inTEST Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless otherwise noted, financial amounts below are in millions of dollars. inTEST supplies thermal and semiconductor test products through its Thermal and Electromechanical Semiconductor Products (EMS) segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $14.632 | $20.160 | $47.046 | $60.128 |
| Gross profit / margin | $7.205 / 49% | $10.092 / 50% | $22.760 / 48% | $30.397 / 51% |
| Operating income | $0.806 | $0.219 | $1.953 | $5.643 |
| Net earnings (loss) | $0.647 | ($0.566) | $1.598 | $3.829 |
| Diluted earnings (loss) per share | $0.06 | ($0.05) | $0.15 | $0.37 |
Revenue declined 27% year over year in Q3 and 22% for the first nine months. The company attributed weakness primarily to cyclical and seasonal softness in the Semi Market, reduced demand in certain Multimarket areas, slower global growth and U.S.-China trade tensions. Nine-month Semi Market revenue fell 29%; Multimarket revenue fell 12%. Q3 revenue was nearly flat sequentially, up 2% from Q2.
Thermal revenue decreased 27% in Q3 and 19% year to date; EMS revenue decreased 28% and 27%, respectively. Q3 orders were $13.9 million, down 31% year over year and 13% sequentially. Nine-month orders fell 30% to $41.7 million. September 30 backlog was approximately $8.0 million, versus $13.4 million a year earlier and $8.8 million at June 30.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was negative $9.131 million, compared with positive $7.222 million in 2018. The principal driver was payment of the $12.167 million Ambrell earnout outstanding at year-end 2018. Investing cash use was $0.413 million, primarily capital expenditures; financing cash use was $0.179 million for company stock repurchases.
- Cash and cash equivalents were $8.025 million at September 30, down from $17.861 million at December 31, 2018. Working capital was $16.278 million, up from $14.203 million. Cash held by foreign subsidiaries was $3.6 million.
- Total assets were $61.305 million and stockholders’ equity was $44.769 million. The filing reports no borrowings or credit facilities. Operating lease liabilities totaled $5.412 million, including $1.317 million current; the company adopted lease accounting in 2019, recording right-of-use assets.
- Management said cash and projected cash flow should support short-term working capital and corporate requirements, but a significant acquisition could require additional debt or equity financing. No significant capital expenditure commitments were reported for the rest of 2019.
Changes, outlook and risks
- Gross margin declined year to date as fixed costs were less absorbed by lower revenue; lower component costs partly offset the effect. Operating expenses included $0.683 million of costs for an acquisition opportunity not pursued and $0.242 million related to consolidation of Ambrell’s European operations.
- Q3 2018 included a $3.057 million non-deductible increase in Ambrell contingent consideration; the nine-month 2018 amount was $4.073 million. The liability was finalized by December 31, 2018, so there was no comparable 2019 charge. This charge materially affected prior-period comparisons, including reported 2018 earnings and tax rates.
- Management expects future orders and revenue to be approximately equally split between the Semi Market and Multimarket, but provided no specific numerical revenue or earnings guidance. The company described the semiconductor market as cyclical, seasonal and difficult to forecast. Backlog is subject to customer cancellation or delivery rescheduling and is not necessarily indicative of future sales.
- Risks highlighted include semiconductor and broader economic downturns, trade tensions, customer-specific demand changes, customer concentration (Texas Instruments represented 11% of nine-month revenue), pricing pressure, inventory obsolescence, foreign currency exposure and acquisition integration or financing risks. The company reported no changes to its previously disclosed risk factors, no material legal proceedings and effective disclosure controls.
- The board authorized a $3.0 million stock repurchase plan in July 2019. By September 30, the company had repurchased 39,158 shares for approximately $0.179 million; the plan may be suspended or discontinued. Separately, the CEO purchased 12,000 shares in August in open-market transactions, not as company repurchases.
Investor verification points
- Verify the drivers and likely duration of the order and backlog declines, particularly Semi Market softness and reduced telecommunications and industrial demand.
- Assess operating cash generation excluding the one-time Ambrell earnout payment, and monitor liquidity after the substantial year-to-date cash reduction.
- Review gross-margin sensitivity to lower production volume, product mix and fixed-cost absorption.
- Confirm the terms and remaining capacity of the repurchase plan and balance capital returns against acquisition and liquidity needs.
- Monitor grant repayment exposure tied to Rochester employment requirements, as well as lease commitments and potential funding needs for any significant acquisition.