inTEST Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Although the request identifies 2014 Q4, this is an annual filing; it also reports unaudited fourth-quarter results. inTEST designs and sells thermal, mechanical and electrical products, primarily for semiconductor testing and automatic test equipment (ATE), with thermal products also sold into non-ATE markets.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net revenue | $41.796 million | $39.426 million |
| Gross profit / margin | $20.462 million / 49% | $19.015 million / 48% |
| Operating income | $4.916 million | $3.962 million |
| Net earnings | $3.439 million | $3.077 million |
| Diluted earnings per share | $0.33 | $0.30 |
| Operating cash flow | $5.129 million | $3.770 million |
| Cash and cash equivalents, year-end | $23.126 million | $19.018 million |
| Working capital, year-end | $28.561 million | $24.749 million |
| Long-term debt | None reported | None reported |
Capital expenditures were $831,000, versus $424,000 in 2013. The company had no credit facility and reported no 2014 financing cash flows. Cash held by foreign subsidiaries was $3.1 million at year-end; $883,000 was repatriated from Singapore in February 2015, and German subsidiary funds were expected to remain indefinitely reinvested.
Changes versus the prior comparable period
- Annual revenue increased 6%. ATE-market revenue rose 8% to $30.737 million, while non-ATE revenue was essentially flat at $11.059 million. Non-ATE sales were 27% of total revenue, versus 28% in 2013.
- Revenue by segment: Thermal Products rose 2% to $23.446 million; Mechanical Products rose 13% to $11.245 million; Electrical Products rose 9% to $7.105 million. Management attributed part of Mechanical growth to a customer’s new Southeast Asian facility.
- Orders increased 11% to $42.441 million; non-ATE orders rose 17%. Year-end backlog was approximately $3.8 million, compared with $3.1 million, and was substantially expected to ship in 2015.
- Gross margin improved by one percentage point, primarily from better absorption of fixed costs at higher revenue levels. Income tax expense rose to $1.470 million from $931,000, and the effective tax rate increased to 30% from 23%, principally due to fewer tax credits and a prior-year German tax audit benefit.
- Mechanical Products’ operating loss narrowed to $18,000 from $784,000. Thermal operating income was $4.740 million and Electrical operating income was $781,000.
- For Q4 alone, revenue was $9.862 million versus $9.335 million in Q4 2013; net earnings were $959,000 versus $692,000.
Outlook, risks and notable items
- No numerical revenue or earnings guidance was provided. Management expected cash and projected cash flow to support short-term working-capital needs, but noted that a significant acquisition could require additional resources. No significant 2015 capital-expenditure commitments were reported.
- Management’s strategy is to expand thermal-product sales outside ATE, pursue complementary acquisitions, develop products and control costs. It cautioned that non-ATE sales may remain variable and that diversification success is uncertain.
- Results remain exposed to semiconductor/ATE cyclicality and seasonality, pricing pressure, customer ordering patterns, product mix, and short lead-time demands. The filing describes the first and fourth quarters as typically weaker ATE-demand periods.
- Customer concentration is material: Texas Instruments represented 13% of revenue in both years; Hakuto represented 11% in 2014. The ten largest customers generated approximately 48% of 2014 revenue.
- Other disclosed risks include international and foreign-exchange exposure, supplier availability, inventory obsolescence, technology and competition, tax uncertainty, intellectual-property protection, cyber and operational security, and retaining key employees. Foreign customers generated 66% of revenue.
- The company recorded $344,000 of excess and obsolete inventory charges in 2014. No goodwill, indefinite-lived intangible or long-lived asset impairment was recorded; goodwill was $1.706 million. No material legal proceedings or material off-balance-sheet arrangements were reported. The auditor issued an unqualified opinion on the financial statements.
- Management concluded disclosure controls and internal control over financial reporting were effective at a reasonable assurance level. The auditor did not provide an internal-control attestation, as the company was a smaller reporting company.
Important facts for investors to verify
- Whether increased orders and backlog converted into 2015 revenue, given customers’ ability to cancel or reschedule orders.
- Whether non-ATE thermal sales can grow and reduce dependence on cyclical ATE demand.
- Whether customer concentration, competitive pricing and shorter lead times affect margins or order continuity.
- How foreign cash availability, repatriation costs and the effective tax rate evolve.
- Whether Mechanical Products sustains its substantial improvement and avoids renewed operating losses.