inTEST Corporation — Q1 2015 Form 10-Q
Period: Three months ended March 31, 2015; unaudited consolidated results. inTEST designs and manufactures thermal, mechanical and electrical products, primarily for semiconductor test equipment, and is diversifying thermal products into non-ATE markets.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $10.188 million | $8.797 million | +16% |
| Gross profit / reported gross margin | $4.918 million / 48% | $4.185 million / 48% | Gross profit +18% |
| Operating income | $682,000 | $404,000 | +69% |
| Net earnings | $438,000 | $286,000 | +53% |
| Diluted EPS | $0.04 | $0.03 | — |
| Operating cash flow | $(263,000) | $29,000 | — |
Revenue growth reflected improved ATE demand and higher sales in each product segment. ATE revenue increased 10% to $8.347 million; non-ATE revenue rose 55% to $1.841 million, chiefly from automotive customers. Thermal Products revenue was $5.717 million (+9%), Mechanical $2.435 million (+19%), and Electrical $2.036 million (+35%).
Cash and cash equivalents were $22.485 million at March 31, down from $23.126 million at year-end; working capital was $28.967 million. Current assets were $34.205 million and current liabilities $5.238 million. The company reported no borrowings or credit facilities; $350,000 of restricted certificates of deposit secured lease letters of credit. Capital expenditures were $179,000. Operating cash use reflected working-capital growth, including a $1.484 million increase in receivables and a $475,000 increase in inventory. Foreign-exchange effects reduced cash by $199,000.
Changes, outlook and risks
- Operating expenses rose to $4.236 million from $3.781 million. G&A included $320,000 in due-diligence and transaction costs for a potential acquisition; management said its evaluation was incomplete and decision criteria were not expected to be known until the target’s Q2 results.
- Orders were $11.431 million, up 12% year over year and 27% sequentially. Backlog was approximately $5.0 million, versus $4.5 million a year earlier and $3.8 million at year-end; substantially all was expected to ship in 2015, but orders may be canceled or rescheduled.
- Management expected cash and projected cash flow to cover short-term working-capital needs, but noted a significant acquisition could require additional financial resources. It planned to repatriate up to $1.0 million from its German subsidiary in the second half of 2015; $883,000 had been repatriated from Singapore in February.
- No formal earnings or revenue guidance was provided. Management highlighted ATE cyclicality and seasonality, pricing pressure, product/customer mix effects on margins, customer-specific demand shifts, inventory obsolescence, and reliance on a limited customer base. Hakuto accounted for 10% of revenue, compared with 11% in Q1 2014.
- Effective tax rate increased to 35% from 30%, primarily because a greater share of pretax income came from U.S. operations. Foreign currency translation adjustments were a $329,000 loss, versus a $4,000 gain, reducing comprehensive earnings to $109,000 from $290,000.
- The filing reported no material legal proceedings, material subsequent events, or material off-balance-sheet arrangements. Management stated disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the potential acquisition proceeds, and its funding requirements and expected economics.
- Whether order growth and backlog convert to shipments and cash, given customer rescheduling rights and negative operating cash flow.
- Whether working-capital requirements, especially receivables and inventory, normalize as activity changes.
- How ATE cyclicality, competitive pricing, customer/product mix, and expansion in non-ATE markets affect growth and margins.
- Cash availability and potential U.S. tax costs associated with planned foreign-fund repatriation.