Business context and reporting period
inTEST Corporation’s Form 10-K covers the fiscal year ended December 31, 2018; it is an annual filing, not a standalone fourth-quarter report. The company designs and sells thermal-management and induction-heating products, plus electromechanical semiconductor test-interface products. Its reportable segments are Thermal and Electromechanical Semiconductor Products (EMS). The May 2017 Ambrell acquisition expanded Thermal into industrial induction heating and other non-semiconductor markets.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $78.6 million | $66.8 million | +18% |
| Gross profit / margin | $39.4 million / 50% | $34.7 million / 52% | Margin down about 2 percentage points |
| Operating income | $5.2 million | $3.6 million | +43% |
| Net earnings | $3.0 million | $1.0 million | Up $2.1 million |
| Diluted EPS | $0.29 | $0.09 | Up $0.20 |
| Operating cash flow | $11.0 million | $7.2 million | Up $3.7 million |
- Revenue growth was led by Thermal, up 33% to $56.0 million; EMS revenue fell 8% to $22.6 million. Thermal operating income was $1.2 million versus a loss of $0.8 million; EMS operating income declined to $5.4 million from $6.8 million.
- Net cash increased by $4.6 million during the year. Cash and cash equivalents were $17.9 million at year-end, up from $13.3 million; working capital was $14.2 million, down from $16.6 million.
- Capital expenditures were $2.2 million, primarily for Ambrell’s Rochester facility. The company reported no credit facilities and did not identify material off-balance-sheet arrangements. A $12.2 million Ambrell earnout payable was a current liability, expected to be paid in April 2019. The filing does not identify conventional borrowings as a significant funding source.
- Foreign customers accounted for $53.0 million, or 68%, of revenue. Foreign subsidiaries held $3.9 million, or 22%, of year-end cash.
Material changes versus the prior comparable period
- Reported revenue increased $11.8 million, but Ambrell contributed $26.4 million in 2018 versus $13.6 million in 2017. Excluding Ambrell, revenue declined 2% and orders declined 4%, primarily reflecting weaker EMS demand in the ATE market.
- Revenue from non-semiconductor markets rose 14% to $33.2 million, representing 42% of total revenue. Excluding Ambrell, non-semiconductor revenue fell to $14.0 million from $15.8 million, mainly due to telecommunications weakness.
- Gross margin declined from 52% to 50%. The company cited higher fixed operating costs; product mix and customer pricing also affect margins.
- Texas Instruments represented 11% of revenue in both years. The ten largest customers accounted for about 40% of revenue in 2018 versus 46% in 2017.
Outlook, commentary, risks and unusual items
- Management expects future orders and revenue to be approximately equally split between semiconductor and non-semiconductor markets, but provided no numeric earnings or revenue guidance. Year-end backlog was $13.4 million, substantially all expected to ship in 2019; management cautions that backlog is not necessarily indicative of future sales and orders may be changed or canceled.
- Management highlighted semiconductor/ATE cyclicality and seasonality, competitive pricing, customer purchasing changes, concentrated customers, supplier availability, technology shifts, foreign-market exposure, currency movements, and the ability to diversify and integrate acquisitions as risks.
- Ambrell-related contingent consideration was a major unusual item: the company recorded a $6.9 million noncash expense in 2018, following $7.0 million in 2017. The 2018 amount reflected Ambrell’s adjusted EBITDA and raised the year-end earnout payable to $12.2 million. This expense materially affects reported operating results and is not deductible for tax purposes.
- Fourth-quarter 2018 revenue was $18.4 million, gross profit $9.0 million, and net loss $0.8 million, or loss per share of $0.08. The quarter included a $2.8 million increase in contingent consideration fair value.
- Income tax expense was $2.0 million, with a 40% effective tax rate versus 75% in 2017. The company reversed a $476,000 provisional transition-tax accrual in 2018 after concluding no transition tax was due.
- Adoption of revenue-recognition guidance in 2018 had no significant impact. The company expected lease-accounting adoption in January 2019 to increase assets and liabilities by approximately $4.9 million, without a significant change in lease expense pattern.
- No material legal proceedings were reported. Management concluded disclosure controls and internal control over financial reporting were effective at the reasonable-assurance level; the auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether underlying demand and profitability improve, particularly in EMS, after excluding Ambrell’s acquisition contribution and earnout remeasurement expense.
- The final Ambrell earnout payment and its effect on cash, and whether the expected 2019 payment is consistent with the $12.2 million year-end payable.
- Whether gross margin stabilizes amid product-mix changes and customer pricing pressure.
- Whether backlog converts to revenue as expected, given customer cancellation and rescheduling rights and the cyclical ATE market.
- Customer and international concentration, including Texas Instruments’ 11% revenue share and the company’s reliance on foreign customers and overseas cash.
- The balance-sheet and expense effects of lease-accounting adoption and the company’s ability to fund future acquisitions without an existing credit facility.