inTEST Corporation — Q1 2017 Form 10-Q
Business and period: The company designs and sells thermal, mechanical, and electrical products used primarily in semiconductor testing, with additional thermal products serving non-ATE markets. This unaudited report covers the three months ended March 31, 2017, compared with Q1 2016. Effective January 1, 2017, the company reported two segments: inTEST Thermal Solutions (iTS) and inTEST Electromechanical Semiconductor Products (EMS). Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $14.18 | $8.65 |
| Gross profit / gross margin | $7.73 / 55% | $4.07 / 47% |
| Operating income | $3.13 | $0.10 |
| Net earnings | $2.08 | $0.08 |
| Diluted earnings per share | $0.20 | $0.01 |
| Cash used in operating activities | $1.00 | $0.32 |
Revenue increased 64% year over year. iTS revenue rose 50% to $7.78 million; EMS revenue rose 85% to $6.40 million. ATE-market revenue was $10.44 million, up 72%, while non-ATE revenue was $3.74 million, up 45%. Operating expenses were $4.60 million, versus $3.97 million; higher selling and general and administrative costs were partly offset by lower engineering and product development expense. Income tax expense was $1.09 million in both periods at a reported 35% effective tax rate.
Cash and cash equivalents were $27.46 million at March 31, 2017, down from $28.61 million at year-end 2016. Working capital was $35.13 million, compared with $32.95 million. Current assets were $41.57 million and current liabilities $6.43 million. The company reported no credit facilities or borrowings; $0.18 million of restricted certificates of deposit secured lease letters of credit. Operating cash use reflected a $4.42 million increase in receivables, partly offset by earnings and higher income taxes payable. Capital expenditures were $0.11 million. Total assets were $46.35 million and stockholders’ equity $39.92 million.
Changes, outlook, and risks
- Orders rose 53% year over year to $15.03 million and 30% sequentially. Backlog was approximately $8.2 million, versus $3.5 million a year earlier and $7.4 million at December 31, 2016; substantially all was expected to ship during 2017. Backlog is not necessarily indicative of future sales and orders may be canceled or rescheduled.
- Management attributed stronger demand to both ATE and non-ATE customers, including automotive-related semiconductor testing, IoT and consumer/industrial applications, and increased telecommunications orders for optical transceiver products. Non-ATE markets represented 26% of revenue, down from 30% a year earlier and 42% sequentially.
- No specific earnings or revenue guidance was provided. Management expected cash and projected operating cash flow to cover short-term working-capital and corporate needs, but noted a significant acquisition could require additional resources. No significant capital expenditure commitments were disclosed for the rest of 2017.
- Risks include semiconductor and ATE cyclicality and seasonality, customer-specific demand shifts, customer concentration, pricing pressure, competition, inventory obsolescence, and dependence on customers’ purchasing patterns. Texas Instruments and distributor Hakuto each represented 13% of Q1 2017 revenue. Management reported no changes to the risk factors in its 2016 Form 10-K.
- The share-repurchase plan bought 13,883 shares for $62,000 during the quarter. Management said the existing trading-plan price cap had been exceeded and it was considering parameters for future repurchases. No material legal proceedings or off-balance-sheet arrangements were reported; disclosure controls were concluded effective at the reasonable-assurance level.
Important facts to verify
- Whether the sharp revenue, margin, and earnings improvement can be sustained given semiconductor-market cyclicality and product/customer mix.
- Whether receivables growth converts to cash and whether operating cash flow improves after the quarter’s $1.00 million cash use.
- How backlog converts to shipments, and whether concentrated customers or volatile non-ATE demand affect future results.
- Potential implications of upcoming accounting standards, particularly revenue recognition (planned adoption January 1, 2018) and lease accounting (effective January 1, 2019); management did not expect revenue guidance adoption to significantly affect timing or amounts based on its assessment to date.
- Foreign-subsidiary cash: $1.8 million was held abroad and repatriation of certain funds could trigger U.S. taxes.