturing those orders. What semi customers tell us is that the constraint has moved from building wafers to packaging and testing finished devices fast enough. Every tester they add needs a manipulator, docking hardware and interface. Beyond total orders, the quarter showed the breadth of our Semi momentum. We grew with existing customers and added new ones. We were selected for new test sites at existing customers, received the first order from a customer that had not purchased from us in a decade, added a data storage customer serving the data center market and received an order for our high-voltage interface hardware ordered for a customer's evaluation of a new silicon carbide wafer test platform. Customers are also ordering further ahead of need than they used to. Testers often carry lead times of 18 months, so customers are placing orders for our accompanying equipment well ahead of the delivery. This gives us better visibility than we typically have. Outside of Semi, Auto/EV orders of $9.4 million more than double Q2's level as new model releases get back to a normal schedule after a slowdown in the EV momentum from 2024 through 2025. Year-over-year Auto/EV orders were lower against an exceptionally strong third quarter of 2025. However, we view the sequential improvement as encouraging. In Q3, a major automaker placed its first order for our functional test systems, which will be used to test power management systems. We also received repeat orders from existing functional test customers and shipped 2 more battery test systems to an EV customer. In Defense/Aerospace, orders grew 43% compared to Q2. We added new aerospace and defense customers and orders for our induction heating systems from this market rose for a second consecutive quarter. In Industrial, orders were up 9% sequentially. The customer placed the largest industrial order we have received for our in-circuit test systems since adding this product line to our portfolio. Here's what this means for the next several quarters. First, stronger orders give us an improved visibility over the next 2 to 3 quarters. Second, the sales funnels refilled. Even after capturing record orders in Q3, our funnel as we entered Q4 was roughly comparable to the start of Q3. Our opportunity set is intact, giving us confidence in continued order momentum in Q4. Third, technology wins are opening new doors. As customers and new end markets wrestle with how to design, test and deliver high-power and energy conversion products, it increasingly means we get the call for our solutions to their toughest challenges. We are excited to see our technologies and expertise in handling heat become more critically valued in so many new applications. Today's engagement on customers' toughest challenges becomes tomorrow's funnel opportunity and in time, tomorrow's orders. Together, these factors position us to close 2026 at the high end of our revenue guidance and gives us a solid start to 2027. One note on our supply chain. As we noted in our release, lead times are expanding. Our supply chain and engineering teams are adapting accordingly and are managing the situation. With that, I will turn it over to Duncan. Duncan?

