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INTT > SEC Filings for INTT > Form 10-Q on 12-Aug-2013All Recent SEC Filings

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Form 10-Q for INTEST CORP


12-Aug-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Risk Factors and Forward-Looking Statements

In addition to historical information, this discussion and analysis contains statements relating to possible future events and results that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can often be identified by the use of forward-looking terminology such as "believes," "expects," "intends," "may," "will," "should" or "anticipates" or similar terminology. See Part I, Item 1 - "Business - Cautionary Statement Regarding Forward-Looking Statements" in our 2012 Form 10-K for examples of statements made in this report which may be "forward-looking statements." These statements involve risks and uncertainties and are based on various assumptions. Although we believe that our expectations are based on reasonable assumptions, investors and prospective investors are cautioned that such statements are only projections, and there cannot be any assurance that these events or results will occur.

Information about the primary risks and uncertainties that could cause our actual future results to differ materially from our historic results or the results described in the forward-looking statements made in this report or presented elsewhere by Management from time to time are included in Part I, Item 1A - "Risk Factors" in our 2012 Form 10-K. Material changes to such risk factors may be reported in subsequent Quarterly Reports on Form 10-Q in Part II, Item 1A. There have been no such changes from the risk factors set forth in our 2012 Form 10-K.

Overview

This MD&A should be read in conjunction with the accompanying consolidated financial statements.

Our business and results of operations are substantially dependent upon the demand for ATE by semiconductor manufacturers and companies that specialize in the testing of ICs. Demand for ATE is driven by semiconductor manufacturers that are opening new, or expanding existing, semiconductor fabrication facilities or upgrading existing equipment, which in turn is dependent upon the current and anticipated market demand for semiconductors and products incorporating semiconductors. In the past, the semiconductor industry has been highly cyclical with recurring periods of oversupply, which often have a severe impact on the semiconductor industry's demand for ATE, including the products we manufacture. This can cause wide fluctuations in both our orders and net revenues and, depending on our ability to react quickly to these shifts in demand, can significantly impact our results of operations. These industry cycles are difficult to predict and in recent years have become more volatile and, in certain cases, shorter in duration. Because the industry cycles are generally characterized by sequential periods of growth or declines in orders and net revenues during each cycle, year over year comparisons of operating results may not always be as meaningful as comparisons of periods at similar points in either up or down cycles. In addition, during both downward and upward cycles in our industry, in any given quarter, the trend in both our orders and net revenues can be erratic. This can occur, for example, when orders are canceled or currently scheduled delivery dates are accelerated or postponed by a significant customer or when customer forecasts and general business conditions fluctuate during a quarter.

We believe that purchases of most of our products are typically made from semiconductor manufacturers' capital expenditure budgets. Certain portions of our business, however, are generally less dependent upon the capital expenditure budgets of the end users. For example, purchases of certain related ATE interface products, such as sockets and interface boards, which must be replaced periodically, are typically made from the end users' operating budgets. In addition, purchases of certain of our products, such as docking hardware, for the purpose of upgrading or improving the utilization, performance and efficiency of existing ATE, tend to be counter cyclical to sales of new ATE. Moreover, we believe a portion of our sales of thermal products results from the increasing need for temperature testing of circuit boards and specialized components that do not have the design or quantity to be tested in an electronic device handler. In addition, we market our Thermostream temperature management systems in industries outside the semiconductor test industry, such as the automotive, consumer electronics, defense/aerospace, energy and telecommunications industries. We believe that these industries usually are less cyclical than the ATE industry.

