Thank you, Laura. I'd like to welcome everyone to our 2013 fourth quarter and year-end results conference call. Before I begin today's remarks, I want to explain Bob Matthiessen's absence from the call this afternoon. Bob had surgery this past Friday and is currently recovering and will be back to join us for the next quarterly conference call when we release Q1 2014 results on May 1, 2014. We all wish him a speedy recovery.
2013 was decidedly a challenging year for the backend semiconductor equipment industry, particularly in the second half of the year. Despite this, we delivered solid operating results. As we had said many times, we have structured our business to make money even during challenging times, and our operating results mark inTEST's fourth consecutive year of profitability as well as our 17th consecutive quarter. As forecasted, our orders in the second half of 2013 were stronger by those in the first half by 5%. 2013 gross margin expanded to 48% from 44% a year ago; and net earnings for the year of $0.30 per diluted share increased by $0.09 over 2012 net earnings. The industry weakness as well as seasonal softening negatively compounded results for the fourth quarter.
Fourth quarter 2013 bookings were $9.3 million compared with third quarter 2013 bookings of $10.4 million and consistent with fourth quarter 2012 booking. 23% of Q4 '13 bookings were derived from non-semiconductor tests. Recall that at the end of the second quarter we have revised the non-semi related historical bookings and revenue figures to include service, which previously had not been included.
Q4 net revenues of $9.3 million were at the high end of our guidance range, and while they were down compared with the $9.9 million for Q3 2013, they improved $1.1 million over fourth quarter 2012 net revenues of $8.3 million. 22% of fourth quarter 2013 net revenues were derived from non-semiconductor tests.
Fourth quarter gross margin of 50% increased 48% from the previous quarter and 42% versus a year ago. Net earnings for the quarter of $0.07 per diluted share exceeded our guidance. They were down quarter-over-quarter compared with the $0.10 per share in Q3 2013, but were substantially increased on a year-over-year basis compared with the $0.02 per share recorded in the fourth quarter of 2012.
In addition, we reported a positive book-to-bill ratio for the quarter, have a solid balance sheet and we continue our trend of generating cash and carrying no debt.
Now, let me turn to the segments in which we operate.
Our Thermal Product segment is the segment providing inTEST with significant growth opportunities in the future. We specialize in delivering semi-custom thermal test solution that can be readily adapted to markets outside of the semiconductor market, including automotive, consumer electronics, defense/aerospace, energy, industrial and telecommunications. Thermal segment bookings for the fourth quarter were $5.4 million compared with bookings for the third quarter of $6.5 million. The reduced bookings in the fourth quarter were driven by weakened demand from customers in the Asian transceiver market for our Thermal product, as well as the aforementioned soft semi demand that impacted all three of our product segments. In spite of this weak demand, Thermal bookings in the second half of 2013 were up 18% compared to the first half. The growth in bookings in the second half did not translate into increased revenues in the fourth quarter though, and Thermal segment revenues for the fourth quarter were $5.4 million compared with $5.8 million for the third quarter.
During the fourth quarter, a large order for four Sigma chambers was received from a manufacturer of medical devices for testing pacemakers. Thermal platform activity increased driven by demand in the military and microwave market. Looking forward in 2014, a large military contractor has advised us to expect significant orders for Sigma thermal engine, both current generation and next generation, whose development is now in discussion. The outlook for business at Sigma's historically largest customer is improving. For the last two years this company has been recovering from capacity constraints caused by supply issues from Asia. They're in the process of commissioning a new manufacturing facility in the Midwest and have begun discussions with us to identify thermal test requirement.
Asia has once again become active in Q1 and large orders received from Hakuto for China and Japan with additional orders expected late in the first quarter or early in the second quarter from Chinese customers which could total 20 systems. The OEM Chiller Project for applications in the energy industry has been completed. We are now on the approved vendor list with first orders expected in the second quarter of 2014 for delivery by year-end.
Turning to the Mechanical Products segment, bookings in the fourth quarter were $2.4 million, up from $1.8 million in the third quarter. Fourth quarter Mechanical sales were $2.2 million, consistent with the third quarter. We continued working with a major IDM on manipulator docking and interface product for a new internal test system. The scheduled release of this new test system was at the end of 2013 but they are currently behind schedule. During the quarter, we evaluated several countries for offshore manufacturing of certain products manufactured by the Mechanical Product segment and did much preparation work on that front. Our goal is to reduce operating cost for this segment initially for our best-selling manipulator family but we expect to expand on that if we are successful.
