inTEST Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. inTEST designs and sells mechanical, thermal and electrical products used primarily in semiconductor testing; Thermal Products also serves other industries. Figures below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $11.681 | $11.305 | $37.185 | $36.094 |
| Gross profit / margin | $6.133 / 52.5% | $5.452 / 48.2% | $18.024 / 48.5% | $17.357 / 48.1% |
| Operating income / margin | $2.415 / 20.7% | $1.686 / 14.8% | $6.399 / 17.2% | $5.986 / 16.6% |
| Pre-tax earnings | $2.420 | $1.694 | $6.470 | $5.975 |
| Net earnings | $5.182 | $1.678 | $9.094 | $5.958 |
| Diluted EPS | $0.50 | $0.17 | $0.88 | $0.59 |
Q3 revenue increased 3% year over year but fell 15% from Q2 2011’s $13.8 million. Q3 net earnings included a $2.8 million income tax benefit; the nine-month benefit was $2.6 million. The benefit primarily reflected a $2.9 million reversal of a valuation allowance on deferred tax assets, based on management’s assessment that future taxable income would likely permit their use. Accordingly, net income growth substantially exceeded pre-tax earnings growth.
Nine-month operating cash flow was $5.809 million, versus $3.643 million in 2010. Investing cash use was $0.645 million, including $0.685 million of property and equipment purchases, mainly for facility relocations. Financing cash provided $0.030 million. Cash rose to $12.064 million from $6.895 million at year-end 2010.
At September 30, 2011, current assets were $24.404 million and current liabilities $5.786 million, implying working capital of $18.618 million. Total liabilities were $5.786 million; the filing reports no borrowings. The secured credit facility was terminated during Q3, and the company said it had no available borrowing facility. Restricted certificates of deposit totaled $0.5 million, supporting outstanding lease letters of credit.
Comparisons and operating developments
- Q3 segment revenue: Thermal $7.572 million, up 57% year over year; Mechanical $3.172 million, down 20%; Electrical $0.941 million, down 63%. Thermal’s growth offset declines in the other segments. Management attributed Mechanical and Electrical weakness to softer ATE demand; roughly 50–60% of Thermal sales were to industries outside ATE, where demand had recently been stronger.
- Nine-month segment revenue was $19.593 million Thermal (up 50%), $13.299 million Mechanical (down 19%) and $4.327 million Electrical (down 34%).
- Q3 gross margin improved to 52.5%, primarily due to a more favorable Mechanical Products mix, including higher docking-product sales. Nine-month gross margin rose modestly; fixed operating costs and direct labor were broadly stable as a share of revenue.
- Q3 orders were $10.5 million, down from $13.5 million in Q2 but above $9.8 million a year earlier. September 30 backlog was approximately $6.1 million, versus $7.2 million at June 30 and $4.5 million a year earlier. Most backlog was expected to ship in 2011, but orders may be canceled or rescheduled.
- Texas Instruments represented 12% of nine-month revenue. No other customer reached 10% in 2011. Customer concentration and semiconductor-industry cyclicality remain relevant exposures.
Outlook, risks and other matters
Management expected cash and projected future cash flow to be sufficient for short-term working capital needs; it gave no specific revenue or earnings guidance. It stated that there were no significant remaining 2011 capital expenditure commitments, though spending could change with market demand. A shelf registration filed in May 2011 permits offerings of up to $30 million of securities, subject to stated limits; no offering was reported in this filing.
Management highlighted volatile, cyclical semiconductor/ATE demand, customer order changes, pricing pressure, competition, reliance on a relatively small number of customers, and possible inventory obsolescence. It reported no significant changes to the risk factors in the 2010 Form 10-K, no material legal proceedings, and no material off-balance-sheet arrangements. No restructuring charges were recorded in the first nine months of 2011. Disclosure controls were concluded effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether the deferred tax assets can be realized as forecast; the valuation-allowance reversal materially boosted reported net earnings but did not itself provide cash.
- Subsequent orders, cancellations and shipments, particularly given the Q3 sequential order decline and lower backlog than Q2.
- Whether Thermal Products’ strength can offset continuing weakness in Mechanical and Electrical Products and ATE demand.
- Working-capital trends, especially inventory, which increased to $4.674 million from $3.489 million at year-end.
- Liquidity needs and lease-related letter-of-credit collateral, given the absence of a borrowing facility.