inTEST Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 23, 2020. The company supplies thermal test/process systems and semiconductor test equipment through its Thermal and Electromechanical Semiconductor Products (EMS) segments. Its operations serve the semiconductor “Semi Market” and other markets collectively called “Multimarket.”
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenue | $60.7 million | $78.6 million |
| Gross profit / gross margin | $29.2 million / 48% | $39.4 million / 50% |
| Operating income | $2.5 million | $5.2 million |
| Net earnings | $2.3 million | $3.0 million |
| Diluted EPS | $0.22 | $0.29 |
| Cash from operations | $(8.4) million | $11.0 million |
| Capital expenditures | $0.6 million | $2.2 million |
| Cash and cash equivalents at year-end | $7.6 million | $17.9 million |
| Working capital at year-end | $16.5 million | $14.2 million |
Revenue fell 23%. Semi Market revenue declined 32% to $31.0 million; Multimarket revenue declined 10% to $29.7 million, but rose to 49% of total revenue from 42%. Thermal revenue decreased 22% to $43.8 million, while EMS revenue declined 25% to $16.8 million. Thermal operating income improved to $2.3 million from $1.2 million; EMS operating income fell to $1.7 million from $5.4 million.
Operating cash flow was negative primarily because the company paid the $12.2 million Ambrell earnout payable in 2019. The filing reports no credit facilities and does not identify conventional borrowings; year-end long-term obligations of $6.5 million principally reflect lease liabilities. Operating lease liabilities totaled $5.1 million, of which $1.3 million was current. The company said cash and projected future cash flow were expected to support short-term requirements, while noting potential additional financing needs for a significant acquisition or a more severe pandemic impact.
For the fourth quarter, revenue was $13.6 million and net earnings were $0.7 million, compared with revenue of $18.4 million and a net loss of $0.8 million in Q4 2018.
Material changes and unusual items
- Orders fell 32% to $52.8 million; year-end backlog declined to $5.5 million from $13.4 million. The company cautions that backlog is not necessarily indicative of future sales.
- Lower revenue reduced fixed-cost absorption and gross margin. Selling expense fell 12%; engineering and product development expense was broadly flat at $5.0 million.
- General and administrative expense included $683,000 for an acquisition opportunity not pursued and $240,000 for consolidation of Ambrell’s European operations.
- 2018 included a $6.9 million expense from increasing the Ambrell contingent consideration liability; there was no comparable 2019 charge. This affected the year-over-year comparison.
- Cash fell by $10.2 million during 2019, reflecting operating cash use, capital spending, share repurchases and currency effects. The company repurchased 229,308 shares for $1.1 million in 2019; the plan was suspended March 2, 2020.
- Adoption of lease accounting guidance in 2019 added right-of-use assets and lease liabilities to the balance sheet; prior-year amounts were not restated.
Outlook, risks and contingencies
- The company expects future orders and revenue to be approximately equally split between the Semi Market and Multimarket, but gave no quantified revenue or earnings guidance.
- Management identified COVID-19 as a material risk after year-end. The Fremont, California EMS facility temporarily shut on March 17, 2020; other manufacturing facilities were open as of the filing date. Further closures, supply delays, customer order postponements or cancellations, and added costs could materially affect results. The duration and financial impact were not estimable.
- Other significant risks include semiconductor-market cyclicality and seasonality, customer concentration, competitive pricing, supplier constraints, international exposure and foreign currency, acquisition execution and financing, and technology or inventory obsolescence. Texas Instruments represented 10% of 2019 revenue; the ten largest customers represented 34%.
- The company had $463,000 of state and local grant funds subject to potential repayment if employment requirements are not met; it received a waiver for the 2019 city employment requirement. No material legal proceedings or material off-balance-sheet arrangements were reported.
- The board authorized a $3.0 million share repurchase plan, subsequently suspended in March 2020. No cash dividends were paid in 2019 or 2018, and none were planned for the foreseeable future.
Investor verification priorities
- Track post-year-end COVID-19 effects on facility operations, supplier availability, customer orders and cash flow.
- Assess whether orders and backlog stabilize after the 32% order decline, particularly in the Semi Market and optical-transceiver-related business.
- Review cash conversion and liquidity after the Ambrell earnout payment, including cash held overseas and the absence of borrowing facilities.
- Evaluate segment profitability and whether Thermal’s Multimarket mix can offset continued EMS and semiconductor weakness.
- Confirm the status of the suspended repurchase plan, potential grant repayment obligations and lease commitments.