inTEST Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company designs and sells thermal, mechanical, and electrical products, primarily for semiconductor automated test equipment (ATE), and also serves several non-ATE markets. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $10.823 | $9.203 | $29.955 | $30.950 |
| Gross profit / margin | $5.577 / 52% | $4.323 / 47% | $14.973 / 50% | $15.087 / 49% |
| Operating income | $1.704 | $0.401 | $2.531 | $2.721 |
| Net earnings | $1.090 | $0.310 | $1.657 | $1.828 |
| Diluted earnings per share | $0.11 | $0.03 | $0.16 | $0.17 |
| Operating cash flow | Not presented for the quarter | $1.741 | $2.919 |
Q3 revenue rose 18% year over year, while nine-month revenue declined 3%. Q3 net earnings increased to $1.090 million from $0.310 million; nine-month earnings fell to $1.657 million from $1.828 million. Nine-month operating cash flow decreased, with higher receivables a major working-capital use.
Liquidity, capital, and segments
- At September 30, cash and cash equivalents were $26.345 million, working capital was $31.828 million, and total assets were $42.032 million. Cash was $25.710 million at December 31, 2015.
- No borrowings or credit facilities were disclosed. The company reported $225,000 of lease-related letters of credit, secured by restricted certificates of deposit. Management said cash and projected cash flow should support near-term working capital and potential share repurchases; a significant acquisition could require additional resources.
- Nine-month investing cash use was $282,000, primarily property and equipment purchases. Financing cash use was $841,000 for repurchases of 209,271 shares. The repurchase plan had $4.010 million remaining at September 30.
- Q3 segment revenue and pre-tax earnings: Thermal $6.641 million and $1.402 million; Mechanical $2.118 million and $63,000; Electrical $2.064 million and $311,000. Mechanical had a small pre-tax profit versus a $759,000 loss in Q3 2015.
- For the first nine months, Thermal revenue was $17.429 million, Mechanical $6.727 million, and Electrical $5.799 million. Mechanical recorded only $4,000 of pre-tax earnings, compared with a $1.240 million loss in the prior-year period.
Material changes and management commentary
- Q3 orders increased 34% year over year to $11.282 million but declined 10% sequentially, which management attributed mainly to seasonal ATE demand. Nine-month orders rose 12% to $33.719 million, including 31% growth in non-ATE orders.
- Backlog was approximately $6.1 million at September 30, versus $3.0 million a year earlier and $5.7 million at June 30. The company expected substantially all backlog to ship in 2016, but cautioned that orders can be canceled or rescheduled and backlog is not necessarily predictive of sales.
- Management attributed the Q3 gross-margin improvement primarily to lower fixed operating costs and higher revenue; nine-month gross margin also improved modestly. A January workforce reduction in Mechanical Products generated a $99,000 restructuring charge; estimated annualized savings were approximately $690,000. Further restructuring review was ongoing, with no assurance it would achieve sustained profitability.
- Nine-month G&A included $479,000 of due-diligence and transaction costs for a potential acquisition no longer being pursued, and the $99,000 restructuring charge. The comparable 2015 period included $329,000 of costs for an acquisition that did not close. Q3 taxes also included additional expense related to repatriating $921,000 from the German subsidiary.
- Management gave no specific revenue or earnings guidance. It cited cyclical and seasonal ATE demand, pricing pressure, customer-specific demand shifts, and potentially volatile results. No material changes to the risk factors in the 2015 Form 10-K were reported. No material legal proceedings or off-balance-sheet arrangements were disclosed.
Key investor verification points
- Whether the elevated backlog converts to revenue as expected, particularly given customer cancellation and rescheduling rights and seasonal order patterns.
- Whether the increase in receivables—$2.252 million over year-end—converts to cash, and why operating cash flow trails the prior-year period.
- Whether Mechanical Products sustains profitability and realizes the estimated restructuring savings.
- The impact of customer concentration: Hakuto represented 13% of nine-month revenue, and Texas Instruments represented 11% in 2016.
- Potential tax costs on foreign cash, acquisition-related spending, and the pace and funding of any further share repurchases.