inTEST Corporation — Q2 2013 Form 10-Q
Business and period: Designer and manufacturer of thermal, mechanical and electrical products, primarily for semiconductor automated test equipment, with some thermal-product sales to other industries. This unaudited report covers the quarter and six months ended June 30, 2013; financial amounts are in thousands except per-share data.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $11,218 | $13,576 | $20,191 | $24,307 |
| Gross profit / margin | $5,465 / 48.7% | $6,194 / 45.6% | $9,570 / 47.4% | $10,790 / 44.4% |
| Operating income | $1,489 | $1,994 | $1,853 | $1,910 |
| Net earnings | $1,003 | $1,334 | $1,295 | $1,291 |
| Diluted EPS | $0.10 | $0.13 | $0.13 | $0.13 |
- Q2 revenue declined 17% year over year but increased 25% from Q1 2013’s $8,973. Q2 net earnings fell 25% year over year; first-half net earnings were nearly unchanged.
- Q2 gross margin improved to 48.7% from 45.6%, attributed mainly to product/customer mix, lower component costs and lower obsolete-inventory charges. First-half operating margin was 9.2%, versus 7.9% in 2012.
- First-half operating cash flow was $541, versus $1,707 in 2012. Receivables increased $1,753 and inventory increased $423, partly offset by higher payables.
- Cash and cash equivalents were $16,032 at June 30, up from $15,576 at year-end. Total assets were $34,178 and stockholders’ equity $29,171. Current liabilities were $5,007; the filing reports no borrowings or credit facility. $450 of restricted certificates of deposit secured lease letters of credit.
Changes and operating trends
- Q2 revenue by segment: Thermal $5,772, down 11% year over year; Mechanical $3,812, up 23%; Electrical $1,648, down 59%. Mechanical and Electrical revenue rose sequentially, while Thermal declined 2%.
- Management attributed weakness primarily to lower ATE-industry demand and an unusually strong Electrical Products comparison in Q2 2012 from one OEM customer. Thermal demand had not yet shown the recovery seen in Mechanical and Electrical.
- First-half revenue from non-ATE industries was not separately quantified; for Q2 it was $2.5 million, or 22% of revenue, versus $2.2 million, or 17%, in Q2 2012.
- Q2 orders were $11.0 million, compared with $7.7 million in Q1 2013 and $11.8 million in Q2 2012. Backlog was approximately $2.7 million at June 30, versus $2.9 million at March 31 and $5.2 million a year earlier. Orders and backlog are not assurances of future revenue; customers may cancel or reschedule.
- There were no restructuring charges in the first half of 2013, compared with $359 in the first half of 2012 for the Thermonics facility closure. First-half 2012 also included Thermonics acquisition and California relocation costs; the acquisition closed in January 2012.
Outlook, risks and other matters
- No numerical revenue or earnings guidance was provided. Management said future order and revenue levels are uncertain and expects cash and projected cash flow to cover short-term working-capital needs. No significant capital-expenditure commitments were identified for the rest of 2013.
- Key exposures include semiconductor-industry cyclicality, changing demand and customer schedules, pricing pressure and competition, customer concentration, inventory obsolescence, and reliance on a relatively small number of customers. Texas Instruments represented 11% of first-half 2013 revenue, down from 19%; no other customer exceeded 10% in that period.
- Management said risk factors were unchanged from the 2012 Form 10-K. No material legal proceedings or material off-balance-sheet arrangements were reported. Disclosure controls were concluded effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether the Q2 sequential rebound in Mechanical and Electrical orders and revenue continues, given lower year-over-year revenue and backlog.
- Whether improved gross margin is sustainable as product mix, component costs and obsolete-inventory charges change.
- Working-capital conversion, particularly receivables and inventory growth, and the resulting operating cash flow.
- Exposure to ATE cycles, OEM pricing pressure and customer concentration, as well as the timing of any broader Thermal Products recovery.
- Liquidity needs and access to financing if cash flow weakens; the company reported no borrowing facility.