inTEST Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statement amounts are in thousands of dollars except per-share data. inTEST designs and sells thermal, mechanical, and electrical products, primarily for semiconductor test markets, with thermal products also serving non-ATE markets.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $10.485 million | $11.559 million | $19.132 million | $21.747 million |
| Gross margin | 51% | 51% | 49% | 50% |
| Operating income | $731 | $1,638 | $827 | $2,320 |
| Net earnings | $486 | $1,080 | $567 | $1,518 |
| Diluted EPS | $0.05 | $0.10 | $0.05 | $0.14 |
Q2 revenue fell 9% year over year; first-half revenue fell 12%. First-half ATE revenue declined 17%, while non-ATE revenue increased 5%. Q2 revenue rose 21% sequentially from Q1, as ATE demand improved. First-half orders increased 3% to $22.437 million; June 30 backlog was approximately $5.7 million, versus $3.8 million a year earlier. Management cautioned that backlog can be canceled or rescheduled and is not necessarily indicative of future sales.
At June 30, cash and cash equivalents were $25.003 million, working capital was $30.688 million, and total current liabilities were $4.666 million. The company reported no credit facilities; the filing does not identify outstanding borrowings. First-half operating cash flow was $195, compared with $853 in 2015. Capital expenditures were $164, and share repurchases used $770. Cash declined $707 during the half to $25.003 million. Restricted certificates of deposit were $225.
Segment and expense developments
- First-half revenue declined in Thermal Products (13%), Mechanical Products (6%), and Electrical Products (16%). Thermal remained the largest segment at $10.788 million.
- Mechanical Products reported a first-half pretax loss of $59, improved from a $481 loss a year earlier; it generated pretax income of $311 in Q2. Management said restructuring efforts are intended to restore profitability.
- Q2 general and administrative expense rose 37% to $2.145 million, including $456 of diligence and transaction costs for a potential acquisition that the company is no longer pursuing. First-half G&A also included $99 of restructuring charges; the comparable 2015 period included $320 of acquisition-related costs.
Outlook, risks, and unusual items
Management expects cash and projected operating cash flow to support short-term working-capital needs. It estimated annualized savings of approximately $690 from the January 2016 Mechanical Products workforce reduction, while noting that further restructuring costs may arise and the effort may not succeed. No specific revenue or earnings guidance was provided. The share repurchase plan was suspended in May 2016.
Key risks include cyclical and volatile semiconductor/ATE demand, pricing pressure and competition, customer concentration, inventory obsolescence, and execution of the Mechanical Products restructuring and any acquisition strategy. Hakuto represented 15% of first-half revenue and Texas Instruments 11%. The company reported no material legal proceedings, no material changes to the risk factors in its 2015 Form 10-K, and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the sequential Q2 improvement in orders and revenue continues, given lower year-over-year revenue and the cyclical ATE exposure.
- Progress toward Mechanical Products profitability and realization of the estimated $690 annualized restructuring savings.
- The nature and potential recurrence of acquisition-related diligence costs; the discussed potential transaction was abandoned.
- Operating cash conversion, working-capital movements, and the impact of the suspended repurchase plan on liquidity.
- Customer concentration and the quality and deliverability of the $5.7 million backlog.