inTEST Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unless otherwise noted, amounts are in millions; the filing presents financial statement amounts in thousands.
Business context
inTEST supplies test and process solutions across semiconductor and other markets. Its reportable segments are Thermal, which sells thermal test, process and induction-heating products, and Electromechanical Solutions (EMS), which sells semiconductor test products. The filing describes a recovery in demand, particularly in the semiconductor market, alongside efforts to diversify into markets including industrial, automotive and life sciences.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $21.144 | $14.443 | $62.520 | $38.948 |
| Gross margin | $10.395; 49% | $6.450; 45% | $30.878; 49% | $17.384; 45% |
| Operating income (loss) | $2.549 | $0.427 | $8.164 | $(0.733) |
| Net earnings (loss) | $2.175 | $0.458 | $6.996 | $(0.515) |
| Diluted EPS | $0.20 | $0.04 | $0.65 | $(0.05) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $8.123 | $2.400 |
Q3 revenue rose 46% year over year; nine-month revenue rose 61%. Management attributed higher gross margin mainly to better absorption of fixed costs at higher sales levels, partly offset by higher component material costs and product-mix effects. Nine-month revenue increased in both segments: Thermal rose 25% to $36.863 million and EMS rose 173% to $25.657 million. Semiconductor-market revenue increased 122% to $42.653 million.
At September 30, cash and cash equivalents were $18.743 million, working capital was $27.588 million, and current assets were $41.132 million versus current liabilities of $13.544 million. Cash increased from $10.277 million at December 31, 2020. Operating cash flow was $8.123 million; capital expenditures were $0.577 million. Higher receivables and inventory absorbed cash as business expanded. No funded debt balance is listed on the September 30 balance sheet; operating lease liabilities totaled $6.539 million, including current and long-term portions.
Material changes and unusual items
- Orders were $21.148 million in Q3, up 47% year over year but down 16% from Q2. Backlog was approximately $20.4 million, versus $8.7 million a year earlier; the company expected to deliver approximately 75% during 2021. Orders and backlog can fluctuate with timing, cancellations and customer delivery changes.
- Texas Instruments accounted for 14% of nine-month revenue, primarily through EMS; no other customer reached 10%.
- The EMS manufacturing consolidation in Fremont, California, into Mt. Laurel, New Jersey, was completed in Q3. Nine-month restructuring and other charges were $0.303 million, including costs related to the consolidation and CFO transition. The former CFO retired in June and a new CFO was appointed.
- The company signed a Fremont facility sublease beginning August 2021 and expects about $0.350 million of incremental sublease income over prior estimates, recognized over the sublease term.
- After quarter-end, inTEST acquired Z-Sciences for approximately $0.5 million cash and Videology for approximately $12 million cash. Purchase accounting was incomplete when the filing was prepared.
- On October 15, the company entered a new credit agreement providing a $25 million delayed-draw term note and $10 million revolver. It drew $12 million on October 28 to finance Videology and entered an interest-rate swap; the company expected an approximately 3.2% fixed rate on that draw, based on then-current leverage. The facility is secured by substantially all company assets and includes financial covenants.
Outlook, commentary and risks
The filing provides no formal revenue or earnings guidance. Management reported strong semiconductor demand associated with semiconductor shortages and technology adoption, while noting that Q3 semiconductor-market revenue declined 13% sequentially. A significant EV-customer order is expected to ship over several quarters. Management said it expected cash, operating cash generation and available borrowing capacity to support short-term needs and planned investments, including acquisitions.
Key risks include semiconductor-market cyclicality, changing customer capital spending and order timing, supply-chain and materials availability, customer concentration, product obsolescence, competitive pricing, COVID-19 and potential variants, and the execution and integration of acquisitions. The company also cited uncertainty in demand across multimarkets and potential volatility in product mix and margins. It reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of period-end.
Important facts for investors to verify
- Whether the strong 2021 order and backlog levels converted into revenue and cash on schedule, particularly the large EV-customer order.
- Whether the semiconductor demand surge is sustainable and how customer concentration, especially Texas Instruments, affects results.
- Acquisition funding, final purchase accounting, integration progress and performance of Z-Sciences and Videology.
- Compliance with the new credit facility’s leverage and fixed-charge coverage covenants, and the effect of the $12 million borrowing on liquidity and interest expense.
- Whether margin improvement persists amid product-mix changes, component costs, supply constraints and higher operating expenses.