Business context and reporting period
inTEST Corporation designs, manufactures and markets thermal, mechanical and electrical products, primarily for semiconductor automatic test equipment (ATE), and also sells thermal products into non-ATE markets. This unaudited Form 10-Q covers the three months ended March 31, 2014; comparisons are with the first quarter of 2013 unless noted. Amounts below are in thousands of dollars except per-share data.
Financial results and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $8,797 | $8,973 |
| Gross profit / margin | $4,185 / 48% | $4,105 / 46% |
| Operating income | $404 | $364 |
| Net earnings | $286 | $292 |
| Diluted EPS | $0.03 | $0.03 |
| Operating cash flow | $29 | $(134) |
| Capital expenditures | $200 | $44 |
At March 31, 2014, cash and cash equivalents were $18,853, working capital was $25,058, total assets were $35,935, and stockholders’ equity was $31,480. Current liabilities totaled $4,455. The filing reports no borrowings or credit facilities; $450 of restricted certificates of deposit secured lease letters of credit. Cash declined $165 during the quarter, ending at $18,853.
- Cash from operations was modest despite $286 of net earnings. Inventory increased $595 and accrued wages and benefits fell $407, partly reflecting payment of 2013 bonuses.
- Gross margin improved by 2 percentage points, attributed to lower fixed operating costs and a $75 reduction in excess and obsolete inventory charges.
- Income tax expense was $125 versus $78. The reported figures imply effective rates of approximately 30% in 2014 and 21% in 2013; the MD&A contains inconsistent wording about the comparative rates. Management attributes the higher 2014 rate to research and development credits recorded in 2013.
Material changes and operating trends
- Revenue fell 2% year over year. Thermal Products revenue declined 11% to $5,243, while Mechanical Products rose 14% to $2,047 and Electrical Products rose 18% to $1,507.
- ATE-market revenue rose 12% to $7,607; non-ATE revenue fell 45% to $1,190, primarily reflecting reduced demand from an industrial customer that management said was temporarily capacity-constrained.
- Orders increased 32% year over year to $10,161, with increases across all segments. Orders were up 10% from Q4 2013. Backlog was approximately $4,500, versus $2,900 a year earlier and $3,100 at December 31, 2013; substantially all was expected to ship in 2014, but customers may cancel or change delivery timing.
- Revenue was down 6% from Q4 2013, which management linked to weaker prior-quarter demand and lower opening backlog; many Q1 orders arrived too late to ship during the quarter.
- One distributor, Hakuto, represented 11% of revenue, all in Thermal Products, versus 10% a year earlier. Foreign revenue was $5,648, about 64% of total revenue.
Outlook, risks and other notable items
- Management expected cash and projected future cash flow to cover short-term working-capital needs. It had no credit facility and reported no significant capital-expenditure commitments for the remainder of 2014, while noting spending could change with demand or strategy.
- Approximately $3,100 of cash was held by foreign subsidiaries. The company planned to repatriate about $1,500 from its German subsidiary in Q2 2014 and intended to indefinitely reinvest the remaining foreign funds.
- Key risks include cyclical and volatile semiconductor/ATE demand, customer concentration, pricing pressure, competition, changing customer requirements, inventory obsolescence, and uncertainty in building non-ATE market share. Management said there were no changes to the risk factors in its 2013 Form 10-K.
- The company recorded $35 of excess and obsolete inventory charges, compared with $110 a year earlier. It reported no material subsequent events, material legal proceedings, or material off-balance-sheet arrangements. Disclosure controls were deemed effective at the reasonable-assurance level.
- A proposed 2014 Stock Plan, subject to stockholder approval, would permit awards covering up to 500,000 shares. Future unrecognized stock-based compensation was $378, expected to be recognized over a weighted-average 3.3 years.
Important facts for investors to verify
- Whether the strong increase in orders and backlog converts into shipments and revenue, given customer cancellation and scheduling flexibility.
- How much the temporarily capacity-constrained industrial customer affected Thermal Products, and whether that demand recovers.
- The sustainability of the improved gross margin amid pricing pressure, product/customer mix changes, and higher selling expense.
- The cash-flow impact of inventory growth, foreign-cash repatriation and any related U.S. taxes.
- The effective-tax-rate comparison: the MD&A’s rate wording conflicts with the rates implied by the financial statements and its explanation of 2013 tax credits.