Other 2013 achievements for Mechanical include the development of a new dock for higher-end applications requiring more automation. This was sent for evaluation to a major customer before year-end and has been well received. We are making some minor changes and are ready to announce this product before the end of Q1 2014. We successfully proliferated the PIB direct docking at several sites. We installed the Cobal 500 for a SPEA tester at a Korean customer, which was our first Korean sale to an end user. This was the result of new sales representation there. Our Cobal 250 manipulator is now available for over 20 different test systems, while our Cobal 500 manipulator is now available for 10 different test systems.
2013 revenues for this segment were up slightly from 2012, but remains disappointing. We currently expect more significant growth in revenues in this segment in 2014. First quarter 2014 orders are comparatively strong and broad-based. In addition, we have just received orders for a leasing of three manipulators from a large European IDM. A follow-on order is likely, although the first three have not yet been installed. Incidentally, this is the same customer who has leased substantial equipment from our Thermal division.
Now, let me turn to our Electrical segment. Bookings for the fourth quarter were $1.6 million compared with $2.0 million for the third quarter; and Q4 Electrical revenues were $1.7 million compared with $1.9 million last year. We had initially seen strong orders in this segment early on in the quarter, but that did not continue due to the aforementioned softness in the semi market, as well as the seasonal reduction in demand in the fourth quarter we have seen in recent years.
2013 achievements for the Electrical Product segment include the development of a new wafer probe interface at the request of a major IDM. This was field tested and approved at the start of the year and we installed about 45 of these at various sites for this IDM in 2013. We have named this product Lone Star. We have developed our own in-house tester codenamed 'lynx' to replace an aging commercial unit that had become obsolete. This is currently configured with over 15,000 measurement pins, but the switch matrix can be expanded to 65,000 pins. In high resolution mode, the pins can be paired to achieve measurement accuracy better than 10 milliohms. The major advantage is that the entire interface can be measured in one pass plus the cost of fixturing for each interface is greatly reduced. This is not something that our customers see directly but it does save time and cost. And finally, we are designing a new range of interfaces for a major family of testers and will have first articles available within a few weeks for field testing at customer sites, plus internal evaluation.
Let me now provide a review of Q4 financial results.
Fourth quarter 2013 end user net revenues were $7.9 million or 85% of net revenues compared with third quarter end user net revenues of $8.7 million. OEM net revenues were $1.4 million or 15% of net revenues compared with third quarter OEM net revenues of $1.2 million. As noted earlier, net revenues for markets outside of semiconductor tests were $2.0 million or 22% of net revenues compared with $3.6 million or 37% of net revenues in the third quarter.
The Company's gross margin for the fourth quarter was $4.7 million or 50% as compared with $4.8 million or 48% in the third quarter. The improvement in the gross margin was primarily the result of a decrease in our component material cost, which declined from 33.0% in the third quarter to 31.9% in the fourth quarter. Also contributing to the improvement in our Q4 gross margin was a decrease in our fixed manufacturing cost, which decreased from $1.5 million in Q3, to $1.4 million in Q4.
Our Electrical and Thermal Product segment both experienced reductions in their component material cost during the fourth quarter. Our Electrical Product segment's component material cost decreased from 41.3% in Q3 to 36.9% in Q4, while our Thermal Product segment saw its component material cost decline from 28.2% in Q3 to 26.9% in Q4. The decreases in component material cost in our Electronic Product segment was driven by changes in customer mix, while the reduction in our Thermal Product segment was due to product mix. Offsetting these decreases was an increase in the component material cost of our Mechanical Product segment, which increased from 38.7% in Q3 to 40.2% in Q4 due to both product and customer mix.
I'll now discuss a breakdown of operating expenses for the quarter.
Selling expense for the fourth quarter was $1.4 million compared with $1.3 million for the third quarter, an increase of $168,000 or 13%. The increase was primarily due to increased salary and benefits expense (due to recent additions of staff in our Thermal and Electrical Product segments), as well as higher levels of sales commission expense in those same segments.
