inTEST Corporation — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. inTEST supplies precision-engineered manufacturing and testing solutions through its Thermal and Electromechanical Semiconductor Products (EMS) segments. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $11.230 | $18.062 | Down 38% |
| Gross profit / margin | $4.867 / 43% | $8.836 / 49% | Margin down 6 percentage points |
| Operating income (loss) | $(1.361) | $1.441 | Turned to loss |
| Net income (loss) | $(1.143) | $1.138 | EPS: $(0.11) vs. $0.11 |
| Operating cash flow | $(0.119) | $(9.475) | Improved; prior period included a $10.048 million Ambrell earnout payment |
| Cash and cash equivalents | $7.318 at Mar. 31 | $7.612 at Dec. 31, 2019 | Down $0.294 |
| Working capital | $15.760 at Mar. 31 | $16.534 at Dec. 31, 2019 | Down $0.774 |
Revenue declines were concentrated in EMS, down 65% to $1.896 million, and the Semi Market, down 50% to $5.011 million. Thermal revenue fell 26% to $9.334 million. Multimarket revenue declined 22% to $6.219 million. Gross margin compression reflected lower revenue and reduced absorption of fixed operating costs; fixed operating costs were 22% of revenue versus 15% a year earlier, despite a $0.293 million absolute reduction.
At March 31, current assets were $23.776 million and current liabilities $8.016 million; the balance sheet showed no funded borrowings. Operating lease liabilities totaled $5.947 million, including $1.303 million current. Cash used for property and equipment was $0.080 million. The company repurchased $0.074 million of stock during the quarter and suspended its repurchase plan on March 2.
Material changes and operating trends
- Orders increased 16% year over year to $13.776 million and 24% from Q4 2019. Semi Market orders rose 20% year over year; Multimarket orders rose 12%.
- Backlog was approximately $8.1 million at quarter-end, versus $7.2 million a year earlier and $5.5 million at December 31, 2019. The company expected substantially all backlog to ship during 2020, but noted orders may be canceled, accelerated, or postponed.
- The company attributed the revenue decline primarily to the semiconductor cycle downturn that began in 2019 and weaker industrial demand. Defense/aerospace revenue increased, partly offsetting declines elsewhere.
- No customer represented 10% or more of Q1 2020 revenue; Texas Instruments had represented 16% in Q1 2019.
Outlook, risks, and unusual items
- COVID-19 and outlook: The pandemic compounded the Semi Market downturn. Management said the expected market recovery could be delayed by two or more quarters. It expected available working capital and the new revolving facility to provide sufficient liquidity through the remainder of 2020, while warning that the pandemic’s duration and impact could not be estimated reliably.
- Financing after quarter-end: On April 10, the company obtained a $7.5 million, 364-day revolving credit facility bearing interest at LIBOR plus 2.5%; it had drawn $2.8 million as of the filing date. The facility is secured by substantially all specified assets and includes financial and other covenants.
- PPP loans: The company and subsidiaries obtained $2.829 million in PPP loans in April, then repaid them in full with applicable interest on May 5, 2020.
- Operational risks: Facilities were deemed essential; the Fremont facility was temporarily shut in late March and Mansfield closed for two weeks in early April, but both had reopened by the filing date. Travel restrictions reduced or suspended some customer service activity, typically 8%–10% of revenue. Supply disruptions, material cost increases, further closures, staffing constraints, and customer delays or cancellations could materially affect results.
- Impairment and contingency: The company’s March 31 qualitative review found goodwill and long-lived assets not impaired, but further reviews were planned and a future material impairment remained possible. It had a $0.463 million contingent liability for New York grant proceeds while not meeting employment targets; failure to satisfy requirements or obtain a waiver could require repayment of a proportionate amount.
- The company reported no material legal proceedings and said disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether the Semi Market recovery was delayed as management anticipated, and whether orders converted into revenue and backlog shipments.
- Actual utilization, covenant compliance, borrowing availability, and liquidity under the M&T revolver; the filing does not state the amount remaining available after the reported draw.
- COVID-19 effects on facility operations, supply costs, customer service revenue, and customer orders.
- Whether subsequent impairment testing or grant-employment outcomes resulted in charges or repayment obligations.
- How the company’s expense reductions and product/market mix affected gross margin and cash burn in subsequent periods.