inTEST Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited quarterly results, including Q4 2013; this is an annual report, not a stand-alone quarterly filing. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
inTEST designs, manufactures and markets thermal, mechanical and electrical products used mainly in semiconductor testing with automatic test equipment (ATE). It reports three segments: Thermal Products, Mechanical Products and Electrical Products. The company is expanding thermal-product sales beyond ATE into telecommunications, industrial, defense/aerospace and other markets. It operates internationally, with 66% of 2013 revenue shipped to foreign customers.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $39.4 million | $43.4 million |
| Gross profit / margin | $19.0 million / 48% | $19.1 million / 44% |
| Operating income / margin | $4.0 million / 10% | $3.0 million / 7% |
| Net income / diluted EPS | $3.1 million / $0.30 | $2.2 million / $0.21 |
| Cash from operations | $3.8 million | $6.6 million |
| Capital expenditures | $0.4 million | $0.4 million |
| Cash and cash equivalents at year-end | $19.0 million | $15.6 million |
| Working capital at year-end | $24.7 million | $21.0 million |
| Total assets / stockholders’ equity | $35.5 million / $31.1 million | $32.4 million / $27.8 million |
| Long-term debt | None reported | None reported |
The company reported no credit facilities. A $450,000 restricted certificate of deposit secured letters of credit for leases. Of $19.0 million in year-end cash, $2.3 million was held by foreign subsidiaries; management intended to reinvest those funds overseas.
FY2013 Q4 revenue was $9.3 million and net income was $0.7 million, compared with $8.3 million and $0.2 million, respectively, in Q4 2012.
Material changes versus FY2012
- Revenue declined 9%, principally as ATE-market revenue fell 17% to $29.3 million. Non-ATE revenue rose 29% to $10.1 million, or 26% of total revenue versus 18% in 2012.
- Revenue by segment: Thermal $23.0 million, down 6%; Mechanical $10.0 million, roughly flat; Electrical $6.5 million, down 29%. Electrical comparisons were affected by unusually high, non-recurring demand from one OEM in 2012.
- Gross margin increased to 48% from 44%, with lower component costs as a share of revenue, fewer inventory-obsolescence charges and reduced fixed costs contributing. Inventory obsolescence charges were $0.3 million versus $0.7 million.
- Operating income improved despite lower revenue, partly because operating expenses fell and 2012 included $0.3 million of restructuring charges and acquisition/relocation costs. The effective tax rate fell to 23% from 29%, reflecting research credits and other tax benefits.
- Operating cash flow fell to $3.8 million from $6.6 million, including working-capital uses from higher receivables and inventories and lower deferred revenue/customer deposits.
- Segment operating income: Thermal $4.3 million (up from $2.9 million); Mechanical loss $0.8 million (improved from a $1.9 million loss); Electrical income $0.7 million (down from $2.0 million). Mechanical Products remained loss-making amid reduced available manipulator demand as some tester manufacturers increased captive production.
- Order backlog declined to $3.1 million from $4.2 million. The Thermonics acquisition occurred in January 2012, so prior-year results included its operations only from the acquisition date.
Outlook, risks and unusual items
- Management said it expected ATE demand to improve across segments in 2014, citing stronger Mechanical Products demand late in 2013 and fluctuating demand into early 2014. It cautioned that the duration and scale of any improvement were uncertain.
- Management was exploring ways to increase Mechanical Products revenue and reduce that segment’s variable and fixed costs. Continued captive manufacturing by tester manufacturers could further constrain its market.
- Key risks include semiconductor/ATE cyclicality, pricing pressure, rapid technology change, concentrated customers (the ten largest generated about 47% of revenue), and supply-chain constraints. Texas Instruments represented 13% of 2013 revenue.
- Foreign operations generated 16% of consolidated revenue; foreign customers accounted for 66% of revenue. Foreign cash repatriation, currency movements and geopolitical or regulatory conditions could affect results or liquidity.
- No material legal proceedings or material off-balance-sheet arrangements were reported. No goodwill or intangible-asset impairment was recorded in 2013. Management reported disclosure controls and internal control over financial reporting effective at a reasonable assurance level; the auditor did not provide an internal-control attestation.
- No dividend was paid in 2013; the 2012 special dividend was $0.08 per share. A proposed 2014 stock plan covering up to 500,000 shares was subject to stockholder approval.
Important facts for investors to verify
- Whether the anticipated 2014 ATE recovery materialized, and how current orders and backlog compare with the filing’s year-end levels.
- Whether non-ATE thermal sales can keep growing and diversify revenue sustainably, given their historical variability and the company’s limited presence in those markets.
- Whether Mechanical Products can reach profitability despite captive manufacturing and customer concentration in its addressable market.
- How operating cash flow and working capital evolve, including the location and practical availability of cash held overseas.
- Whether customer concentration, pricing, supplier availability and inventory-obsolescence assumptions change materially.