Thank you, Rich. Starting on Slide 6. On a sequential basis, revenue in Q3 was essentially flat, down $0.2 million from $35.3 million in Q2 to $35.1 million. Higher Defense/Aerospace, Semi, Industrial and other revenue largely offset a $6.8 million decline in Auto/EV following Q2's shipment of high revenue, lower-margin Auto/EV projects from backlog. Defense/Aerospace increased $3.6 million, Semi increased $2.5 million, Industrial contributed $0.8 million and other contributed $0.7 million. Partially offsetting these gains, in addition to the Auto/EV decline, was a $0.8 million decrease in Life Sciences. Compared to Q3 2025, revenue increased $8.8 million or 34% from $26.2 million. The net increase was driven by Defense/Aerospace, which more than tripled on higher program activity, together with growth in Auto/EV, Semi and Industrial. Together, these 4 markets contributed $9.9 million of growth, which more than absorbed declines in Life Sciences and Safety/Security. Turning to Slide 7. Q3 gross profit was $16.7 million, up 52% year-over-year and gross margin was 47.7%. Sequentially, gross margin expanded by 720 basis points from 40.5%, reflecting a large positive shift in product mix. Compared with the prior year period, gross margin increased by 580 basis points from 41.9%, reflecting the same positive shift in mix. Moving on to Slide 8. Operating expenses for the third quarter were $14 million, up $0.1 million sequentially as higher general and administrative expenses were largely offset by lower amortization of intangibles. On a year-over-year basis, we generated $8.8 million of incremental revenue while absorbing only $1.8 million of incremental operating expenses. This reduced operating expenses as a percentage of revenue to 39.9% from 46.4% in the prior year period. The $1.8 million or 14.8% increase reflects higher selling, general and administrative and engineering expenses, primarily higher payroll and payroll-related costs and higher commissions associated with higher volume, partially offset by lower amortization and restructuring costs. Slides 9 and 10 collectively measure our profitability. On Slide 9, net margin expanded by 400 basis points sequentially and 890 basis points year-over-year to 5.3% and adjusted EBITDA margin expanded by 640 basis points sequentially and over 1,000 basis points year-over-year to 12.6%. For Q3, net earnings were $1.9 million compared with $0.5 million in the second quarter and a net loss of $0.9 million in Q3 2025. Adjusted EBITDA was $4.4 million, up from $2.2 million in the second quarter and $0.4 million in Q3 2025. On Slide 10, net earnings were $0.15 per diluted share compared with a net loss of $0.08 per diluted share in the prior year period. Adjusted EPS, which adds back tax-affected acquired intangible amortization and restructuring charges, was $0.18 per diluted share compared with an adjusted net loss of $0.02 per diluted share in Q3 2025. One item to note since it affected per share results this quarter is on the tax line. Our effective tax rate in Q3 was approximately 30%. This brings our year-to-date tax rate up to an increased expected full-year rate of approximately 20%, including the discrete benefit recorded in Q2. The higher expected rate is driven by a higher proportion of profitability being generated in our higher tax jurisdictions. Slide 11 shows our capital structure and cash flow. We ended Q3 with cash and cash equivalents of $20.9 million, a decline of $1.2 million from the end of Q2. Operating activities used $0.3 million of cash in the quarter. Net earnings and noncash charges contributed approximately $4.4 million, which was more than offset by a $3.6 million increase in accounts receivable and a $1 million reduction in customer deposits and deferred revenue. After $0.4 million of capital expenditures, free cash flow was negative $0.6 million. We also reduced term debt by $1 million during the quarter. At September 30, 2026, we had approximately $61 million in total liquidity, including $20.9 million of cash and equivalents and $40 million of available borrowing capacity, consisting of $30 million under our delayed draw term loan facility and a full $10 million under our undrawn revolving credit facility. On August 14, we amended the facility to extend our ability to draw on the term note through August 28, 2028. Total debt was $5.5 million, and our leverage ratio was 0.5x trailing 12-month adjusted EBITDA. We were in compliance with all covenants at quarter end. Turning to Slide 12 and our financial guidance. Q3 came in at or better than our August guidance on revenue, gross margin and operating expenses. Our Q4 guidance maintains a steady incremental progression with 2 factors to keep in mind. First, Q3's product mix was particularly favorable. Second, we expect some modest expense increases in Q4 as we fill open leadership positions and start planning for 2027. Looking beyond Q4, we are positioned for a solid start to 2027. Our record backlog, roughly 60% of which ships in 2027, together with Q3 semiconductor orders converting largely in the first half supports that outlook. We will provide full year '27 guidance with our fourth quarter results as is our practice. For Q4, we project revenue of $34 million to $36 million, gross margin of approximately 45%, operating expenses of $14.2 million to $14.7 million and within operating expenses, amortization of $0.5 million. This guidance excludes any potential acquisitions and restructuring and restructuring-related costs and assumes our view of macroeconomic conditions remains unchanged through the end of the year. One housekeeping note. After the market closes today, we intend to file our Form 10-Q. We will also file a Form S-3 to refresh our existing shelf registration before it expires. Now if you turn to Slide 13, I will turn the call back over to Rich. Rich?

