inTEST Corporation — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; the filing also reports quarterly results, including fourth-quarter 2017. inTEST designs and manufactures thermal management and induction-heating products, plus electromechanical semiconductor test interface products. Its reportable segments are Thermal and Electromechanical Semiconductor Products (EMS).
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $66.8 million | $40.2 million |
| Gross profit / margin | $34.7 million / 52% | $20.4 million / 51% |
| Operating income | $3.6 million | $4.1 million |
| Net earnings | $975,000 | $2.7 million |
| Diluted earnings per share | $0.09 | $0.26 |
| Cash from operations | $7.2 million | $4.3 million |
Revenue rose 66%, including $13.6 million from Ambrell, acquired May 24, 2017. Excluding Ambrell, revenue increased 32%. Thermal revenue was $42.2 million and EMS revenue was $24.6 million. Semiconductor-market revenue was $37.8 million; non-semiconductor revenue was $29.0 million, or 44% of total.
Operating income declined despite higher sales, principally because the company recorded a $7.0 million increase in Ambrell contingent-consideration expense. The effective tax rate was 75%, versus 37% in 2016; the contingent-consideration adjustment was nondeductible, and the Tax Cuts and Jobs Act also affected tax accounting. Fourth-quarter revenue was $19.4 million, but the company recorded a $4.6 million net loss, including a $7.5 million contingent-consideration fair-value increase.
At year-end, cash and cash equivalents were $13.3 million, down from $28.6 million, and working capital was $16.6 million, down from $33.0 million. Current assets were $31.0 million and current liabilities $14.4 million. The company reported no credit facility and no material off-balance-sheet arrangements. Liabilities included a $5.4 million current Ambrell earnout payable, a $5.7 million noncurrent contingent-consideration liability, and tax liabilities; operating-lease commitments totaled $7.9 million. Cash used for the Ambrell acquisition was $22.0 million, net of cash acquired. The company said cash and projected operating cash flow should support near-term requirements, including integration and earnout payments.
Changes and material items
- Orders increased 52% to $69.0 million; excluding Ambrell, they increased 20%. Year-end backlog rose to $13.7 million from $7.4 million; substantially all was expected to ship in 2018, but orders may be rescheduled or canceled.
- EMS operating income increased to $6.8 million from $1.0 million. Thermal reported an operating loss of $822,000, compared with $4.2 million of income, with Ambrell integration, acquired-asset amortization and contingent-consideration accounting affecting results.
- Ambrell’s 2017 revenue contribution was $13.6 million. The 2017 and 2018 earnouts are based on adjusted EBITDA and capped at $18 million in aggregate. The 2017 earnout accrued was $5.4 million.
- Cash declined largely because of the acquisition. Goodwill increased to $13.7 million from $1.7 million; no goodwill or intangible impairment was recorded.
Outlook, commentary and risks
Management expects future orders and revenue to be approximately equally divided between semiconductor and non-semiconductor markets, and views diversification through Ambrell and other thermal-market opportunities as a way to reduce semiconductor-cycle exposure. This is a stated expectation, not quantified financial guidance. Management cited stronger ATE demand, telecommunications and defense/aerospace activity, and demand associated with automotive, Internet of Things and consumer/industrial electronics.
Key risks include semiconductor and ATE cyclicality and seasonality, competitive and customer pricing pressure, changing customer buying patterns, customer and distributor concentration, and execution and integration of acquisitions. Hakuto and Texas Instruments each represented 11% of 2017 revenue; the ten largest customers represented 46%. Other risks include supplier availability, technology change, foreign-market and currency exposure, and uncertainty in the Level 3 earnout valuation. The company plans approximately $2.1 million of Ambrell facility improvements in 2018 and expects up to $900,000 in grants and refundable tax credits, subject to employment and other conditions. No material legal proceedings were reported.
Investor verification points
- Review the Ambrell earnout formula, accrued 2017 payment, $5.7 million estimated 2018 liability and $18 million aggregate cap; the valuation depends on management forecasts and unobservable inputs.
- Assess the source and durability of earnings: fourth-quarter sales growth coincided with a large fair-value expense and a net loss; confirm segment results and the tax reconciliation.
- Track cash conversion, working-capital changes, acquisition-related cash use, earnout payments and planned facility spending.
- Test whether the expected shift toward an approximately even semiconductor/non-semiconductor revenue mix is achieved and reduces cyclicality without eroding margins.
- Consider customer concentration, backlog cancellation/rescheduling risk, lease commitments and the lack of a borrowing facility.