inTEST Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. inTEST designs and manufactures thermal, mechanical, and electrical products used mainly in semiconductor testing, with some thermal product sales to other industries. Amounts below are in U.S. dollars; financial statement figures are in thousands unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $10.799m | $11.681m | $35.106m | $37.185m |
| Gross profit / margin | $4.762m / 44.1% | $6.133m / 52.5% | $15.552m / 44.3% | $18.024m / 48.5% |
| Operating income / margin | $989k / 9.2% | $2.415m / 20.7% | $2.899m / 8.3% | $6.399m / 17.2% |
| Net earnings | $664k | $5.182m | $1.955m | $9.094m |
| Diluted earnings per share | $0.06 | $0.50 | $0.19 | $0.88 |
| Operating cash flow | Not separately provided | Not separately provided | $4.826m | $5.809m |
Q3 revenue fell 8% year over year; nine-month revenue fell 6%. Gross margin contracted 8.4 percentage points in Q3 and 4.2 points year to date. Management attributed the margin decline chiefly to product and customer mix, higher component costs, and increased excess-inventory charges. Net earnings comparisons are also affected by 2011’s substantial income tax benefit from reversal of deferred-tax valuation allowances.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $14.7m, versus $14.0m at December 31, 2011. Current assets were $26.246m and current liabilities $5.287m.
- Total assets were $33.668m; stockholders’ equity was $28.381m. The filing reports no funded borrowings and states that the company had no available credit facilities. Restricted certificates of deposit were $450k, securing lease letters of credit.
- Nine-month investing cash use was $4.072m, including $3.802m for the Thermonics acquisition and $283k for property and equipment. Cash increased $743k over the period.
- Management expects cash and projected future cash flow to support short-term working capital needs, but notes it cannot be certain that credit facilities could be obtained if needed.
Segments, orders, and material changes
Q3 segment revenue was Thermal Products $6.037m (down 20%), Mechanical Products $2.677m (down 16%), and Electrical Products $2.086m (up 122%) year over year. Thermal revenue included $1.4m from Thermonics; excluding that acquisition, Thermal revenue would have declined 39%. For the first nine months, Thermal revenue was $18.651m, Mechanical $8.277m, and Electrical $8.189m. Mechanical’s nine-month decline was 38%, while Electrical increased 90%.
- Q3 orders were $8.7m, versus $11.8m in Q2 2012 and $10.5m in Q3 2011. Backlog was $3.2m at September 30, down from $5.2m at June 30 and $6.1m a year earlier; most backlog was expected to ship during 2012, but orders may be canceled or rescheduled.
- On January 16, 2012, inTEST acquired substantially all Thermonics assets and certain liabilities for approximately $3.802m in cash. Thermonics contributed $3.467m in revenue from acquisition through September 30; its net income was not separately tracked. The acquisition added $1.728m of identifiable intangible assets and $50k of goodwill.
- The Thermonics facility relocation generated $359k of first-quarter restructuring charges. Nine-month G&A also included $337k of acquisition costs. Excess and obsolete inventory charges were $522k for the first nine months, up from $278k.
Outlook, commentary, and risks
The filing provides no formal revenue or earnings guidance. Management said a major Electrical Products OEM customer’s demand weakened significantly in Q3 and expected Electrical revenue to decline in Q4 versus Q3. Management also cited lower demand in the ATE market and weakened demand in some non-ATE markets. Results are subject to semiconductor-industry cyclicality, changing customer demand, pricing pressure, product mix, and inventory obsolescence. Texas Instruments represented 16% of nine-month revenue and Teradyne 13%; the filing identifies dependence on a relatively small number of customers as a risk. Management reported no material changes to the risk factors in the 2011 Form 10-K, no material legal proceedings, and no material off-balance-sheet arrangements. Disclosure controls were concluded effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether order levels and the $3.2m backlog convert to revenue as expected, given cancellation and rescheduling risk.
- Whether Q4 Electrical Products revenue declines as management anticipated, and how demand develops across the segments.
- Whether gross margins stabilize amid mix shifts, customer pricing pressure, and elevated inventory-obsolescence charges.
- Whether Thermonics delivers the expected strategic contribution and whether acquisition-related intangible amortization and costs affect future results.
- How deferred-tax asset realization assumptions and the absence of available borrowing facilities affect future liquidity and reported earnings.