Thanks, Duncan. Before we open the call to questions, I want to walk you through how electronification connects our end markets, how it is shaping our R&D and our new product priorities and how it is creating new opportunities for InTest. Electronification is making customer testing more complex and essential, which is increasing demand for our solutions. Our portfolio is positioned well to meet these changing needs. In Semi, our advanced manipulators and high-powered chillers address customers' growing power and thermal and testing requirements. The same trend is reshaping our Flying Probe business. These systems were originally built to check circuit board continuity and perform basic probing, but now they must meet more demanding test requirements as customers add electronics to their products. Battery testing is a clear example as it requires longer, more complex routines than flying probe systems have traditionally run. We are expanding these systems from single-purpose testers into broader test platform. Each new application adds test content per system, increasing the value for both the customers and to InTest. Our functional test systems are following a similar path. First developed for Auto/EV, they now also serve other end markets. Our teams are also working more closely to win customers. As an example, in Q3, an industrial customer for an in-circuit test system placed a separate order for one of our functional test systems. For European markets where new regulations are restricting usage of certain refrigerants, we will launch a first-of-a-kind new product next week that conforms to the new legislation that we believe equals or exceeds the performance of its predecessor. Collaboration like this helps us grow revenue, but that's only half the job. The other half is making sure more of that growth reaches the bottom line consistently and through the cycle. On my first call as CEO, I stated I would develop an operational plan for InTest and share it with you. On our Q2 call, I outlined where I was focused and that work is well underway. Over the past 2 quarters, I have examined the business through 5 lenses: our product portfolio, the levers that drive profitability, including product cost, mix and supply chain, how efficiently we deploy our operating expenses, how we optimize our manufacturing footprint and how we can share R&D more effectively across our divisions. Over that time, I have visited our facilities, met with our teams and worked with my direct reports to develop detailed actions. InTest has grown through acquisitions, and our business have largely been run and managed separately. InTest's next phase is to operate our business as a coordinated platform, capturing commercial opportunities, cost synergies and the sharing of ideas. To help execute this plan, Scott Taylor joined InTest on October 1 as Vice President and General Manager of ITS, reporting to me. Scott brings more than 20 years of multisite P&L responsibility, including leading North American operations of a thermal management manufacturer and a deep background in lean manufacturing and operational excellence. He will help ensure we deliver on the plan. The plan is as much about where we direct our dollars as it is about where we take them out. As we plan for 2027, we will put our spending where it earns the best return. In our operations, that means continued efficiency gains. In our product, it means a disciplined engineering spend because the demands our customers are bringing us, such as the test applications I described a moment ago, make that the best investment InTest can make. To summarize, as we see it today, we are entering 2027 with a promising momentum and with our operational plan aimed squarely at profitability, efficiency and InTest's long-term success. With that, operator, please open the call to questions.

[Operator Instructions] Our first question is from Max Michaelis with Lake Street Capital Markets.

Congrats on the quarter. First one for me. If we look at the Q3 order book, obviously, really solid. It sounds like that funnel is filled back up for Q4. I assume Semi is a big part of that, but I'll let you answer it for me. Is the mix going to be relatively similar in terms of order or the order book for Q4 as we saw in Q3?

Thanks, Max. Good to speak with you. Certainly, Semi is maintaining strength. But as noted, we're pretty positive about the activities in the other markets like Auto/EV and Mil/Aero as well.

I would just add, Max, in terms of the mix. Similar mix, our guide does take margin down a little bit as you probably saw. So we do see some small shifts to drive that, but certainly relatively positive mix versus where we were, for example, in Q2.

Yes. And the Q4 gross margin guide makes sense, I mean, just given your commentary around Q3 orders from Semi largely converting in first half of '27. But I'm curious to know on these guys are ordering ahead of time. I mean the conversations you're having with your customers going into 2027 is what we saw in Q3 and Q4, was that largely pull-forward from these customers? Or do you expect to see that order book continue to see solid strength heading into the first few quarters of 2027?

Certainly, we're -- we'll guide to 2027 later, but the momentum seems pretty strong right now. I think we -- it's hard to tell what the market is going to do, but we do see strength in Semi for sure, seemingly to go into the early part of 2027, at least.

Our next question is from Ted Jackson with Northland REIT Securities.

Again, congrats on the quarter, and it's nice to see everything turn in business come in. So, I wanted to touch base on supply chain. You made a comment with regards to increased lead times. It's not the first company I've listened to this cycle make those types of observations. And so I guess what I wanted to dig into on this was where are those pinch points? What kind of materials? How can -- how should we think about that as we think of actual working capital really, kind of, let's call it, the coming 6, 12 months or whatever you want to put to it. I mean I'd assume some -- a lot of companies are actually taking inventory up relative to, kind of, historic norms because of these, kind of, issues and just, kind of, building more of a buffer. And is any of that, kind of, effort being driven by your customer base? That's, kind of, my first.

Yes. Let me take that, Ted. So I don't think we're seeing any unusual supply chain challenges with large bumps in demand that we're obviously seeing. There's going to be some, and there certainly are bits and pieces as we would typically expect, but that's part and parcel of managing the ups and downs of the business. So, nothing that we can't manage. We do manage it, in some cases, a little bit more investment in working capital and inventory depending on the pieces and parts. But there's nothing out of the ordinary. Day-to-day, there's always battles, but nothing particularly unusual that we're highlighting.

