inTEST Corporation — Q2 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2015. inTEST designs and manufactures thermal, mechanical and electrical products, primarily for semiconductor test equipment, and is expanding thermal products into other markets. Figures below are unaudited; financial amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $11.56 | $12.34 | $21.75 | $21.14 |
| Gross profit / margin | $5.85 / 51% | $6.08 / 49% | $10.76 / 50% | $10.27 / 49% |
| Operating income | $1.64 | $2.04 | $2.32 | $2.45 |
| Net earnings | $1.08 | $1.36 | $1.52 | $1.64 |
| Diluted EPS | $0.10 | $0.13 | $0.14 | $0.16 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $0.85 | $1.02 |
- Q2 revenue declined 6% year over year, while first-half revenue increased 3%. Q2 operating margin was approximately 14.2% versus 16.6% a year earlier; first-half operating margin was approximately 10.7% versus 11.6%.
- Gross margin improved year over year, attributed primarily to lower component costs as a share of revenue and product/customer mix, partly offset by less absorption of fixed costs in Q2.
- At June 30, cash and cash equivalents were $23.47 million, working capital was $30.43 million, and total assets were $41.07 million. Cash increased $0.34 million during the first half.
- There was no reported borrowing debt or cash flow from financing activities. The company had $0.35 million of letters of credit secured by restricted certificates of deposit. It reported no credit facilities.
- First-half operating cash flow was affected by increases in receivables ($2.39 million) and inventories ($0.38 million), partly offset by increases in payables and other liabilities. Capital spending was $0.39 million.
Material changes and management commentary
- Q2 revenue fell mainly because Mechanical Products revenue declined 40% to $2.49 million. Thermal Products rose 9% to $6.66 million and Electrical Products rose 15% to $2.41 million.
- For the first half, Thermal revenue increased 9% and Electrical revenue increased 24%; Mechanical revenue declined 20%. Non-ATE revenue grew 20% for the first half and represented 22% of revenue, while ATE revenue was down 1%.
- Q2 orders were $10.29 million, down 19% year over year and 10% sequentially. The year-over-year decrease primarily reflected weaker Mechanical Products demand in ATE. Backlog was approximately $3.8 million, versus $4.8 million a year earlier and $5.0 million at March 31; substantially all was expected to ship in 2015, but orders may be canceled or rescheduled.
- Management cited semiconductor/ATE cyclicality, volatile and seasonal demand, short lead times, customer-specific demand shifts, price competition, and customer concentration as risks. It also noted inventory-obsolescence exposure and pressure from OEM purchasing practices.
- Cash and projected future cash flow were expected to support short-term working capital needs. No significant capital expenditure commitments were reported for the rest of 2015. Management said a major acquisition could require additional financial resources. No formal revenue or earnings guidance was provided.
- The company incurred $0.32 million of first-half due diligence and transaction costs for a potential acquisition and decided not to pursue it after confirming the target’s lower-than-expected second-quarter bookings. Management planned to repatriate up to $1.0 million from its German subsidiary in the second half of 2015; $0.88 million had been repatriated from Singapore in February.
Risks, contingencies and other disclosures
- The filing reported no material legal proceedings, no material off-balance-sheet arrangements, and no material changes to the risk factors in the 2014 Form 10-K. Management concluded disclosure controls were effective at a reasonable-assurance level.
- One distributor accounted for 12% of first-half 2015 revenue; no other customer represented 10% or more in that period. The semiconductor market is cyclical, and results can fluctuate materially with demand and product mix.
- Management expected no material financial-statement impact from the inventory accounting update effective in 2017. The company was still evaluating the effect and transition method for the new revenue standard, effective for it in 2018.
Important facts for investors to verify
- Whether Mechanical Products demand and orders recover, given the segment’s Q2 revenue decline and lower consolidated orders.
- Whether non-ATE growth can offset ATE-market volatility, including the durability of recent defense/aerospace and telecommunications demand.
- Cash conversion and working-capital trends, especially receivables and inventory growth relative to revenue and orders.
- Backlog conversion, customer cancellations or deferrals, and continued exposure to key customers and distributors.
- Potential tax effects of planned foreign-cash repatriation and any future acquisition or capital requirements.