inTEST Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. inTEST designs and manufactures thermal, mechanical, and electrical products used primarily in semiconductor testing; Thermal Products also serves non-ATE markets. Amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $9.203 | $10.794 | $30.950 | $31.934 |
| Gross profit | $4.323 | $5.168 | $15.087 | $15.435 |
| Gross margin | 47% | 48% | 49% | 48% |
| Operating income | $0.401 | $1.284 | $2.721 | $3.732 |
| Net earnings | $0.310 | $0.837 | $1.828 | $2.480 |
| Diluted EPS | $0.03 | $0.08 | $0.17 | $0.24 |
- Q3 revenue declined 15% year over year; nine-month revenue declined 3%. Q3 earnings fell 63% year over year.
- Nine-month operating cash flow was $2.919 million, versus $1.787 million in 2014. Capital expenditures were $0.545 million; cash increased to $25.383 million from $23.126 million at year-end 2014.
- At September 30, cash was $25.383 million, working capital $30.835 million, and total current liabilities $4.897 million. The filing reports no conventional borrowings or credit facility. Letters of credit totaled $0.350 million and were secured by restricted certificates of deposit.
- Q3 segment revenue: Thermal $6.259 million, Mechanical $1.273 million, and Electrical $1.671 million. For nine months, Thermal and Electrical revenue increased 8% and 13%, respectively, while Mechanical declined 33%. Mechanical reported a nine-month pretax loss of $1.240 million.
Material changes and management commentary
- Q3 orders were $8.405 million, down 21% year over year and 18% sequentially. ATE orders fell 24% year over year; non-ATE orders fell 16% year over year but rose 27% sequentially. Backlog was approximately $3.0 million, compared with $4.7 million a year earlier and $3.8 million at June 30.
- Management attributed weakness mainly to near-term ATE softness, seasonality, and reduced capital spending by some Mechanical Products customers. It cited lower Q3 fixed-cost absorption as a reason for the gross-margin decline; favorable product/customer mix partly offset this.
- For the first nine months, lower component costs and mix supported a one-point gross-margin improvement. Engineering and product development expense rose 12%, reflecting staffing and product-development spending. General and administrative expense included $0.329 million in due-diligence and transaction costs for a potential acquisition that was not pursued.
- Management said cash and projected operating cash flow should support short-term working-capital needs and anticipated repurchases. It stated that a significant acquisition could require additional resources; no credit facility was available.
Outlook, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management described the ATE market as cyclical, volatile, and seasonally weaker in the fourth and first quarters; orders and backlog are not necessarily predictive of future sales.
- Key risks include customer concentration, pricing pressure, competition, changing customer demand, inventory obsolescence, and reliance on semiconductor/ATE demand. Hakuto accounted for 13% of nine-month revenue, compared with 11% in 2014.
- On October 27, 2015, after quarter-end, the board authorized repurchases of up to $5 million of common stock. Repurchases are discretionary, may be suspended, and are expected to be funded from cash or operating cash flow. The filing identifies inability to complete the program as a risk.
- The filing reports no material legal proceedings, material off-balance-sheet arrangements, or material subsequent events other than the repurchase authorization. Management reported disclosure controls effective at the reasonable-assurance level and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether ATE orders, Mechanical Products demand, backlog, and margins stabilized after the reported near-term softness.
- Actual repurchase activity and its effect on cash, working capital, and capacity to fund acquisitions.
- The concentration and durability of major-customer revenue and the progress of Thermal Products in non-ATE markets.
- The segment-asset table shows Thermal assets falling from $26.211 million at year-end 2014 to $16.645 million, while Mechanical assets rise from $7.801 million to $20.481 million; the filing text does not provide a clear explanation for this shift.