inTEST Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Financial amounts below are in millions of dollars unless stated otherwise. inTEST designs and sells thermal management, induction heating and semiconductor test-interface products through its Thermal and Electromechanical Semiconductor (EMS) segments. 2018 results include Ambrell, acquired in May 2017.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $21.10 | $15.89 | $39.97 | $30.07 |
| Gross margin | $10.91; 51.7% | $8.42; 53.0% | $20.31; 50.8% | $16.15; 53.7% |
| Operating income | $4.52 | $2.28 | $5.42 | $5.41 |
| Net earnings | $4.01 | $1.45 | $4.40 | $3.52 |
| Diluted EPS | $0.39 | $0.14 | $0.42 | $0.34 |
| Operating cash flow | Not provided separately | Not provided separately | $3.50 | $1.08 |
- Q2 revenue rose 33% year over year; six-month revenue rose 33%. Excluding Ambrell, management said Q2 revenue increased 5%, while first-half revenue declined 3%.
- Cash and cash equivalents were $10.71 at June 30, down from $13.29 at December 31, 2017; working capital was $13.92, down from $16.58. The company reported no credit facilities and no material off-balance-sheet arrangements.
- Total liabilities were $18.14, including $6.28 of current Ambrell earnout payable. No borrowings are reported; $0.18 of restricted certificates of deposit secured lease letters of credit.
- First-half investing cash use was $1.92, primarily for Ambrell facility leasehold improvements. Financing cash use was $4.12, including the acquisition earnout payment. Cash declined by $2.58 overall.
Material changes versus prior periods
- Thermal revenue increased 52% in Q2 and 60% in the first half; EMS revenue increased 6% in Q2 but declined 3% for the first half. Ambrell contributed $6.4 of Q2 revenue and $12.7 of first-half revenue.
- First-half revenue by market increased 15% in semiconductor and 73% in non-semiconductor markets, the latter substantially reflecting Ambrell. EMS first-half revenue was lower amid weaker demand from some customers.
- Gross margin declined to 51.7% in Q2 from 53.0%, and to 50.8% for the first half from 53.7%. Management cited component costs and higher fixed operating costs, including Ambrell’s costs.
- Q2 operating income increased substantially, while first-half operating income was essentially flat. First-half operating expenses included a $1.02 increase in the estimated Ambrell earnout liability; Q2 included a $0.71 fair-value decrease that reduced expense.
- The effective tax rate was 9% in Q2 and 18% for the first half, versus 38% and 36%, respectively, in 2017. The decline primarily reflected reversal of $0.48 of provisional transition-tax payable.
Outlook, risks and unusual items
- Management expects Ambrell to diversify the business and said future orders and revenue are expected to be approximately evenly split between semiconductor and non-semiconductor markets. No specific revenue or earnings guidance was provided.
- Orders were $19.27 in Q2, up 32% year over year but down 6% from Q1; first-half orders rose 35% to $39.85. Excluding Ambrell, first-half orders were described as relatively flat year over year.
- Backlog was approximately $13.6 at June 30, versus $11.1 a year earlier and $15.4 at March 31. The company expects substantially all accepted backlog to ship in 2018, but orders can be canceled, accelerated or postponed and backlog is not necessarily indicative of future sales.
- Management said available cash and projected cash flow should cover short-term working capital, the earnout and other corporate requirements. A significant acquisition could require additional financing; no borrowing facility is available.
- Key risks include semiconductor/ATE cyclicality and seasonality, customer concentration, price competition, changing customer demand and product mix, inventory obsolescence, and integration and forecast uncertainty. Texas Instruments represented 13% of first-half revenue.
- The remaining Ambrell earnout is contingent on 2018 adjusted EBITDA and capped, together with the 2017 earnout, at $18.0. The June 30 liability was $6.28 and uses Level 3 estimates; changes in projected performance can affect earnings.
- Adoption of the new lease standard is expected in 2019 and management anticipated a significant balance-sheet impact from recognizing right-of-use assets and lease liabilities. Management reported effective disclosure controls, no material legal proceedings and no material subsequent events.
Investor verification priorities
- Track Ambrell’s 2018 performance and the eventual earnout payment, including the effect of fair-value revisions on reported earnings.
- Assess whether order growth and backlog convert into revenue, especially given the sequential Q2 order and backlog declines.
- Monitor gross-margin recovery, component costs, inventory growth and EMS demand independent of acquisition contributions.
- Verify cash generation and liquidity against earnout obligations and planned capital spending; review the forthcoming lease-standard balance-sheet impact.