INTEST CORP annual report, FY2014

inTEST Corporation — FY2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. Although the request identifies 2014 Q4, this is an annual filing; it also reports unaudited fourth-quarter results. inTEST designs and sells thermal, mechanical and electrical products, primarily for semiconductor testing and automatic test equipment (ATE), with thermal products also sold into non-ATE markets.

Financial results and liquidity

MetricFY2014FY2013
Net revenue$41.796 million$39.426 million
Gross profit / margin$20.462 million / 49%$19.015 million / 48%
Operating income$4.916 million$3.962 million
Net earnings$3.439 million$3.077 million
Diluted earnings per share$0.33$0.30
Operating cash flow$5.129 million$3.770 million
Cash and cash equivalents, year-end$23.126 million$19.018 million
Working capital, year-end$28.561 million$24.749 million
Long-term debtNone reportedNone reported

Capital expenditures were $831,000, versus $424,000 in 2013. The company had no credit facility and reported no 2014 financing cash flows. Cash held by foreign subsidiaries was $3.1 million at year-end; $883,000 was repatriated from Singapore in February 2015, and German subsidiary funds were expected to remain indefinitely reinvested.

Changes versus the prior comparable period

  • Annual revenue increased 6%. ATE-market revenue rose 8% to $30.737 million, while non-ATE revenue was essentially flat at $11.059 million. Non-ATE sales were 27% of total revenue, versus 28% in 2013.
  • Revenue by segment: Thermal Products rose 2% to $23.446 million; Mechanical Products rose 13% to $11.245 million; Electrical Products rose 9% to $7.105 million. Management attributed part of Mechanical growth to a customer’s new Southeast Asian facility.
  • Orders increased 11% to $42.441 million; non-ATE orders rose 17%. Year-end backlog was approximately $3.8 million, compared with $3.1 million, and was substantially expected to ship in 2015.
  • Gross margin improved by one percentage point, primarily from better absorption of fixed costs at higher revenue levels. Income tax expense rose to $1.470 million from $931,000, and the effective tax rate increased to 30% from 23%, principally due to fewer tax credits and a prior-year German tax audit benefit.
  • Mechanical Products’ operating loss narrowed to $18,000 from $784,000. Thermal operating income was $4.740 million and Electrical operating income was $781,000.
  • For Q4 alone, revenue was $9.862 million versus $9.335 million in Q4 2013; net earnings were $959,000 versus $692,000.

Outlook, risks and notable items

  • No numerical revenue or earnings guidance was provided. Management expected cash and projected cash flow to support short-term working-capital needs, but noted that a significant acquisition could require additional resources. No significant 2015 capital-expenditure commitments were reported.
  • Management’s strategy is to expand thermal-product sales outside ATE, pursue complementary acquisitions, develop products and control costs. It cautioned that non-ATE sales may remain variable and that diversification success is uncertain.
  • Results remain exposed to semiconductor/ATE cyclicality and seasonality, pricing pressure, customer ordering patterns, product mix, and short lead-time demands. The filing describes the first and fourth quarters as typically weaker ATE-demand periods.
  • Customer concentration is material: Texas Instruments represented 13% of revenue in both years; Hakuto represented 11% in 2014. The ten largest customers generated approximately 48% of 2014 revenue.
  • Other disclosed risks include international and foreign-exchange exposure, supplier availability, inventory obsolescence, technology and competition, tax uncertainty, intellectual-property protection, cyber and operational security, and retaining key employees. Foreign customers generated 66% of revenue.
  • The company recorded $344,000 of excess and obsolete inventory charges in 2014. No goodwill, indefinite-lived intangible or long-lived asset impairment was recorded; goodwill was $1.706 million. No material legal proceedings or material off-balance-sheet arrangements were reported. The auditor issued an unqualified opinion on the financial statements.
  • Management concluded disclosure controls and internal control over financial reporting were effective at a reasonable assurance level. The auditor did not provide an internal-control attestation, as the company was a smaller reporting company.

Important facts for investors to verify

  • Whether increased orders and backlog converted into 2015 revenue, given customers’ ability to cancel or reschedule orders.
  • Whether non-ATE thermal sales can grow and reduce dependence on cyclical ATE demand.
  • Whether customer concentration, competitive pricing and shorter lead times affect margins or order continuity.
  • How foreign cash availability, repatriation costs and the effective tax rate evolve.
  • Whether Mechanical Products sustains its substantial improvement and avoids renewed operating losses.