inTEST Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
inTEST designs and manufactures thermal, mechanical and electrical products, primarily for semiconductor integrated-circuit testing and automatic test equipment (ATE). Thermal products also serve automotive, consumer electronics, defense/aerospace, energy, industrial and telecommunications markets. In 2015, the company reported three segments: Thermal, Mechanical and Electrical. In January 2016, it combined Mechanical and Electrical operations into the inTEST EMS Products Division while continuing to report them separately as segments.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net revenue | $38.889 million | $41.796 million | Down 7% |
| Gross profit / margin | $18.698 million / 48% | $20.462 million / 49% | Margin down 1 percentage point |
| Operating income | $2.562 million | $4.916 million | Down 48% |
| Net earnings | $1.861 million | $3.439 million | Down 46% |
| Diluted EPS | $0.18 | $0.33 | Down $0.15 |
| Operating cash flow | $3.498 million | $5.129 million | Down $1.631 million |
| Capital expenditures | $0.599 million | $0.831 million | Down $0.232 million |
| Cash and cash equivalents at year-end | $25.710 million | $23.126 million | Up $2.584 million |
| Working capital | $30.764 million | $28.561 million | Up $2.203 million |
Year-end total assets were $39.984 million and stockholders’ equity was $35.925 million. The company reported no long-term debt and said it had no credit facilities. Current liabilities were $4.059 million. Cash held by foreign subsidiaries was $2.0 million; repatriation may entail foreign taxes or other restrictions. The company reported $0.350 million of restricted certificates of deposit securing lease letters of credit.
Cash from operations exceeded net earnings, but operating cash flow declined year over year. Cash increased despite operating cash flow and capital spending, with foreign-exchange effects reducing cash by $0.160 million. The company repurchased 41,332 shares for $0.155 million during 2015.
Material changes versus the prior comparable period
- ATE-market revenue fell 8% to $28.238 million; non-ATE revenue fell 4% to $10.651 million and remained 27% of total revenue.
- Thermal revenue rose 3% to $24.084 million; Electrical revenue rose 2% to approximately $7.3 million. Mechanical revenue fell 33% to $7.540 million.
- Mechanical Products recorded an operating loss of $1.902 million, compared with a $0.018 million loss in 2014. Thermal operating income was $4.517 million versus $4.740 million; Electrical operating income was $0.673 million versus $0.781 million.
- Orders declined 12% to $37.448 million, including a 38% decrease in Mechanical orders. Year-end backlog fell to approximately $2.4 million from $3.8 million.
- Gross margin declined as lower revenue reduced absorption of fixed operating costs. Engineering and product development expense increased 10% to $3.935 million; general and administrative expense rose 3% to $6.404 million, including $0.329 million of costs for an acquisition the company did not pursue.
- Fourth-quarter revenue was $7.939 million, compared with $9.862 million in fourth-quarter 2014. Fourth-quarter 2015 net earnings were $0.033 million, or $0.00 per diluted share, versus $0.959 million, or $0.09 per diluted share, in fourth-quarter 2014.
Outlook, commentary, risks and unusual items
- Management attributed weaker results primarily to softer ATE demand, particularly from Mechanical customers, and reduced capital spending by certain customers. It said market softness began affecting orders in the second quarter of 2015 and continued into the first quarter of 2016. No quantified revenue or earnings guidance was provided.
- On January 4, 2016, the company implemented a workforce reduction tied to the new EMS division. It recorded a $99,000 restructuring charge in Q1 2016 and estimated annualized savings of approximately $690,000. Management said its review of Mechanical operations was ongoing and that the restructuring might not succeed.
- Key risks include semiconductor/ATE cyclicality and seasonality, intense price competition, customer concentration, customer and OEM buying-pattern changes, potential loss of market share to in-house OEM manufacturing, and dependence on suppliers for some custom components. The ten largest customers represented about 43% of 2015 revenue; distributor Hakuto accounted for 12%.
- Foreign customers generated $24.595 million, or 63% of revenue. Foreign subsidiaries generated 13% of revenue. Currency movements, overseas operations and possible constraints or costs to repatriate cash are risks.
- The company’s $5 million share-repurchase authorization was discretionary and not a commitment to buy shares. Through February 29, 2016, it had repurchased 126,356 shares for $0.512 million. No dividends were paid in 2015 or 2014, and management did not expect cash dividends in the foreseeable future.
- Management reported no material legal proceedings, no material off-balance-sheet arrangements, and no goodwill or other disclosed asset impairment charges in 2015. The independent auditor issued an unqualified opinion on the financial statements; management assessed disclosure controls and internal control over financial reporting as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether the Mechanical Products restructuring delivers the estimated savings and improves segment profitability.
- Whether continued ATE-market weakness, customer capital spending and lower orders lead to further revenue or backlog declines.
- Whether the company can protect or regain Mechanical and Electrical market share amid OEM in-house production and pricing pressure.
- How customer concentration, particularly Hakuto’s 12% revenue contribution, and foreign-market exposure affect future results and cash availability.
- Whether reported cash and working capital remain sufficient to fund operations, repurchases and potential acquisitions, given there is no credit facility.
- Whether post-year-end restructuring costs, repurchases and equity awards affect 2016 cash flow, earnings and share count as described in the filing.