inTEST Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The company designs and sells thermal, mechanical, and electrical products, primarily for semiconductor test equipment, and is expanding thermal products into non-ATE markets. Amounts below are in U.S. dollars; financial-statement figures are in millions unless noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $10.794 | $9.900 | $31.934 | $30.091 |
| Gross profit / margin | $5.168 / 48% | $4.756 / 48% | $15.435 / 48% | $14.326 / 48% |
| Operating income | $1.284 | $1.087 | $3.732 | $2.940 |
| Net earnings | $0.837 | $1.090 | $2.480 | $2.385 |
| Diluted EPS | $0.08 | $0.10 | $0.24 | $0.23 |
For Q3, revenue increased 9% year over year, while net earnings fell 23%, primarily as income tax expense rose to $431,000 from $24,000. The prior-year quarter benefited from German tax-audit and federal tax-return adjustments; there were no similar 2014 items. For the first nine months, revenue grew 6% and net earnings grew 4%, despite a higher effective tax rate of 34% versus 20%.
Operating cash flow was $1.787 million for the first nine months, compared with $1.356 million in 2013. Capital expenditures were $536,000; investing cash use was $528,000. Cash increased to $20.147 million from $19.018 million at year-end 2013. Working capital was $27.718 million. Current liabilities were $4.884 million, and the filing reports no borrowing facility or conventional debt balance. Restricted certificates of deposit of $450,000 secured lease letters of credit. Cash held by foreign subsidiaries was $2.6 million; repatriation could trigger U.S. tax, and management intended to reinvest those funds abroad.
Material changes and operating trends
- Q3 revenue rose year over year mainly on Mechanical Products, up 40% to $3.077 million. Thermal revenue was up 1% to $5.908 million; Electrical revenue declined 3% to $1.809 million.
- For nine months, Mechanical revenue rose 19% and Electrical 13%, while Thermal declined 1%. ATE-market revenue increased 15% to $24.256 million; non-ATE revenue decreased 14% to $7.678 million.
- Q3 orders were $10.647 million, up 2% year over year but down 16% sequentially. The sequential decline reflected softer Mechanical and Electrical demand and a seasonal ATE slowdown, partly offset by stronger thermal orders from non-ATE customers. Nine-month orders increased 15% to $33.448 million.
- Backlog was approximately $4.7 million at September 30, versus $3.2 million a year earlier and $4.8 million at June 30. The company expected substantially all backlog to ship in 2014, but orders may be canceled or rescheduled.
- Gross margin remained 48%. Higher material costs as a share of revenue were offset by improved absorption of fixed costs. Selling expense increased with commissions and revenue; engineering and product development expense declined.
Outlook, risks and other matters
Management expected cash and projected operating cash flow to cover short-term working-capital needs and had no significant capital-expenditure commitments for the balance of 2014. The filing provides no specific revenue or earnings guidance. Management described the semiconductor/ATE market as cyclical, seasonal, volatile, and difficult to forecast; it noted pricing pressure, customer concentration, changing customer demand and product mix, and inventory-obsolescence risk. Non-ATE markets are part of its diversification strategy, but the company said it had not yet established meaningful market shares there. Texas Instruments represented 11% of nine-month revenue, as did distributor Hakuto; the filing identifies customer concentration as a risk.
No material changes to the risk factors in the 2013 Form 10-K, material legal proceedings, material off-balance-sheet arrangements, or material subsequent events were reported. Management concluded disclosure controls and procedures were effective at the reasonable-assurance level. New revenue-recognition guidance was expected to take effect for the company on January 1, 2017; the transition method and financial impact were still under evaluation.
Important facts for investors to verify
- Whether the seasonal ATE slowdown continues and how orders, backlog, and deliveries develop after September 30.
- Whether Mechanical and Electrical growth offsets weaker Thermal and non-ATE revenue, and whether non-ATE diversification gains traction.
- Whether the 34% effective tax rate is representative of future periods, given the unusual tax benefits in the 2013 comparison period.
- Cash conversion and working-capital needs, particularly the increases in receivables and inventory during the first nine months.
- Exposure to major customers and distributors, pricing pressure, product-mix changes, and inventory obsolescence.