inTEST Corporation — Q1 2018 Form 10-Q
Period: Three months ended March 31, 2018; comparative period is Q1 2017. Amounts are in U.S. dollars; financial statement figures are in thousands unless noted. inTEST designs and sells thermal management products, semiconductor automated test equipment interface solutions, and induction heating systems. Its reportable segments are Thermal and Electromechanical Semiconductor Products (EMS). Ambrell, acquired in May 2017, is included in Thermal.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $18.871 million | $14.180 million | +33% |
| Gross profit / margin | $9.395 million / 49.8% | $7.728 million / 54.5% | Margin down about 4.7 percentage points |
| Operating income | $0.907 million | $3.131 million | Down 71% |
| Net earnings / diluted EPS | $0.381 million / $0.04 | $2.078 million / $0.20 | Down 82% |
| Operating cash flow | $2.279 million | $(1.000) million | Improved |
| Capital expenditures | $1.168 million | $0.114 million | Primarily Ambrell facility improvements |
- Revenue growth was acquisition-driven: Q1 2018 included $6.2 million of Ambrell revenue. Excluding Ambrell, revenue decreased 11% year over year, reflecting softer semiconductor ATE demand and lower telecommunications demand.
- Thermal revenue rose 70% to $13.234 million, while EMS revenue fell 12% to $5.637 million. Semiconductor-market revenue was nearly flat at $10.539 million; non-semiconductor revenue more than doubled to $8.332 million, largely due to Ambrell.
- Management attributed lower gross margin primarily to higher fixed operating costs, including $1.1 million of Ambrell costs. Operating expenses also included a $1.726 million increase in the estimated fair value of Ambrell contingent consideration.
- Income tax expense was $0.601 million, with a 61% effective tax rate versus 35% in Q1 2017; the non-tax-deductible contingent-consideration adjustment contributed to the higher rate.
Liquidity, obligations and capital resources
- At March 31, 2018, cash and cash equivalents were $14.438 million, working capital was $17.649 million, and current assets were $33.287 million against current liabilities of $15.638 million.
- Total liabilities were $25.605 million. The filing reports no borrowings or credit facilities; restricted certificates of deposit of $0.175 million support lease-related letters of credit.
- Ambrell-related obligations included $5.833 million payable for the 2017 earnout, paid in April 2018, and $6.992 million of estimated fair value for the potential 2018 earnout. Aggregate 2017 and 2018 earnouts are capped at $18 million.
- Cash increased by $1.148 million during the quarter. Operating cash flow benefited from working-capital movements, including higher accounts payable, while inventory rose $1.760 million. The company expects to spend about $2.1 million on Ambrell’s Rochester facility improvements; it took occupancy on May 1, 2018.
- Management said cash and projected operating cash flow should support near-term requirements, including Ambrell integration and earnout payments. A significant acquisition could require additional financing; the company has no borrowing facility.
Orders, outlook and risks
- Orders were $20.588 million, up 37% year over year but down 5% from Q4 2017. Excluding $7.0 million of Ambrell orders, consolidated orders declined 10% year over year, primarily reflecting EMS weakness and seasonal/cyclical semiconductor ATE softness.
- Backlog was approximately $15.4 million, versus $8.2 million a year earlier and $13.7 million at December 31, 2017; $6.3 million was attributable to Ambrell. The company expects substantially all backlog to ship in 2018, but orders may be canceled, accelerated or postponed.
- Management expects future orders and revenue to be approximately evenly split between semiconductor and non-semiconductor markets as Ambrell expands diversification. No specific financial guidance was provided.
- Management described the ATE market as cyclical, seasonal, volatile and difficult to forecast, with demand typically stronger in Q2 and Q3. Other risks include customer concentration, pricing pressure, competition, shifting customer demand, inventory obsolescence and acquisition integration or valuation uncertainty. The filing states there were no material changes to the risk factors in the 2017 Form 10-K.
- ASC 606 revenue recognition was adopted January 1, 2018 with no material impact. The company expects the lease accounting standard effective in 2019 to significantly increase balance-sheet assets and liabilities for multi-year leases; its assessment was ongoing.
- No material legal proceedings or off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective at the reasonable assurance level.
Important facts for investors to verify
- Whether Ambrell’s projected 2018 adjusted EBITDA supports the $6.992 million contingent-consideration estimate and whether any additional earnout will be due.
- Whether orders and backlog convert to revenue as expected, given cancellation and delivery-timing risks.
- Whether EMS and other legacy business demand stabilizes, and whether acquisition-excluded revenue trends improve.
- Whether gross margins recover as Ambrell integration and facility costs evolve, and how the planned Rochester investment affects cash needs.
- How the lease-standard adoption changes reported liabilities and liquidity measures, and whether customer or market concentration risks change.