While the majority of our orders and net revenues are derived from the ATE market, our operating results do not always follow the overall trend in the ATE market in any given period. We believe that these anomalies may be driven by a variety of changes within the ATE market, including, for example, changing product requirements, longer time periods between new product offerings by OEMs and changes in customer buying patterns. In particular, demand for our mechanical and electrical products, which are sold exclusively within the ATE industry, and our operating margins in these product segments have been affected by shifts in the competitive landscape, including (i) customers placing heightened emphasis on shorter lead times (which places increased demands on our available engineering and production capacity increasing unit costs) and ordering in

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inTEST CORPORATION

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Continued)

smaller quantities (which prevents us from acquiring component materials in larger volumes at lower cost and increasing unit costs), (ii) the practice of OEM manufacturers to specify other suppliers as primary vendors, with less frequent opportunities to compete for such designations, (iii) the role of third-party test and assembly houses in the ATE market and their requirement of products with a greater range of use at the lowest cost,
(iv) customer supply line management groups demanding lower prices and spreading purchases across multiple vendors, and (v) certain competitors aggressively reducing their products' sales prices (causing us to either reduce our products' sales price to be successful in obtaining the sale or causing loss of the sale). These shifts in market practices have had, and may continue to have, varying levels of impact on our operating results and are difficult to quantify or predict from period to period. Management has taken, and will continue to take, such actions it deems appropriate to adjust our strategies, products and operations to counter such shifts in market practices as they become evident.

     Net Revenues and Orders

     The following table sets forth, for the periods indicated, a breakdown of
     the net revenues from unaffiliated customers both by product segment and
     geographic area (based on the location to which the goods are shipped).

                                                               (in 000's)
                                                   Three Months Ended      Six Months Ended
                                                   June 30,      March 31,     June 30,
      Net revenues from unaffiliated             2013     2012     2013      2013     2012
      customers:
      Thermal Products                         $ 5,772  $ 6,503    $5,898  $11,670  $12,614
      Mechanical Products                        3,812    3,086     1,796    5,608    5,600
      Electrical Products                        1,648    3,987     1,282    2,930    6,103
      Intersegment sales                           (14)       -        (3)     (17)     (10)
                                               $11,218  $13,576    $8,973  $20,191  $24,307
      Intersegment sales:
      Thermal Products                            $  -      $ -       $ -     $  -     $  -
      Mechanical Products                           14        -         3       17       10
      Electrical Products                            -        -         -        -        -
                                                   $14      $ -       $ 3      $17      $10
      Net revenues from unaffiliated customers
      (net of intersegment sales):
      Thermal Products                         $ 5,772  $ 6,503    $5,898  $11,670  $12,614
      Mechanical Products                        3,798    3,086     1,793    5,591    5,590
      Electrical Products                        1,648    3,987     1,282    2,930    6,103
                                               $11,218  $13,576    $8,973  $20,191  $24,307
      Net revenues from unaffiliated
      customers:
      U.S.                                     $ 3,504  $ 3,733    $3,214  $ 6,718  $ 7,929
      Foreign                                    7,714    9,843     5,759   13,473   16,378
                                               $11,218  $13,576    $8,973  $20,191  $24,307

Our consolidated net revenues for the quarter ended June 30, 2013 decreased $2.4 million or 17% as compared to the same period in 2012. For the quarter ended June 30, 2013, net revenues (net of intersegment sales) of our Thermal and Electrical Products segments decreased $731,000 or 11% and $2.3 million or 59%, respectively, as compared to the same period in 2012, while the net revenues (net of intersegment sales) of our Mechanical Products segment increased $712,000 or 23% as compared to the same period in 2012. Our consolidated net revenues for the quarter ended June 30, 2013 increased $2.2 million or 25% as compared to the quarter ended March 31, 2013. Net revenues (net of intersegment sales) of our Mechanical and Electrical Products segments increased $2.0 million or 112% and $366,000 or 29%, respectively, for the second quarter of 2013 as compared to the first quarter of 2013, while the net revenues (net of intersegment sales) of our Thermal Products segment decreased $126,000 or 2% during this time period. Net revenues from customers in various industries outside of the ATE industry and those net revenues as a percentage of our total consolidated net revenues were $2.5 million or 22%, respectively, for the quarter ended June 30, 2013, compared to $1.9 million or 22%, respectively, for the quarter ended March 31, 2013, and $2.2 million or 17%, respectively, for the quarter ended June 30, 2012.

