inTEST Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. inTEST designs and sells mechanical, thermal, and electrical products used primarily in semiconductor testing. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $13.80 | $15.26 | $25.50 | $24.79 |
| Gross margin | 49.3% | 48.3% | 46.6% | 48.0% |
| Operating income | $2.72 | $3.17 | $3.98 | $4.30 |
| Net earnings | $2.66 | $3.17 | $3.91 | $4.28 |
| Diluted EPS | $0.26 | $0.31 | $0.38 | $0.42 |
| Operating cash flow | Not presented separately | Not presented separately | $2.52 | $0.62 |
At June 30, cash and cash equivalents were $8.88 million, versus $6.90 million at December 31, 2010. Current assets were $21.59 million and current liabilities $5.98 million. Total liabilities were $5.98 million. The company reported no borrowings under its $250,000 secured credit facility; it had $700,000 of outstanding lease-related letters of credit, supported by restricted certificates of deposit. Six-month capital expenditures were $640,000, primarily for facility moves. No significant capital expenditure commitments were reported for the remainder of 2011.
Changes and operating drivers
- Q2 revenue declined 10% year over year, while first-half revenue rose 3%. Q2 net earnings fell about 16%; first-half net earnings declined about 9%.
- For Q2, Thermal Products revenue rose 41% year over year to $6.67 million, while Mechanical Products fell 35% to $5.10 million and Electrical Products fell 26% to $2.04 million. For the first half, Thermal revenue increased 46%, while Mechanical and Electrical revenue declined 19% and 16%, respectively.
- Management attributed prior-year Q2 strength in Mechanical and Electrical to accelerated orders following the industry downturn. Thermal benefited from a later recovery and strength in non-semiconductor markets. Management also cited some recent softening in ATE demand, partly offset by new Electrical business at a major customer.
- Q2 gross margin improved year over year, but first-half margin declined, reflecting higher fixed operating costs, including added staffing, restored benefits, and facility relocation costs. Q2 operating margin was 19.7%, versus 20.8% a year earlier; first-half operating margin was 15.6%, versus 17.4%.
- Orders were $13.5 million in Q2, compared with $13.1 million in Q1 2011 and $12.2 million in Q2 2010. Backlog was approximately $7.2 million at June 30, versus $7.5 million at March 31 and $6.0 million a year earlier; most was expected to ship in 2011, but orders may be canceled or rescheduled.
Outlook, risks, and other items
- Management expected profitability to continue through the balance of 2011 and into 2012, and cash plus projected cash flows to support short-term working capital needs. It cautioned that future orders and revenue were uncertain.
- The company recorded a full $3.2 million valuation allowance against deferred tax assets, but said it expected to assess whether some or all could be realized in the foreseeable future. Any release was conditional on that assessment.
- A shelf registration filed in May 2011 permits offerings of up to $30 million of securities, subject to stated limits; no offering proceeds are reported in this filing.
- Key risks include semiconductor-industry cyclicality, customer concentration, pricing pressure, competition, changing customer demand, and inventory obsolescence. Texas Instruments represented 11% of first-half 2011 revenue. Management reported no significant changes to the risk factors in its 2010 Form 10-K.
- The $250,000 credit facility was scheduled to expire September 30, 2011. A $200,000 letter of credit tied to a terminated lease was canceled July 12, 2011. The filing reported no material legal proceedings, no material off-balance-sheet arrangements, and no restructuring charges in the first half. Management concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether ATE demand and order trends support management’s profitability outlook, particularly given the recent softness noted in Mechanical Products.
- Whether Thermal’s growth in non-semiconductor markets can continue to offset weaker Mechanical and Electrical results.
- How revenue mix, pricing pressure, and operating costs affect gross and operating margins in coming quarters.
- Whether deferred tax assets become realizable and whether any valuation-allowance release is appropriate.
- Whether the credit facility was renewed or replaced after its September 2011 expiration, and whether any shelf offering was subsequently made.