Engineering and product development expense was $817,000 for Q4 compared to $945,000 for Q3, a decrease of $128,000 or 14%, driven primarily by reduced spending on product development initiatives in the fourth quarter. To a lesser extent, there were also reductions in patent legal costs.
General and administrative expense for the fourth quarter was $1.4 million compared to $1.5 million in the third quarter, a decrease of $42,000 or 3%. The decrease was primarily driven by reduced cost associated with our year-end audit, salary and benefit cost and intangible amortization. These decreases were partially offset by increases in investor relation and corporate legal expenses.
Other income was $15,000 for the fourth quarter compared to $24,000 for the third quarter and we accrued income tax expense of $345,000 during the fourth quarter compared to $24,000 booked in the third quarter.
Our effective tax rate of 33% in the fourth quarter increased significantly from the 2% recorded in the third quarter. The abnormally low tax rate in the third quarter was primarily driven by the impact of booking the favorable result of the completion of a tax authority audit of our German deferred tax asset where we had a significant valuation allowance. To a lesser extent, we had a tax credit true-up based upon the finalization of our 2012 tax return. We expect our effective tax rate will range from 30 to 33% during 2014. At December 31, 2013, we had a total deferred tax asset of $1.7 million, down $317,000 from September 30.
Fourth quarter net income was $692,000 or $0.07 per diluted share compared with third quarter net income of $1.1 million or $0.10 per diluted share. Average shares outstanding were 10,435,000 at December 31.
Amortization and depreciation expense is $207,000 for the fourth quarter and EBITDA was $1.2 million for the fourth quarter.
For 2013, net revenues were $39.4 million compared to $43.4 million in 2012, a reduction of $4.0 million or 9%, due primarily to the softness in the semiconductor markets in 2013 compared to 2012. However, due to an improved margin in 2013, 48% versus 44% in 2012, and a $1.0 million reduction in operating expenses year-over-year, which were inflated in the first half of 2012 due to the acquisition of Thermonics and costs related to the move of our Silicon Valley operation, our net income for 2013 of $3.1 million or $0.30 per diluted share was $921,000 or $0.09 per share greater than the comparable prior period.
Consolidated headcount at the end of December, which includes temporary staff, was 129, a decrease of two individuals during the fourth quarter in our Mechanical Product segment.
I'll now turn to our balance sheet.
Cash and cash equivalents at the end of the fourth quarter were $19.0 million, up $2.3 million from September 30. We currently expect cash and cash equivalents to increase throughout 2014.
Accounts receivable decreased to $5.7 million at December 31, down $1.7 million since September 30.
Inventory also decreased slightly by $241,000 to $3.2 million at the end of December.
Capital expenditures during the fourth quarter were $167,000 compared to $162,000 in the third quarter. The additions were in our Thermal Product segment and represented additions to our leased system. For 2013, capital expenditures were $424,000 compared to $431,000 in 2012.
I've provided the consolidated and segment booking data earlier in the call, but the backlog at the end of December was $3.1 million, relatively unchanged from the end of September.
In terms of our financial outlook, as noted in our earnings release, due to seasonably lower demand we typically experience at the beginning of each year, we expect that net revenues for the quarter ended March 31, 2014 will be in the range of $8.5 to $9.5 million, with net earnings ranging from $0.02 to $0.06 per diluted share. We currently expect that our Q1 2014 product mix will be slightly less favorable than the fourth quarter of 2013, and that the first quarter gross margin will range from 46 to 48%.
Gartner has forecast that the ATE industry will resume growth in 2014 and we continue to be encouraged by quote activity and momentum which gives us the positive outlook. We see revenue growth resuming in the second quarter of 2014, and overall, we expect that 2014 will be stronger for inTEST than 2013.
As Bob has noted in our prior earnings calls, our long term objective is to grow and transform inTEST into a broad-based thermal solutions test company while continuing to supply our valued customers in the semiconductor test arena. Today, inTEST has evolved into a thermal test solutions provider offering a comprehensive product portfolio capable of addressing growth markets in both the semiconductor and non-semiconductor markets, which include automotive, consumer electronics, defense/aerospace, energy, industrial and telecommunications. We believe the conditions for our long-term success remain firmly in place.
Operator, that concludes our formal remarks. We can now take questions.