Okay. And then question was in my head, and I just went back out. Let's talk about Alfamation. I mean you've commented on this a little bit in the past that you had an air pocket with sort of the restructuring, if you would, of vehicle manufacturing and they shipped off of EVs and they need to, kind of, reposition themselves. And you're now starting to see some strength in there. And you also have talked about your efforts to and success in extending the markets that some of those solutions go beyond Auto and EV. When you look into the opportunity funnel in front of you and maybe even the orders that you booked in the third quarter, can you provide some color with regards to the mix between Auto/EV and other markets and, kind of, how that's changed in the last 12 months?

Yes, sure, Ted. So I would say, generally, the majority is still in the Auto/EV space. That's certainly their strength. And as that market seems to be settling back into its normal cycles, we're seeing our continued strength in there. But as we mentioned, we had industrial customers and some other customers outside of the space looking at our functional test systems. So we've had some continued wins. I would say it's early phase of growing that market. It's building our name in that market and for the products and getting some of those wins that will drive the future of the growth in that -- in those spaces.

Okay. And then my last question, I just wanted to touch over on Semi on the front end. The back-end turn, you're feeling really good about where you stand. You had good order momentum in this quarter. You think it's going to continue at least into the first half of '27. Those cycles can be 12, 18 months long. So you've got a good runway there. What's going on, on the front-end side? What are you seeing in terms of activity, pipeline opportunity, sort of the next leg, if you would, that might lift that segment higher? That's my last question.

Yes. I think as we've mentioned before, there are some signs of life activity growing in that space. I would say it's maybe a bit more active than it was a month ago when we preannounced our orders. But it's still early stages, in my opinion. I think as we go forward, we're certainly hoping that, that market comes back. Again, I'll caution, I don't think it's going to come back to what it did 3 or 4 years ago. But the capacity seems to be being utilized, and that's a good sign. The activity level is certainly picking up, and we're going to stay on top of that.

And then, is that a margin structure similar to the back end? Or how would you compare it?

Yes. Margin-wise is typically not quite as good. Those product lines quite often we're selling to other manufacturers of equipment. So generally, the margins aren't quite as high as the back-end Semi space that we've touted as being our -- generally our highest margin product lines.

[Operator Instructions] Our next question is from Dick Ryan with Oak Ridge Financial.

So, Rich, question on the defense side. In the slide deck, you said the induction heating had 2 quarters now of business there. How are your divisions hitting the defense cycle? Is it the defense industry? I mean it's good to see that Ambrell is participating in that, but how else are you hitting the defense side?

It's a good question, Dick, thanks. The -- many of our businesses, I would say almost all of them with the exception of maybe our EMS business, which is almost exclusively Semi, all participate in the defense cycle to some degree with varying -- mostly with the prime contractors. We don't directly go to the government very often, but usually through the big prime contractors.

Yes. I mean I can add a little bit as well. We do sell across our business units there, Dick. The in-circuit flying probe testers are used for PCB type testing across a number of primes and so forth, the induction heating equipment we referenced in manufacturing processes. The environmental business with process chillers, for example, does some significant business with, again, a number of the larger primes and Videology as well, some of the cameras. We have some small lines there that are also going into that space. So it really cuts across the business.

That's good to see. That's one of the goals, obviously. So you -- Duncan, on the service side. I don't know if I caught what the service represented in the quarter. What's your thoughts on that?

Yes. Service is running just over 14%, which is a fairly typical number for us. That percentage drops sometime as revenues increase, the dollar is fairly stable, but we've been running reasonably stable numbers there in our service business.

There are no further questions at this time. I would like to turn the conference back over to Rich for closing remarks.

Thank you, operator, and thank you all for joining us. Demand has arrived. It is in our expanding backlog, and we are executing on our operational plan to convert it consistently. Please reach out to our Investor Relations team to coordinate our continued dialogue. On Slide 14, please note the details regarding the replay of this call as well as our up-and-coming investor event schedule. We hope to see you at one of the conferences we will be attending. Thank you again for participating today, and have a great day.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.