Hi, good afternoon, everyone, and welcome to the 27th Annual Needham Growth Conference, and I'm thrilled today to have inTEST here with us, and we have Nick Grant, President and CEO, and Duncan Gilmour, CFO, here with us today to present. Nick, Duncan, thank you for joining me today.
Thank you, Ross.
First, we're going to start with a presentation, and then we will turn to some Q&A. Please put Q&A into the chat, and then if not, you can also email questions directly to me at rcole@needhamco.com. Thank you.
Great, thanks, Ross, and thanks, everyone, for your interest in inTEST Corporation. I'm Nick Grant, President and CEO, as Ross indicated, and with me is Duncan Gilmour, our CFO. Excited to share with you the journey that inTEST is on. We will touch on some forward-looking statements as well as non-GAAP financial measures that are mentioned throughout, so please read the disclaimers here as well as on our website. So I was brought in in 2020 to really unlock the potential of inTEST Corporation. I was the first external CEO. inTEST has been around since the early 1980s and started in back-end semi-test went public in 1997. Did a few small deals to help drive a little bit of diversification and a larger deal in 2017 with a company called Ambrell. It does induction heating solutions.
Over that timeframe from going public in 1997 to when I took over in 2020, the company really struggled to grow sustainably. And that's something I have been doing throughout my career for large multinationals, including Emerson, AMETEK, ABB. And when I saw inTEST, I saw a great company, good technology, solid balance sheet business here that provides a great foundation for growing. And we launched our five-point strategy to deliver growth here, started by defining who we want to be when we grow up here, and that's really an innovative test and process technology supplier of choice. And really what differentiates us is our engineering know-how and expertise in the markets we serve to deliver these engineered solutions that add tremendous value to our customers. We have restructured the company around three technology divisions, and I'll share more about that in the coming slides.
So the transformation here was really about taking a company that was predominantly back-end semi-test and really shifting it to more of a diversified market player, targeting markets like automotive, industrial, aerospace, defense, ones that have longer tail, secular tailwinds, identifying how we can take existing products into new markets, also driving acquisitions to help expand our served addressable market out there, focusing on the organization structure that I mentioned, restructuring around technology divisions to be able to unlock the true potential of these companies, and focus aggressively on M&A to complement organic growth. Made some really nice headway there, and I'll discuss that also coming up. And then last but not least is not losing sight of the customers. So we have some really good blue chip marquee customers out there, a great base to build off of, and that's what we've been doing.
inTEST, as I mentioned, a history of highly engineered, custom-driven solutions serving today a wide variety of markets and a strong customer base. You can see a few of them in the middle. We are a global company. About 40% of our sales in the Americas, about 30% in Europe, Middle East, and then the balance in Asia-Pacific there. Predominantly manufacturing in North America with some operations in Canada and in Italy as a result of the acquisition. Our five-point strategy for growth is really nothing revolutionary, but really things the company needed to focus on to take it to the next level. Global and market expansion. This is really serving our customers around the world better, increasing our customer bases by going after competitive accounts and companies that were near adjacent markets that we could penetrate.
Driving innovation and differentiation is passion for myself here, making sure we've got robust new product roadmaps, staying ahead of the competition, and focusing on more standardized sub-assemblies that could be late-stage customized to position ourselves from a cost perspective. Service and support, never losing a customer after we complete the sale, taking care of them to ensure they get the most out of the products and having that customer for life is an area that the teams have been focused on. One of the areas I've spent a lot of time on over the last four years is really this talent and culture, shifting this sleepy, conservative type company, very risk-averse given its cyclicality in the back-end semi space to more of a performance-driven, results-oriented business and making sure we've got the right people in the right roles in the company.
Last but not least is really driving acquisitions, strategic acquisitions and partnerships to expand our solution portfolio to better strengthen our position in target markets and widen our customer base. Speaking of acquisitions, the most recent one we completed was a company called Alfamation in March of last year. The company is headquartered in Milan, Italy, serving predominantly the automotive industry out there. They manufacture test equipment used for a wide variety of electronics and dashboards, infotainment system, lighting systems, onboard computing systems in vehicles. The company was founded by the original founder, was looking for a succession plan. We were able to connect with him and really sell the value of inTEST and how nicely they fit into our Electronic Test division and how we could take their business to the next level. Excited to have that business part of inTEST here.
