inTEST Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. inTEST supplies precision-engineered products for manufacturing and testing through its Thermal and Electromechanical Semiconductor Products (EMS) segments. Amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $14.4 | $21.1 | $32.4 | $40.0 |
| Gross profit / margin | $6.7 / 46.8% | $10.9 / 51.7% | $15.6 / 48.0% | $20.3 / 50.8% |
| Operating income (loss) | ($0.3) | $4.5 | $1.1 | $5.4 |
| Net income (loss) | ($0.2) | $4.0 | $1.0 | $4.4 |
| Diluted EPS | ($0.02) | $0.39 | $0.09 | $0.42 |
| Operating cash flow | Not provided by quarter | ($10.0) | $3.5 |
- Q2 revenue declined 32% year over year; six-month revenue declined 19%. Q2 Thermal revenue fell 25% and EMS revenue fell 46% year over year.
- Six-month revenue was down in both the Semi Market (25%) and Multi Markets (11%). Semi Market revenue represented $17.8 million of the six-month total.
- Management attributed the decline principally to cyclical and seasonal Semi Market weakness, lower demand in certain Multi Markets (including optical transceivers), and slowing global economic growth. Lower utilization of fixed costs as revenue fell contributed to margin compression.
- Q2 general and administrative expense included $351,000 of costs for an acquisition opportunity not pursued and $175,000 related to consolidating Ambrell’s European operations. For the first half, those costs were $703,000 and $175,000, respectively.
Cash, liquidity and obligations
- Cash and cash equivalents were $7.6 million at June 30, 2019, down from $17.9 million at year-end 2018. Working capital was $15.4 million, compared with $14.2 million at year-end.
- Operating cash outflow of $10.0 million included payment of the $12.2 million Ambrell acquisition earnout accrued at December 31, 2018. Capital expenditures were $0.3 million. Management said cash and projected future cash flow should meet short-term working-capital and other corporate requirements.
- There was no borrowing credit facility or reported debt balance. Operating lease liabilities totaled $5.9 million, including $1.3 million current; the company reported $6.7 million of undiscounted future lease payments.
- Foreign subsidiaries held $4.2 million, or 55%, of cash. Management expected to repatriate $1.5–$1.8 million from Germany in Q3 2019.
Orders, outlook and other developments
- Q2 orders were $15.9 million, down 17% year over year but up 34% sequentially from Q1. Six-month orders declined 30% year over year. Management believed the sequential increase indicated the company had experienced the trough of the current Semi Market downturn.
- Backlog was approximately $8.8 million at June 30, versus $13.6 million a year earlier and $7.2 million at March 31. The company expected substantially all backlog to ship in 2019, but noted orders may be canceled, accelerated or postponed and backlog is not necessarily indicative of future sales.
- Management expects future orders and revenue to be approximately equally split between the Semi Market and Multi Markets. No specific revenue or earnings guidance was provided.
- On July 31, 2019, the board authorized a stock repurchase plan for up to $3.0 million, funded from operating cash flow or available cash; purchases are discretionary. This followed termination of the prior plan.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording right-of-use assets and lease liabilities; adoption did not significantly change expense recognition. No material legal proceedings or changes to previously disclosed risk factors were reported.
Key risks and investor verification points
- Verify the pace and sustainability of order recovery, especially in the cyclical Semi Market, and whether the Q2 sequential increase translates into shipments and revenue.
- Track gross margins and fixed-cost absorption if revenue remains below prior-year levels, as well as product and customer mix.
- Assess cash generation excluding the one-time $12.2 million earnout payment, and monitor cash levels, overseas cash availability and the planned repatriation.
- Review the assumptions behind the expected market diversification and the claim that future orders and revenue will be approximately equally split between the Semi and Multi Markets.
- Monitor the costs and execution of the Ambrell European consolidation, lease commitments, and any stock repurchases relative to liquidity needs.
- Consider customer concentration and market risks: Texas Instruments represented 12% of first-half revenue; management cited semiconductor cyclicality, pricing pressure, technological change, inventory obsolescence and broader economic conditions.