inTEST Corporation — Q1 2019 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2019, with comparisons to Q1 2018. inTEST supplies thermal, mechanical and electronic products used in semiconductor testing and other markets. Its reportable segments are Thermal and Electromechanical Semiconductor Products (EMS). Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and liquidity
- Revenue: $18.1 million, down 4% from $18.9 million. Thermal revenue was $12.6 million (down 5%); EMS was $5.4 million (down 4%). Semiconductor-market revenue fell 4% to $10.1 million; non-semiconductor revenue fell 5% to $8.0 million.
- Profit and margins: Gross profit was $8.8 million versus $9.4 million; gross margin was 49%, down from 50%. Operating income rose to $1.4 million from $0.9 million. Net earnings were $1.1 million, or $0.11 per diluted share, versus $0.4 million, or $0.04 per diluted share.
- Operating expenses and taxes: General and administrative expense increased 25% to $3.7 million, primarily due to higher third-party professional fees. Income tax expense was $0.3 million versus $0.6 million; the effective tax rate was 22% versus 61%. The prior-year rate was elevated partly because a contingent-consideration charge was not tax deductible.
- Cash flow: Operating activities used $9.5 million, compared with $2.3 million provided in Q1 2018. The 2019 outflow included a $10.0 million payment toward the Ambrell acquisition earnout. Cash and cash equivalents declined to $8.2 million from $17.9 million at year-end; the remaining $2.1 million earnout was paid in April.
- Liquidity and obligations: Working capital was $14.7 million, versus $14.2 million at December 31, 2018. The company reported no credit facilities and no material off-balance-sheet arrangements. It said cash and projected future cash flow should meet short-term working-capital and corporate needs, while noting a significant acquisition might require additional financing. Operating lease liabilities totaled $4.4 million at quarter-end; no conventional borrowings are reported in the filing.
- Other balance-sheet items: Total assets were $61.4 million and stockholders’ equity was $44.1 million. Inventory rose to $7.1 million from $6.5 million. Goodwill was $13.7 million; net intangible assets were $14.6 million.
Material changes and operating trends
- Orders fell 42% year over year to $11.9 million and 35% from Q4 2018. Semiconductor-market orders declined 56% year over year; non-semiconductor orders declined 22%. Management attributed weakness mainly to cyclical and seasonal semiconductor-market softness, lower demand in optical transceivers, and slower global economic growth.
- Backlog was approximately $7.2 million at March 31, down from $15.4 million a year earlier and $13.4 million at December 31, 2018. The company said substantially all backlog was expected to ship in 2019, but cautioned that orders may be canceled, accelerated or postponed.
- The EMS revenue increase versus Q4 2018 reflected a large customer order shipped in Q1; management said this one-time order was not expected to recur in the near term.
- Texas Instruments represented 16% of Q1 revenue, compared with 11% a year earlier. The filing notes reliance on a relatively small number of customers.
Outlook, risks and unusual items
- Management expected future orders and revenue to be approximately evenly divided between semiconductor and non-semiconductor markets, while emphasizing that demand and results may fluctuate significantly. The filing provides no numerical revenue or earnings guidance.
- Key risks include semiconductor and ATE cyclicality, seasonality, global economic conditions, customer concentration, customer pricing pressure, product and inventory obsolescence, and execution and financing risks related to acquisitions. The company said risk factors were unchanged from its 2018 Form 10-K.
- ASC 842 lease accounting was adopted January 1, 2019, adding right-of-use assets and lease liabilities to the balance sheet without a significant change to lease expense patterns. The Mansfield, Massachusetts lease was amended in April to extend through December 2024 and add space; the company estimated an approximately $1.8 million increase in right-of-use assets and lease liabilities upon modification.
- The Rochester facility grant arrangements could require repayment of received funds if specified employment targets are not met. The company had received $0.2 million and expected to receive the remaining $0.35 million during 2019.
- Management concluded disclosure controls were effective at the reasonable-assurance level. The company reported no material legal proceedings and no material subsequent events requiring adjustment.
Important facts for investors to verify
- Whether the sharp declines in orders and backlog stabilize, particularly in semiconductor and ATE markets.
- How much of reported cash-generation capacity remains after the earnout payments and other working-capital needs.
- Whether the one-time EMS shipment and customer concentration affect upcoming quarterly comparisons.
- Whether G&A spending, pricing pressure and lower production absorption put further pressure on operating margins.
- Progress against Rochester employment commitments and the financial impact of lease amendments.