Yeah, it really fits on all five of our strategic initiatives here of our strategy. They provide an innovative engineering and technology business. Their know-how and expertise complements our existing businesses. They give us a stronger footprint in Europe, which is needed to better serve customers in the area. They've provided deeper reach into the automotive EV space as well as opening up some consumer electronics, and we were able to, after the acquisition, bring over about $22 million-$24 million of backlog of orders they had received that yet needed to be shipped, so we were able to strengthen our balance sheet there, so one of the areas I mentioned was diversification. We've made some really nice progress on this over the last four years. When I took over the business in 2020, two-thirds of the company was in that back-end semi, predominantly back-end semi space.
What we've done is grown semi over the timeframe, but have grown these other markets faster through both organic and inorganic investments, and you can see now semi is roughly 40% of our overall sales projected running on the trailing 12 months there. Good inroads with diversifying in automotive, partially due to the acquisitions, but efforts we've made to penetrate that market as well, and defense aero industrial also being targeted markets that we're growing. Shifting now to a little bit more details around our three divisions. The first is Electronic Test. This is where the heritage of the company resides at back-end semi test solutions. We make docking solutions as well as manipulators that move test heads in and out as the test lines are set for new chips. Our primary markets are analog mixed-signal.
We acquired a company called Acculogic that added integrated circuit board testing as well as battery testing solutions to our Electronic Test portfolio. And then most recently, the Alfamation acquisition, which falls into this division, giving us a stronger footprint in automotive. Environmental Technologies division today is very much focused around thermal, really controlling precise temperatures in a wide variety of applications, primarily our temperature test chambers as well as process chillers that we offer to the industries, a wide variety of industries out there. And we look to expand beyond temperature in this market over time through some of our acquisition efforts here to move into the acoustic vibration as well as more environmental humidity altitude testing. Last but not least, our Process Technologies division is an area that centers around really two primary technologies today.
One is induction heating, and this is really a green alternative to any kind of furnace, flame, welding, brazing, gas-using application. We can join materials with induction heating in a much more precise and greener fashion here. Also, with our ability to go high temp and maintain those tight temperatures over a long period of time, our induction heating solutions have really found an entry into the front-end semiconductor space around silicon carbide crystal growing as well as gallium nitride crystal growth and epitaxy applications. The other technology is our imaging cameras. This is more embedded cameras that are used in a wide variety of applications and processes. Applications include dental, ophthalmology-type life science applications for retinal inspection or cavity inspection there, as well as in some defense applications. So I mentioned M&A. It really is something we're driving as a core competency here.
Really pleased with the growth we've seen from growing this business of around $55 million when I took over in 2020 to we've guided to around $130 million this year, and of that, about 45% of that has been organic growth and about 55% is M&A. The teams are really getting their arms around the processes that we put in place, the discipline as we look at targets to make sure we're identifying the right ones to be strategic for us going forward here, and as mentioned, this will continue to build out these three technology divisions we laid out through our inorganic initiatives here, focusing on broader and complementary technology, better geographic footprint, adjacent spaces to drive further growth for us, so with that, let me now turn it over to Duncan to walk you through some of the financials of the company. Duncan.
Thanks, Nick.
We'll start by looking at orders and backlog, the most recent quarter, the gray bars that are reflected on the chart here, so in Q3 2024, our orders were up 4.5% year over year. That does include just under $4 million from the newly acquired Alfamation business. Really, the offset there being our semi business, which in 2024 was a little bit softer. Sequentially, our orders for Q3 at $28 million were up 7%. Again, it includes Alfamation. However, Alfamation was also included in Q2, so true organic growth there. Auto EV, defense aerospace, security, all sectors that showed some strength offset by, again, some softness in our semi business, which really was a theme for 2024 and our most recent quarters. From a backlog perspective, backlog ended Q3 at $45 million, which was up about $5 million year over year. Doesn't include a nice contribution.
