inTEST Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in millions of dollars unless otherwise noted. inTEST supplies thermal and semiconductor test equipment through its Thermal and Electromechanical Solutions (EMS) segments.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $14.443 | $14.632 | $38.948 | $47.046 |
| Gross margin | $6.450; 45% | $7.205; 49% | $17.384; 45% | $22.760; 48% |
| Operating income (loss) | $0.427 | $0.806 | $(0.733) | $1.953 |
| Net earnings (loss) | $0.458 | $0.647 | $(0.515) | $1.598 |
| Diluted EPS | $0.04 | $0.06 | $(0.05) | $0.15 |
- Q3 revenue fell 1% year over year; it rose 9% from Q2 2020. Q3 operating income and net earnings were lower year over year, and gross margin declined four percentage points, primarily due to product and customer mix and lower absorption of fixed costs.
- Nine-month revenue declined 17%. Semi Market revenue fell 23% to $19.256 million and Multimarket revenue fell 11% to $19.692 million. Thermal revenue declined 13% and EMS revenue declined 29%.
- Nine-month operating cash flow was $2.400 million, versus cash used of $9.131 million in 2019. The comparison includes a $12.167 million Ambrell earnout payment in 2019. Investing cash use was $0.520 million; financing cash use was $0.074 million. Cash increased $1.861 million to $9.473 million.
- At September 30, cash was $9.473 million and working capital was $17.358 million. Current liabilities were $9.284 million. Operating lease liabilities totaled $7.348 million, including $1.299 million current.
- No revolving-facility borrowings were outstanding at quarter-end; the company reported the full $7.5 million facility available. The facility expires April 9, 2021, is secured by substantially all assets, and contains financial and other covenants. The company drew and repaid $2.8 million during the period. PPP loans of $2.829 million were fully repaid in May.
Material developments and management commentary
- Management attributed the nine-month loss mainly to the Semi Market downturn, compounded by COVID-19. It said the broader market appeared to be entering a cyclical upturn, but the recovery was uneven for inTEST’s products and customer demand.
- Q3 orders were $14.427 million, up 4% year over year and sequentially; backlog was approximately $8.7 million, compared with $8.0 million a year earlier. Management cautioned that orders and backlog do not assure future revenue, since customers may change delivery timing or cancel orders.
- The company plans to close its Fremont, California EMS manufacturing operation and consolidate manufacturing in Mt. Laurel, New Jersey, with substantial completion expected in Q4 2020. Estimated cash severance and other termination costs total $0.35–$0.50 million; an additional non-cash Fremont lease-asset impairment of $0.7–$0.8 million was expected in Q4. About $0.202 million of tenant improvements was also expected in Q4.
- CEO James Pelrin resigned in August; Richard N. Grant, Jr. became President and CEO. The company recorded $0.495 million of related costs in the first nine months and expected another $0.020 million in Q4. It also expected a $0.1–$0.2 million non-cash impairment of the Mansfield corporate-office lease asset.
- Management expected cash and available credit to support short-term requirements and operations through the balance of 2020. This outlook is subject to COVID-19, demand, supply-chain disruption, and facility risks; no specific revenue or earnings guidance was provided.
Risks, contingencies and unusual items
- COVID-19 may disrupt operations, customer demand and service visits, employee availability, and supply chains; supplier delays, shortages or price increases could reduce margins. Management said the duration and financial impact could not be reasonably estimated.
- The company had not met Rochester facility employment targets as of September 30. A waiver allowed until December 31, 2020 to come into compliance; up to $0.423 million of grant proceeds could be repayable if requirements are not met and no further waiver is obtained.
- Management’s September impairment review concluded goodwill and long-lived assets were not more likely than not impaired; no quantitative test was performed. The annual goodwill assessment was planned for Q4, and future impairment could be material.
- Management stated that there were no material legal proceedings, no material off-balance-sheet arrangements, and no material changes to previously disclosed risk factors other than the added COVID-19-related risk disclosures.
Important facts for investors to verify
- Whether customer orders, backlog, and Semi Market demand support the anticipated recovery, particularly for EMS.
- Actual Q4 costs, timing, customer-delivery effects, and savings from the Fremont consolidation, including the forecast lease impairment.
- Cash burn, covenant compliance, and access to the $7.5 million facility as it approaches its April 2021 expiration.
- Results of the Q4 goodwill impairment assessment and any changes in the COVID-19 outlook or supplier conditions.
- Whether Rochester employment requirements are met or a further waiver is secured, avoiding potential grant repayment.