inTEST Corporation (10-Q): Quarter ended September 30, 2022
inTEST supplies test and process solutions to semiconductor, automotive, industrial, life sciences, defense/aerospace, security and other markets. Effective January 1, 2022, it reorganized reporting into Electronic Test, Environmental Technologies and Process Technologies; prior-period segment information was reclassified. Results include businesses acquired in late 2021, so year-over-year comparisons reflect acquisitions as well as underlying changes.
Financial and operating results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $30.8 million | $21.1 million | $84.4 million | $62.5 million |
| Gross profit / margin | $13.9 million / 45% | $10.4 million / 49% | $38.5 million / 46% | $30.9 million / 49% |
| Operating income | $3.2 million | $2.5 million | $6.7 million | $8.2 million |
| Net earnings | $2.5 million | $2.2 million | $5.2 million | $7.0 million |
| Diluted EPS | $0.23 | $0.20 | $0.48 | $0.65 |
Amounts are in U.S. dollars; financial statement values are reported in thousands unless otherwise stated. Q3 revenue rose 46% year over year; nine-month revenue rose 35%. Management attributed growth to stronger demand across markets and acquisitions. The acquired businesses contributed $4.8 million of Q3 revenue and $14.0 million for the first nine months.
- Q3 gross margin declined to 45% from 49%; the nine-month margin fell to 46% from 49%. Management cited higher component material costs and product, customer and sales-channel mix.
- Nine-month operating income and net earnings declined despite higher revenue, with higher operating expenses, including acquired-business costs and acquired-intangible amortization. Nine-month acquired-intangible amortization was $2.1 million.
- Q3 orders were $32.7 million, up 55% year over year but down 19% from Q2. Nine-month orders increased 37% to $98.3 million. Backlog was approximately $47.9 million at September 30, versus $20.4 million a year earlier and $46.0 million at June 30. The company expected to ship essentially all backlog in 2022 and the first half of 2023, subject to supply constraints; backlog is not a guarantee of future sales.
- Q3 segment revenue was $10.4 million for Electronic Test, $7.6 million for Environmental Technologies and $12.7 million for Process Technologies. Nine-month revenue grew 13%, 12% and 94%, respectively. Process Technologies’ comparison includes acquired businesses.
Cash flow, liquidity and debt
- Cash, cash equivalents and restricted cash totaled $10.0 million at September 30, 2022, down from $21.2 million at December 31, 2021. This excludes $3.5 million of short-term U.S. Treasury investments. Working capital was $30.5 million, compared with $27.0 million at year-end.
- Operating cash flow was negative $3.7 million for the first nine months, versus positive $8.1 million in 2021. The principal working-capital uses included increases of $4.9 million in receivables and $8.5 million in inventory; accounts payable increased $3.9 million. Management linked inventory investment to the higher backlog.
- Investing cash flow was negative $4.2 million, including $3.5 million of Treasury bill purchases and $1.0 million of capital expenditures. Financing cash flow was negative $2.8 million, including $2.9 million of term-loan repayments.
- Term Note debt was $17.2 million, including $4.1 million current and $13.1 million long-term. No revolving-credit borrowings were outstanding. A September amendment increased the Term Note maximum to $50.5 million, with $30.0 million of available funding reported at quarter-end, and extended the credit facility maturity to September 2027. The agreement has financial covenants and is secured by substantially all company assets.
- One $12.0 million term-note draw has a rate fixed at approximately 3.2% through an interest-rate swap. The other $8.5 million draw was variable-rate: approximately 4.4% at September 30 and 5.2% effective October 15. Q3 and nine-month interest expense was $0.2 million and $0.5 million, respectively.
Outlook, risks and notable items
The filing provides no specific revenue or earnings guidance. Management said cash, available borrowing capacity and expected operating cash flows should cover near-term working capital and corporate needs; it estimated minimum short-term working-capital requirements of $8 million to $10 million. It anticipated further investment in staffing, systems and market/geographic expansion.
- Management described demand across markets as stronger, including semiconductor applications, silicon-carbide induction heating, analog and mixed-signal test, and EV-related products. However, semiconductor demand is cyclical and difficult to predict.
- Supply-chain constraints, inflation, material availability and logistics delays were expected to persist. Acculogic relies on a Belarus-based sole-source supplier for certain material; the company estimated a six-to-nine-month supply and was qualifying an alternate supplier. The company warned mitigation efforts may not prevent higher costs or lower revenue.
- COVID-19 had caused lost production time at one facility in April 2022, and China shutdowns required alternate delivery arrangements. Further disruption could affect production or shipments.
- Foreign currency translation reduced comprehensive earnings; the nine-month translation adjustment was negative $1.8 million. Q3 restructuring charges were zero; nine-month 2022 restructuring charges were also zero, compared with $0.3 million for the first nine months of 2021.
- At September 30, contingent consideration liabilities totaled $1.5 million, primarily related to Acculogic and Z-Sciences. The Z-Sciences payment was made in October 2022. A further Acculogic earnout may be payable based on qualifying EV/battery sales. The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls.
Key facts for investors to verify
- Whether backlog converts to revenue on schedule, given supply constraints and customers’ ability to cancel or defer orders.
- Whether inventory growth and negative operating cash flow reverse as shipments and collections progress.
- Whether gross margins recover as material costs and product/customer mix change.
- The availability and cost of debt financing, compliance with credit covenants, and exposure to rising rates on variable-rate debt.
- Progress diversifying revenue beyond semiconductors and qualifying an alternate source for Acculogic’s sole-source material.