End of Q3, just under $15 million of remaining backlog associated with the Alfamation deal. Our backlog turns relatively quickly, about 42% of that backlog number turning beyond Q4 of 2024. So a good amount turning in the next quarter, which is fairly typical of our business. From a revenue perspective, Q3 revenue at $30 million was down $700,000 year over year. That third bullet, the $7.1 million decline in semi being the biggest factor there. Q3 of 2024 did include $5.4 million contribution from Alfamation. And that really drives what we report as our auto EV sector, really driving a lot of diversification, as Nick had touched on with respect to that acquisition and exposure to sectors outside of semi. On a sequential basis, our revenue was down $3.7 million.
We did see a couple of million of shipments that were delayed at the end of Q3 and dropped into our fourth quarter. Absent that, we would have been looking at a flatter picture. Again, we did see some strength in some of the markets outside of semi that's certainly encouraging with respect to our diversification strategy. It should also be pointed out, Q2, we did have an exceptionally strong revenue quarter, that high backlog that came in with the acquisition delivered just under $10 million in Q2, an unusually high revenue number for that business, which is really around a $25 million per annum business. Now, the margin on that was a little bit lower, and we flip over to gross margin. Q2, our gross margin was a little bit lower than we've been seeing in the low 40s%.
That did come back nicely in Q3 when our mix rebalanced and came back to something more normalized, if anything, a little bit better than perhaps we sometimes see. So gross margin at 46.3%, delivering $14 million at the gross margin line. It was nice to see that rebound from the lower percentage that we saw on the higher revenue in Q2. Historically, our back-end semi business, really the legacy part of our business, that does tend to carry higher margins. Our margin percentages tend to be a little bit higher when that business is performing a little bit better relative to the rest of the portfolio. Overall, though, our margins running in the mid-40s for the profile on the previous chart. Turning to operating expenses, Q3 operating expenses were up about $1.5 million versus the prior year.
However, that includes $2.3 million associated with the operating expenses for Alfamation. So on an apples-to-apples basis, we did see a drop in our year-over-year operating expenses. We did do some cost reduction, some rebalancing of spending in our businesses where we did see some softer demand. On a sequential basis, our operating expenses essentially flat Q2 versus Q3. That all translates into bottom line earnings and Adjusted EBITDA. On the left-hand side here, we're showing EPS. Q3 of 2024, adjusted EPS, which includes adding back tax-affected intangible amortization of around $0.10, $0.04 on a GAAP basis, which was up from Q2 at $0.08 adjusted, $0.02 GAAP. You can see those numbers are down somewhat from 2023 when our semi business was ticking over. So we have seen a little bit of a drop there as that semi business has dropped back during 2024.
EBITDA on the right-hand side, net earnings is shown here along with adjusted EBITDA. Adjusted EBITDA just reflects a traditional EBITDA metric with stock compensation also added back. Q3 of 2024, we saw that $2.4 million of adjusted EBITDA increased from Q2 of 2024, similar pattern to the EPS pattern that we talked about. Moving on to cash flow. So we do look at our adjusted EBITDA as somewhat of a proxy for cash. Q3, we did see over $4 million of cash provided from operating activities, $4.2 million. Adjusting for capital expenditures, free cash flow of $3.7 million in Q3. So good to see. Although our semi business in particular, a little bit softer, profitability a little bit softer than we have seen when ticking on all cylinders, we're still seeing nice cash generation from the businesses.
We did pay down just over $5 million in debt in Q3, and we ended the quarter with about $16 million in debt, $18 million of cash, so net cash of just around $2 million. We do continue to have $30 million available to us under a delayed draw term loan for acquisitions, as well as access to a $10 million revolving line of credit, so all in all, relatively healthy balance sheet. From a capital allocation perspective, growth is really what we're ultimately focused on. Organic growth, an important driver of the business, ensuring that we're driving that is really our number one focus from a capital allocation standpoint. We continue to reduce debt, as I talked about. A lot of our debt is on a five-year term loan basis, a loan we initiated in 2021. We continue to pay that down.
