inTEST Corporation — Q2 2012 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and six months ended June 30, 2012. inTEST designs and sells thermal, mechanical and electrical products, primarily for semiconductor automatic test equipment (ATE). Its results are exposed to semiconductor-industry cycles and customer demand. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $13.576 | $13.800 | $24.307 | $25.504 |
| Gross margin | $6.194; 45.6% | $6.798; 49.3% | $10.790; 44.4% | $11.891; 46.6% |
| Operating income | $1.994 | $2.723 | $1.910 | $3.984 |
| Net earnings | $1.334 | $2.655 | $1.291 | $3.912 |
| Diluted EPS | $0.13 | $0.26 | $0.13 | $0.38 |
| Operating cash flow | Not separately stated for the quarter | $1.707 | $2.516 |
Q2 operating margin was 14.7%, versus 19.7% a year earlier; six-month operating margin was 7.9%, versus 15.6%. Income tax expense was $0.660 million in Q2 and $0.632 million for the first half, compared with $0.078 million and $0.138 million, respectively, in 2011.
At June 30, cash and cash equivalents were $11.699 million, current assets $26.141 million and current liabilities $6.183 million. Working capital was approximately $19.958 million. Total assets were $33.767 million and stockholders’ equity $27.584 million. The filing reports no borrowings; $0.450 million of restricted certificates of deposit secured lease letters of credit. The company had no available credit facility.
Material changes versus prior periods
- Q2 revenue declined 2% year over year; first-half revenue declined 5%. Q2 mechanical revenue fell 39% and thermal revenue fell 2%, while electrical revenue rose 95%. The thermal segment included $1.4 million of Thermonics revenue; excluding Thermonics, thermal revenue declined 23% in Q2.
- First-half segment revenue increased 5% in Thermal and 82% in Electrical, but declined 45% in Mechanical. The filing attributes demand weakness mainly to the ATE market and, for some thermal products, weaker demand in non-ATE industries.
- Q2 gross margin fell 3.7 percentage points. Management cited higher fixed operating costs, component costs and an unfavorable customer/product mix. First-half obsolete and excess inventory charges were $0.358 million, up $0.161 million from 2011.
- First-half operating income and net earnings fell substantially. Expenses included $0.359 million of restructuring charges and $0.337 million of Thermonics acquisition costs; acquired intangible amortization also increased.
- Operating cash flow was $1.707 million, down from $2.516 million. Cash fell by $2.258 million during the half, principally reflecting the $3.802 million cash acquisition payment, partly offset by operating cash generation.
Outlook, commentary and risks
- On January 16, 2012, the company acquired substantially all Thermonics assets and certain liabilities for approximately $3.802 million cash plus assumed liabilities. Thermonics added $2.044 million in revenue from acquisition through June 30; its net income contribution was not tracked separately. The company closed Thermonics’ Sunnyvale facility and relocated operations to Mansfield, Massachusetts.
- Orders were $11.8 million in Q2, compared with $12.9 million in Q1 2012 and $13.5 million in Q2 2011. Backlog was $5.2 million at June 30, down from $7.0 million at March 31 and $7.2 million a year earlier; substantially all was expected to ship in 2012, but orders may be canceled or rescheduled.
- Management said cash and projected future cash flow were expected to support short-term working-capital needs. No significant capital-expenditure commitments were identified for the rest of 2012. No formal revenue or earnings guidance was provided, and management cautioned that future orders and revenue were uncertain.
- Key risks include semiconductor and ATE cyclicality, pricing pressure, customer concentration, inventory obsolescence, changing customer buying patterns and reliance on near-term forecasts. Texas Instruments represented 19% of first-half revenue; Teradyne represented 14% in 2012.
- The company reported no material changes to its previously disclosed risk factors, no material legal proceedings and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective at a reasonable-assurance level.
Investor facts to verify
- Whether order trends and backlog stabilize, particularly in Mechanical and Thermal products, and whether Q2 electrical growth is repeatable.
- Thermonics’ subsequent revenue, profitability, integration results and the realized benefits of facility consolidation.
- Gross-margin recovery, inventory obsolescence charges and the effect of customer/product mix and pricing pressure.
- The assumptions supporting deferred tax asset utilization, given the higher 2012 tax expense and prior valuation-allowance reversal.
- Customer concentration and liquidity resilience, especially since the company reported no available borrowing facility.