inTEST Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results. Amounts below are in millions, except per-share data and percentages.
Business context and material developments
inTEST designs and manufactures thermal, mechanical and electrical products, primarily for semiconductor automated test equipment (ATE) customers, and also serves non-ATE markets. Effective January 1, 2017, it reported two segments: Thermal and Electromechanical Semiconductor Products (EMS).
On May 24, 2017, inTEST acquired Ambrell, a precision induction-heating systems manufacturer, for cash consideration of $22.0 million at closing, subject to a working-capital adjustment and potential earnouts. Ambrell’s results are included from the acquisition date. Management expects the acquisition to diversify the business and bring future orders and revenue to an approximately equal split between ATE and non-ATE markets.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $15.9 | $10.5 | $30.1 | $19.1 |
| Gross profit / margin | $8.4 / 53% | $5.3 / 51% | $16.1 / 54% | $9.4 / 49% |
| Operating income | $2.3 | $0.7 | $5.4 | $0.8 |
| Net earnings | $1.4 | $0.5 | $3.5 | $0.6 |
| Diluted EPS | $0.14 | $0.05 | $0.34 | $0.05 |
| Operating cash flow | Not stated by quarter | $3.4 | $0.2 |
Q2 revenue rose 52% year over year; first-half revenue rose 57%. For the first half, Thermal revenue was $17.0 million and EMS revenue was $13.1 million, each up 57%. First-half ATE revenue increased 47% to $20.6 million, while non-ATE revenue increased 86% to $9.5 million, including Ambrell revenue. Ambrell contributed $2.0 million of revenue and $30,000 of net income from acquisition through June 30.
Q2 gross margin improved primarily due to product and customer mix and lower component costs. First-half margin also benefited from better absorption of fixed costs at higher revenue levels. First-half general and administrative expense included $849,000 of Ambrell transaction costs; Q2 net earnings also reflected higher tax expense. The effective tax rate was 38% in Q2 and 36% for the first half, versus 35% in each comparable 2016 period.
Cash, liquidity and obligations
Cash and cash equivalents were $7.6 million at June 30, 2017, down from $28.6 million at December 31, 2016; working capital was $16.6 million, down from $33.0 million. The decline in cash chiefly reflected $24.3 million of net cash used for the Ambrell acquisition. First-half operating cash flow was $3.4 million, while investing cash outflow was $24.5 million and financing cash outflow was $62,000. Receivables and inventory increased with business activity.
Total liabilities were $15.1 million. No borrowings or credit facilities were reported; the filing states the company had no credit facilities available. Acquisition-related contingent consideration was recorded at $2.3 million, including $1.1 million classified as current. Earnouts based on Ambrell’s 2017 and 2018 adjusted EBITDA are capped at $18 million in aggregate. Restricted certificates of deposit of $175,000 supported lease letters of credit. Management expected cash and projected cash flow to cover short-term working capital, Ambrell integration, potential contingent consideration and other corporate needs.
Orders, outlook and risks
Q2 orders were $14.6 million, up 16% year over year but down 3% sequentially. Excluding $2.3 million of Ambrell orders, Q2 orders were down 3% year over year and 18% sequentially; management attributed the sequential decline partly to ATE orders arriving earlier than usual in late 2016 and Q1 2017. First-half orders rose 32% to $29.6 million, or 22% excluding Ambrell. Backlog was approximately $11.1 million at June 30, including $4.4 million attributable to Ambrell; substantially all was expected to ship in 2017, but orders may be canceled, accelerated or postponed.
The filing provides no formal revenue or earnings guidance. Management cited semiconductor/ATE cyclicality and seasonality, customer-specific demand shifts, pricing pressure, competition, customer concentration, and inventory obsolescence as risks. Texas Instruments represented 15% and distributor Hakuto 13% of first-half revenue. Management reported no material change to the risk factors in the 2016 Form 10-K, no material legal proceedings, and no material off-balance-sheet arrangements. Ambrell’s purchase-price allocation and valuation remained preliminary and could change materially; the company expected to finalize them in Q3 2017.
Key facts for investors to verify
- Final Ambrell purchase-price allocation, working-capital adjustment and contingent-consideration valuation, including potential earnout payments.
- Whether order growth and the $11.1 million backlog convert to revenue, particularly given ATE seasonality and the reported Q2 sequential order decline excluding Ambrell.
- Whether gross-margin improvement is sustained as product mix, component costs, pricing pressure and acquisition-related amortization change.
- Liquidity and working-capital trends following the acquisition, including receivables, inventory and the availability of cash held by foreign subsidiaries.
- Customer concentration and progress toward the expected diversification of revenue between ATE and non-ATE markets.