INTEST CORP quarterly report, Q2 FY2014

inTEST Corporation — Q2 2014 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2014. Amounts are in thousands unless noted. inTEST designs and manufactures thermal, mechanical and electrical products, primarily for semiconductor test equipment markets, with thermal products also sold into non-ATE markets.

Financial performance and liquidity

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Revenue	$12,343	$11,218	$21,140	$20,191
Gross margin	$6,082; 49%	$5,465; 49%	$10,267; 49%	$9,570; 47%
Operating income	$2,044	$1,489	$2,448	$1,853
Net earnings	$1,357	$1,003	$1,643	$1,295
Diluted earnings per share	$0.13	$0.10	$0.16	$0.13

• Six-month operating cash flow was $1,020, versus $541 in 2013; investing cash use was $416, principally for property and equipment. Cash increased by $598 to $19,616.
• At June 30, cash and cash equivalents were $19,616, working capital was $26,671, and total assets were $38,395. Current liabilities were $5,540. The filing reports no borrowings or credit facility; $450 of letters of credit for leases were secured by restricted certificates of deposit.
• Cash included $3.0 million held by foreign subsidiaries, which management intended to reinvest indefinitely overseas. Management expected cash and projected future cash flow to cover short-term working capital needs.

Changes versus comparable periods

• Q2 revenue rose 10% year over year; six-month revenue rose 5%. Q2 improvement came from all three segments and was primarily associated with stronger ATE demand. For the first half, Mechanical and Electrical revenue increased, while Thermal revenue declined 3% and non-ATE revenue fell 19%.
• Six-month gross margin improved to 49% from 47%, reflecting lower material costs as a share of revenue and better absorption of fixed costs. Q2 gross margin remained 49% year over year.
• Six-month orders increased 22% to $22.8 million. Q2 orders were $12.6 million, up 15% year over year and 24% sequentially. Q2 non-ATE orders grew 37% year over year; non-ATE orders were 28% of total orders, versus 24% a year earlier.
• Backlog was approximately $4.8 million at June 30, versus $2.7 million a year earlier and $4.5 million at March 31. Most accepted orders were expected to ship during 2014, but orders may be canceled, accelerated, or postponed.

Outlook, risks and other matters

• No specific revenue or earnings guidance was provided. Management described improved ATE demand in Mechanical and Electrical products and continued non-ATE market penetration, while noting weaker ATE demand in Thermal products during Q2 and reduced non-ATE revenue in the first half.
• Results remain exposed to semiconductor and ATE cyclicality, volatile customer order timing, pricing pressure, competition, customer concentration, product mix, inventory obsolescence, and the challenge of building market share in non-ATE markets. Texas Instruments accounted for 13% of first-half revenue; distributor Hakuto accounted for 11% in 2014.
• Management reported no material changes to the risk factors in the 2013 Form 10-K, no material legal proceedings, and no material off-balance-sheet arrangements. Disclosure controls were concluded effective at the reasonable assurance level.
• The company noted newly issued revenue-recognition guidance effective for it January 1, 2017; it was evaluating the impact and had not selected a transition method.

Investor verification points

• Assess whether higher orders and backlog convert to revenue, given the company’s warning that backlog is not necessarily indicative of future sales.
• Track the sustainability and profitability of non-ATE growth and the recovery in Mechanical and Electrical ATE demand, alongside continued Thermal segment weakness.
• Monitor working-capital investment: receivables increased $2.0 million and inventory increased $768 during the first half.
• Review customer concentration, foreign-held cash and potential repatriation taxes, as well as exposure to pricing pressure and semiconductor-cycle volatility.