And then M&A continues to be a core piece of our strategy going forward. And we continue to look at targets and will execute there as opportunities arise. Return of capital, we did buy back some shares in Q3. And certainly, when the opportunity presents itself there and prices look attractive, it's certainly something else we have looked at and would continue to look at. But growth is ultimately our priority. From an outlook perspective for Q4, the guidance that was issued in November, $34 million-$37 million top line, that $2 million I talked about rolling into Q4, helping kind of drive that increase in revenue. Gross margins mix weakening a little bit at 42%. Operating expenses really very consistent with the numbers I talked about as presented there. And ultimately, an EPS of around $0.08 at the midpoint of the revenue range, adjusted EPS around $0.14.
From a full-year basis, that translates to a full year in the $128 million-$131 million range, with margins in the lower 40s%, $50-odd million of operating expenses, etc., as outlined on the chart here. With that, I will hand it back to Nick to wrap up our presentation. Thank you.
Yeah, thank you, Duncan. And as Duncan mentioned, we have seen headwinds in 2024. Our back-end semi business was slow, really starting mid-2023. And then front-end semi started heading into the trough or a pause there at the beginning of last year. And we are seeing a gradual improvement in our back-end semi space, nice solid activity in our defense aero segments out there.
We're looking to drive the team to find growth where we can, driving new products, optimizing our channels to market here, and focusing on customers that are spending, as well as not taking our eyesight off cost discipline and right-sizing actions to make sure the businesses are appropriately sized given their market conditions out there and capturing the efficiencies we can. I believe we're executing on our strategy here and really helping to unlock the potential of inTEST Corporation. With that, Ross, I'll turn it over to you for Q&A. Great.
Thank you, Nick and Duncan. I appreciate the presentation. Now I'll pause for a moment to give some people time to enter any questions they have into the chat, or feel free to email them to me. Just as a reminder, I'll be sharing them anonymously.
I guess while we are waiting then, maybe I'll kick off with a question I've been having. If you could share some of the puts and takes you're seeing for the different segments now that we're in 2025, I'm very curious to see where you think this year is going to head.
Yeah. We haven't given any guidance on 2025 yet, but we started to see last year our back-end semi business coming out of the trough, a couple quarters of sequential improvement, and we would anticipate that back-end semi space will continue to improve. It's more on a traditional cycle and activities or funnels have picked up. Anticipating improvement there. Front-end semi for us, that silicon carbide gallium nitride really had a tremendous capacity build-out in the 2022, 2023 timeframe.
And now really with the slowdown in EVs, feeling as though that's going to be relatively slow for us here in 2025, with potentially some improvement in the second half as capacity starts to get reached and additional investments are needed. Industrial markets for us, relatively stable. Looked at last year thinking about the uncertainty of the election and things were kind of companies were kind of holding off to pull the trigger. Now the election's behind us. I think there's some new uncertainty relative to tariffs and other directions that may take the country may go. So still uncertainty out there, but we do believe the industrial markets are poised to start improving as well. Aerospace defense, relatively strong for us out there. So it's a bit of a mixed bag.
Great. Thank you. And as a reminder, you can send the questions in.
And if not, I'm going to ask one more that I've been wondering about. I'm sure it's on a lot of investors' minds. Have you had any impact from the most recent round of export control and entity list additions, especially in your semi segment?
Yeah. No, great question. The answer to question, no. Our sales to China is on about 8% of our overall sales and predominantly pulled into China through large multinational companies out there. So we have not had any kind of restrictions put on us or our products. And at this stage, we feel as though that will continue to be the case.
Great. Well, thank you. And it looks like we don't have any further questions coming in at this time. So I really appreciate you guys, and I look forward to talking to you again soon.
All right. Great. Thank you, Ross.
Thanks, everyone, for your interest level in inTEST.