inTEST Corporation — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. inTEST supplies test and process solutions through its Thermal and Electromechanical Solutions (EMS) segments, serving semiconductor and other markets. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $19.556 | $11.230 |
| Gross profit / gross margin | $9.521 / 48.7% | $4.867 / 43.3% |
| Operating income (loss) | $2.580 | ($1.361) |
| Net income (loss) | $2.212 | ($1.143) |
| Diluted earnings (loss) per share | $0.21 | ($0.11) |
| Net cash used in operating activities | $0.337 | $0.119 |
- Revenue rose 74% year over year. EMS revenue increased 348% to $8.501 million; Thermal revenue grew 18% to $11.055 million.
- Semi Market revenue rose 166% to $13.320 million; Multimarket revenue was nearly flat at $6.236 million. International revenue was $13.809 million, versus $5.511 million.
- Gross margin improved by approximately 5.4 percentage points, primarily from better absorption of fixed costs at higher sales levels and lower inventory charges, partly offset by component costs and product mix.
- Operating expenses were $6.941 million, up from $6.228 million. Q1 2021 included $55,000 of EMS consolidation charges.
- Operating cash flow was negative despite net income, principally reflecting a $5.082 million increase in receivables. Investing cash outflow was $0.388 million; option exercises provided $0.717 million. Cash declined $82,000 to $10.195 million.
- At March 31, cash was $10.195 million and working capital was $21.285 million. No borrowings were outstanding on the $7.5 million revolving credit facility at quarter-end. The facility was amended April 10, 2021: capacity increased to $10 million and maturity extended to April 9, 2024.
- Total liabilities were $19.277 million, including $6.913 million of operating lease liabilities. The filing reports no outstanding funded debt at quarter-end.
Material changes and operating trends
- Orders reached $25.230 million, up 83% from Q1 2020 and 43% sequentially. Semi Market orders increased 157% year over year and 54% sequentially. Backlog was approximately $17.1 million, versus $8.1 million a year earlier and $11.5 million at December 2020.
- Management attributed stronger semiconductor-related demand to a cyclical market upturn and broader demand for semiconductors. Backlog orders are subject to customer cancellation, acceleration, or postponement and are not necessarily indicative of future sales.
- Texas Instruments accounted for 16% of Q1 revenue, increasing customer-concentration exposure compared with Q1 2020, when no customer represented 10% or more.
- The EMS manufacturing consolidation from Fremont, California, to Mt. Laurel, New Jersey, was substantially completed in late 2020. Integration was expected to finish in Q2 2021; management anticipated another $50,000–$100,000 of cash charges. Training and hiring challenges could affect shipments, quality, and margins.
Outlook, risks, and unusual items
- Management expected available cash, operating cash flow, and the revolving facility to provide sufficient liquidity through 2021. It estimated minimum short-term working capital needs of $5–$7 million and anticipated investments in hiring, systems, and expansion; no specific revenue or earnings guidance was provided.
- COVID-19 effects had eased relative to early 2020, but restrictions continued to constrain in-person aftermarket service. Service and support revenue, typically 8%–10% of consolidated revenue, declined again in Q1 2021. Further effects from the virus, customers, suppliers, or restrictions remained uncertain.
- Key risks include semiconductor-market cyclicality, reliance on major customers, supply-chain and component availability, pricing pressure, product mix and inventory obsolescence, foreign exchange, and execution of the EMS consolidation. The company reported no changes to the risk factors in its 2020 Form 10-K.
- A New York state and local grant arrangement could require repayment of up to $370,000 if employment targets are not met. The company said it was compliant with the applicable targets as of March 31, 2021, following a waiver for 2020.
- The filing reports no material legal proceedings, material off-balance-sheet arrangements, or material subsequent events other than the credit-facility amendment.
Important facts for investors to verify
- Whether elevated semiconductor orders and backlog convert to shipments and revenue, and how sustainable the market upturn proves to be.
- Receivables collection and operating cash conversion, given the large Q1 receivables increase and negative operating cash flow.
- Customer concentration, particularly Texas Instruments’ 16% share of quarterly revenue.
- Progress and costs of EMS integration, including hiring, product quality, customer deliveries, and expected remaining charges.
- COVID-19 effects on service revenue and operations, and compliance with the Rochester employment conditions tied to grant proceeds.
- Availability and terms of the amended $10 million credit facility and the company’s liquidity needs as business activity changes.