inTEST Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in millions of dollars unless noted. inTEST supplies thermal and semiconductor test products through its Thermal and Electromechanical Semiconductor Products (EMS) segments.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $13.275 | $14.352 | $24.505 | $32.414 |
| Gross margin | 46% (filing rounded) | 47% | 45% | 48% |
| Operating income (loss) | $0.201 | $(0.294) | $(1.160) | $1.147 |
| Net earnings (loss) | $0.170 | $(0.187) | $(0.973) | $0.951 |
| Diluted earnings (loss) per share | $0.02 | $(0.02) | $(0.10) | $0.09 |
- Q2 revenue fell 8% year over year; first-half revenue fell 24%. First-half Semi Market revenue declined 33% to $11.869 million, while Multimarket revenue declined 14% to $12.636 million.
- First-half operating cash flow was $0.081 million, versus cash used of $9.951 million in 2019. First-half capital expenditures were $0.190 million. The 2019 operating cash flow included a $12.167 million Ambrell earnout payment.
- Cash was $7.424 million at June 30, down from $7.612 million at year-end 2019; working capital was $16.466 million. No revolving-facility balance was outstanding at quarter-end, and the full $7.5 million remained available.
- No conventional borrowings were outstanding at June 30. The $7.5 million M&T Bank revolver matures April 9, 2021, is secured by substantially all company assets, and includes financial and other covenants. Operating lease liabilities totaled $5.620 million.
- Total assets were $59.858 million and stockholders’ equity was $44.179 million. The current ratio was approximately 2.9x, calculated from reported current assets and liabilities.
Material changes and operating trends
- Q2 orders were $13.918 million, down 13% from Q2 2019 but 1% above Q1 2020. Semi Market orders rose 9% sequentially; management viewed this as a possible sign the downturn was nearing an end, but cautioned that improvement might not continue.
- Backlog was approximately $8.7 million at June 30, compared with $8.8 million a year earlier and $8.1 million at March 31. Orders may be canceled, accelerated, or postponed, so backlog is not necessarily predictive of future sales.
- Q2 Thermal revenue declined 10% year over year to $9.476 million; EMS revenue was nearly flat at $3.799 million. First-half Thermal and EMS revenue declined 19% and 39%, respectively.
- First-half expense reductions included lower selling and general and administrative costs. Prior-year G&A included $0.703 million related to an acquisition opportunity not pursued and $0.223 million of restructuring costs; 2020 first-half restructuring costs were $0.046 million.
Outlook, risks, and unusual items
- Management said the Semi Market recovery had been delayed by at least a quarter, possibly longer, due to COVID-19. It reported increasing Semi Market order rates in Q2 but gave no quantified revenue or earnings guidance.
- Management expected cash and working capital, together with revolver availability, to be sufficient to operate through the balance of 2020. It warned that a worse-than-expected pandemic impact could require additional financing or further cost reductions.
- COVID-19 and the semiconductor downturn affected demand, customer access and aftermarket service, manufacturing operations, employee availability, and supply-chain costs. Service and support revenue, typically 8%–10% of consolidated revenue, could remain depressed. Temporary facility closures and staff reductions had occurred; all facilities were open when the report was filed.
- The company concluded that goodwill and long-lived assets were not more likely than not impaired as of June 30, based on a qualitative review; it did not perform a quantitative impairment test. Further deterioration could prompt testing and a potentially material impairment charge.
- At June 30, the company remained below employment targets tied to a New York grant. Up to $0.423 million of grant proceeds could be repayable; the company had until December 31, 2020 to meet targets under a waiver or seek another waiver.
- The company received $2.829 million in Paycheck Protection Program loans in April and repaid them in full on May 5, 2020. It also drew and repaid $2.8 million on the revolver during Q2. Stock repurchases were suspended March 2, 2020.
- After quarter-end, CEO James Pelrin resigned effective August 6, 2020. Richard N. Grant, Jr. was appointed CEO effective August 24; CFO Hugh T. Regan, Jr. served as interim CEO in the interim.
- The filing reported no material legal proceedings and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective at a reasonable assurance level.
Most important facts for investors to verify
- Whether Semi Market orders and revenue continue to recover, and whether the $8.7 million backlog converts to sales as expected.
- Whether COVID-19 restrictions, customer-site access, or supply constraints further affect operations, margins, and service revenue.
- Revolver availability, covenant compliance, and the company’s liquidity outlook as the facility approaches its April 2021 maturity.
- Progress on the New York employment targets and any repayment exposure related to the grant.
- Whether continued market weakness changes management’s impairment assessment, particularly for Thermal goodwill and intangible assets.
- Execution of the CEO transition and any associated effects on strategy and operating performance.