inTEST Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter ended September 30, 2017; unaudited consolidated results. Amounts below are in millions of dollars unless noted. inTEST designs and sells thermal management, semiconductor test-interface, and induction-heating products. It completed its acquisition of Ambrell on May 24, 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $17.35 | $10.82 | $47.42 | $29.96 |
| Gross profit (gross margin) | $8.80 (50.7%) | $5.58 (51.5%) | $24.95 (52.6%) | $14.97 (50.0%) |
| Operating income | $2.74 | $1.70 | $8.15 | $2.53 |
| Net earnings | $2.02 | $1.09 | $5.54 | $1.66 |
| Diluted EPS | $0.19 | $0.11 | $0.54 | $0.16 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $5.19 | $1.74 |
- Q3 revenue increased 60% year over year; nine-month revenue increased 58%. Ambrell contributed $4.9 million of Q3 revenue and $6.9 million for the nine-month period.
- Q3 gross margin declined year over year, primarily reflecting higher fixed costs, including Ambrell. Nine-month margin improved as greater revenue absorbed fixed costs and product/customer mix reduced component costs.
- For the nine months, net cash used in investing was $22.36 million, including $21.96 million paid for Ambrell, net of acquired cash. Capital expenditures were $0.44 million. Cash declined to $11.50 million from $28.61 million at year-end 2016.
Liquidity, debt, and acquisition
- At September 30, 2017, working capital was $19.60 million, down from $32.95 million at December 31, 2016. Current assets were $28.47 million and current liabilities $8.87 million.
- The filing reports no credit facilities or borrowings. Letters of credit totaled $175,000, secured by restricted certificates of deposit.
- Ambrell’s purchase price was $26.73 million, comprising cash paid and estimated contingent consideration. The earnouts depend on Ambrell’s 2017 and 2018 adjusted EBITDA and are capped at $18 million in aggregate. The liability was valued at $3.57 million at quarter-end after a $0.55 million fair-value reduction, primarily reflecting lower projected 2017 adjusted EBITDA.
- Management said cash and projected cash flows should meet short-term working-capital, integration, potential earnout, and other corporate needs. It planned $1.5–$2.0 million of leasehold improvements for Ambrell’s new Rochester facility, principally during Q4 2017 and Q1 2018.
Changes, outlook, and risks
- Q3 orders were $17.63 million, up 56% year over year; backlog was approximately $11.3 million, including $5.9 million attributable to Ambrell. Management noted backlog is not necessarily indicative of future sales because orders can be canceled or rescheduled.
- Ambrell broadened the company’s industrial and other non-ATE exposure. Management expected future orders and revenue to be approximately equally split between ATE and non-ATE markets. There was no specific numerical revenue or earnings guidance in the filing.
- Excluding Ambrell, Q3 orders were essentially flat year over year and down 9% sequentially, as weaker telecommunications-related non-ATE demand partly offset continued ATE strength. For the first nine months, underlying orders excluding Ambrell increased 14% year over year, led by ATE demand.
- Management cited ATE cyclicality and seasonality, volatile customer order timing, competitive pricing, customer and product concentration, potential inventory obsolescence, and dependence on successful acquisition integration. Texas Instruments and distributor Hakuto each represented at least 10% of nine-month revenue.
- Acquisition-related and other unusual items included $0.88 million of Ambrell transaction costs for the nine months and the $0.55 million contingent-consideration fair-value reduction. The company reported no material legal proceedings, no material change to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether Ambrell meets the adjusted EBITDA thresholds underlying the contingent earnouts, and how the Level 3 valuation changes.
- Whether growth persists excluding Ambrell, particularly given the Q3 sequential slowdown in underlying orders and the reported cyclical and seasonal patterns.
- Whether acquired-business integration, planned facility spending, amortization, and working-capital requirements affect cash generation and liquidity.
- How customer concentration, pricing pressure, and changing ATE/non-ATE demand affect future margins and the expected market mix.