inTEST Corporation — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016. inTEST designs and manufactures thermal, mechanical and electrical products used mainly in semiconductor testing, with thermal products also serving non-ATE markets. For 2016, it reported three segments: Thermal, Mechanical and Electrical; a reorganization to two segments, inTEST Thermal Solutions and inTEST Electromechanical Semiconductor Products, was substantially complete and took effect for reporting on January 1, 2017.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | 2016 | 2015 |
|---|---|---|
| Net revenues | $40.227 | $38.889 |
| Gross profit / gross margin | $20.378 / 50.7% | $18.698 / 48.1% |
| Operating income / margin | $4.146 / 10.3% | $2.562 / 6.6% |
| Net earnings / diluted EPS | $2.658 / $0.26 | $1.861 / $0.18 |
| Cash from operating activities | $4.288 | $3.498 |
| Cash and cash equivalents at year-end | $28.611 | $25.710 |
| Working capital | $32.950 | $30.205 |
- Revenue increased 3%. ATE revenue declined 1% to $28.045 million, while non-ATE revenue rose 14% to $12.182 million, or 30% of total revenue.
- Orders increased 21% to $45.272 million; year-end backlog rose to $7.4 million from $2.4 million. Substantially all backlog was expected to ship in 2017, but orders may be canceled or rescheduled.
- Gross margin improved mainly due to lower fixed operating costs and better absorption of those costs. Operating expenses were $16.232 million versus $16.136 million.
- Effective tax rate rose to 37% from 28%; income tax expense was $1.549 million versus $0.722 million. Management attributed the higher rate primarily to federal tax effects of higher actual and deemed dividends from foreign affiliates.
- Capital expenditures were $0.339 million. The company repurchased 241,805 shares for $0.978 million during 2016. No dividends were paid.
- The company reported no long-term debt and no credit facilities. Cash included $1.7 million held by foreign subsidiaries. Restricted certificates of deposit of $0.175 million secured lease letters of credit; operating lease commitments totaled $5.284 million through 2021.
Material changes versus 2015
- Mechanical and Electrical segment revenues rose 10% and 9%, respectively; Thermal revenue was essentially flat. Segment operating results improved notably in Mechanical, whose operating loss narrowed to $0.074 million from $1.902 million. Electrical operating income rose to $1.063 million from $0.673 million; Thermal operating income declined to $4.210 million from $4.517 million.
- Net earnings increased 43%, while operating cash flow rose 23%. Cash increased by $2.901 million during the year.
- Non-ATE revenue growth was led primarily by telecommunications; telecommunications orders increased 106%. ATE demand strengthened for Mechanical and Electrical products, while Thermal ATE revenue weakened.
- Foreign-customer revenue was $27.166 million, or 68% of total, compared with $24.595 million, or 63%, in 2015.
Outlook, commentary and risks
- No numerical revenue or earnings guidance was provided. Management described semiconductor and ATE demand as cyclical, volatile and seasonal, with stronger demand typically in the second and third quarters and weaker demand in the first and fourth.
- Management expects cash and projected cash flows to cover short-term working capital needs and potential repurchases, but a significant acquisition could require additional resources. The company was not pursuing a potential acquisition after incurring $0.510 million in related due-diligence and transaction costs in 2016.
- A January 2016 workforce reduction generated a $0.099 million restructuring charge. Management said restructuring and procurement improvements helped reduce Mechanical’s operating loss; profitability of that business is not assured.
- Key risks include market cyclicality and customer buying shifts, intense price competition, reliance on a limited number of customers, execution of non-ATE diversification and acquisitions, supplier availability, foreign-market and currency exposure, and retention of key personnel. Hakuto represented 13% of 2016 revenue and Texas Instruments 10%; the ten largest customers represented about 50%.
- Management reported effective disclosure controls and internal control over financial reporting at year-end, each at a reasonable-assurance level. No material legal proceedings or material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the higher orders and backlog convert to shipped revenue and cash, given the company’s warning that backlog is not necessarily predictive.
- Whether Mechanical Products can sustain its sharp operating-loss reduction and achieve profitability, and how segment reporting changes under the 2017 reorganization.
- Whether non-ATE growth, particularly telecommunications, continues and meaningfully reduces exposure to semiconductor/ATE cycles.
- The durability of improved margins amid customer pricing demands, changes in product mix and higher customer concentration.
- Cash availability for U.S. needs, tax consequences of foreign cash repatriation, and the effect of planned buybacks or any future acquisition on liquidity.