inTEST Corporation — Q3 2013 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2013; amounts below are in millions unless stated otherwise. inTEST designs and sells thermal, mechanical and electrical products, primarily for semiconductor test equipment, with thermal products also sold into other industries. The filing compares Q3 and the first nine months of 2013 with the corresponding 2012 periods.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $9.900 | $10.799 | $30.091 | $35.106 |
| Gross margin | 48.0% | 44.1% | 47.6% | 44.3% |
| Operating income | $1.087 | $0.989 | $2.940 | $2.899 |
| Net earnings | $1.090 | $0.664 | $2.385 | $1.955 |
| Diluted EPS | $0.10 | $0.06 | $0.23 | $0.19 |
| Operating cash flow | Not separately stated for Q3 | $1.356 | $4.826 |
Q3 revenue fell 8% year over year, while gross margin increased about 4 percentage points. Management attributed the margin improvement mainly to lower component costs as a share of revenue, product and customer mix, and lower obsolete-inventory charges; lower revenue reduced fixed-cost absorption. Nine-month revenue fell 14%, while gross margin also improved about 3 percentage points.
Segment revenue in Q3 was Thermal $5.844 million, Mechanical $2.193 million and Electrical $1.863 million. For the nine months, segment revenue was down 6% in Thermal, 6% in Mechanical and 42% in Electrical; the Electrical comparison was affected by unusually high, non-recurring OEM demand in 2012. Mechanical Products reported a nine-month pretax loss of $0.742 million, versus a $1.256 million loss a year earlier.
Balance sheet, liquidity and cash flow
At September 30, cash and cash equivalents were $16.751 million, up from $15.576 million at year-end 2012. Current assets were $29.152 million and current liabilities $5.121 million. Total assets were $35.498 million and stockholders’ equity $30.377 million. The filing reports no borrowings; $0.450 million of restricted certificates of deposit secured lease letters of credit. The company said it had no credit facility and expected cash and projected cash flow to support short-term working-capital needs.
Nine-month operating cash flow decreased to $1.356 million from $4.826 million. The main working-capital uses included a $1.892 million increase in receivables and a $0.612 million increase in inventory, partly offset by higher payables. Investing cash use was $0.247 million, primarily capital expenditures; financing cash inflow was $0.030 million from stock-option exercises.
Changes, outlook and risks
- Management reported softening ATE demand during Q3, becoming more pronounced as the quarter progressed, and expected reduced demand to affect Q4 orders and shipments across all product segments.
- Q3 orders were $10.4 million, versus $11.0 million in Q2 2013 and $8.7 million in Q3 2012. Backlog was approximately $3.2 million at quarter-end; management cautioned that orders may be canceled or rescheduled and backlog is not necessarily indicative of future sales.
- Revenue from non-ATE industries was $3.6 million, or 37% of Q3 revenue, compared with $1.3 million, or 12%, in Q3 2012. Management cited these markets as a source of diversification.
- Mechanical Products revenue fell 42% sequentially. Management cited weakened demand and increasing captive production of manipulators by tester manufacturers and was exploring ways to increase revenue and reduce costs.
- Q3 tax expense was $0.024 million (effective rate 2%), compared with $0.348 million (34%) a year earlier. The lower rate reflected benefits from finalizing a German tax audit and filing the 2012 federal return. The nine-month effective rate was 20%, versus 33%, also reflecting reinstated R&D credits.
- Key risks include semiconductor-industry cyclicality, customer concentration, pricing pressure, competition, short lead times and smaller orders, inventory obsolescence, and reliance on customer demand and forecasts. Texas Instruments accounted for 12% of nine-month revenue. Management reported no material changes to the risk factors in its 2012 Form 10-K, no material legal proceedings, and no material off-balance-sheet arrangements.
- After quarter-end, the company issued 85,000 restricted shares on October 29, 2013, with $0.337 million of compensation expense to be recognized over four years.
Important facts for investors to verify
- Whether Q4 demand and shipments weakened as management anticipated, and whether subsequent orders support a recovery.
- Whether the higher gross margin is sustainable as product mix, inventory charges and fixed-cost absorption change.
- Whether Mechanical Products’ demand and profitability improve amid captive manufacturing and cost-reduction efforts.
- How receivables, inventory and operating cash conversion develop after the nine-month working-capital outflow.
- Whether the unusually low Q3 tax rate and the nine-month tax benefits recur; the filing does not indicate that the Q3 rate is a normalized ongoing rate.