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inTEST CORPORATION

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Continued)

We believe the decline in the level of net revenues of our Thermal Products segment in the second quarter of 2013 as compared to the same period in 2012 as well as to the first quarter of 2013 primarily reflects reduced levels of demand within the ATE industry. This segment has historically lagged our other two product segments in regard to experiencing the impact of both increases and decreases in the levels of demand within the ATE industry. This trend has continued in the most recent downturn in the ATE industry. While our Mechanical and Electrical Products segments began to be affected by a decline in demand within the ATE industry in the second quarter of 2011, our Thermal Products segment did not begin to experience a significant impact from this decline in demand until the fourth quarter of 2011. Moreover, our Thermal Products segment has not yet begun to experience an increase in demand within the ATE industry although both our Mechanical and Electrical Products segments have experienced increased levels of demand in the most recent quarter.

We believe the increased level of net revenues experienced by both our Mechanical and Electrical Products segments during the second quarter of 2013 as compared to the first quarter of 2013 reflects increased demand within the ATE industry. Our Mechanical Products segment also recorded an increase in net revenues in the second quarter of 2013 as compared to the same period in 2012, reflecting the impact of this increased level of demand. However, for our Electrical Products segment, net revenues for the second quarter of 2013 decreased as compared to the same period in 2012. We attribute this decrease to the fact that during the second quarter of 2012, our Electrical Products segment experienced an unusually high level of demand from one particular OEM customer which offset the decline in demand within the ATE industry during that quarter.

Total orders for the quarter ended June 30, 2013 were $11.0 million compared to $7.7 million for the quarter ended March 31, 2013 and $11.8 million for the quarter ended June 30, 2012. For the quarter ended June 30, 2013, orders for our Thermal, Mechanical and Electrical Products segments were $5.4 million, $3.7 million and $1.9 million, respectively, compared to $4.7 million, $2.2 million and $759,000 for the quarter ended March 31, 2013, respectively, and $6.4 million, $2.3 million and $3.1 million for the quarter ended June 30, 2012, respectively. Orders from customers in various industries outside of the ATE industry and those orders as a percentage of our total consolidated orders were $2.2 million or 20%, respectively, for the quarter ended June 30, 2013, compared to $1.4 million or 18%, respectively, for the quarter ended March 31, 2013, and $1.4 million or 12%, respectively, for the quarter ended June 30, 2012.We cannot be certain what the level of our orders or net revenues will be in any future period for any of our product segments.

Backlog

At June 30, 2013, our backlog of unfilled orders for all products was approximately $2.7 million compared with approximately $2.9 million at March 31, 2013 and $5.2 million at June 30, 2012. Our backlog includes customer orders which we have accepted, substantially all of which we expect to deliver in 2013. While backlog is calculated on the basis of firm purchase orders, a customer may cancel an order or accelerate or postpone currently scheduled delivery dates. Our backlog may be affected by the tendency of customers to rely on short lead times available from suppliers, including us, in periods of depressed demand. In periods of increased demand, there is a tendency towards longer lead times that has the effect of increasing backlog. As a result, our backlog at a particular date is not necessarily indicative of sales for any future period.

Product/Customer Mix

Our three product segments each have multiple products that we design, manufacture and sell to our customers. The gross margin on each product we offer is affected by a number of factors including the amount of intellectual property (such as patents) utilized in the product, the number of units ordered by the customer at one time, and the amount of inTEST designed and fabricated material included in our product compared with the amount of third-party designed and fabricated material included in our product. The weight of each of these factors, as well as the current market conditions, determines the ultimate sales price we can obtain for our products and the resulting gross margin.

The mix of products we sell in any period is ultimately determined by our customers' needs. Therefore, the mix of products sold in any given period can change significantly from the prior period. As a result, our consolidated gross margin can be significantly impacted in any given period by a change in the mix of products sold in that period.

We sell most of our products to semiconductor manufacturers and third-party test and assembly houses (end user sales) and to ATE manufacturers (OEM sales) who ultimately resell our equipment with theirs to semiconductor manufacturers. Our Thermal Products segment also sells into a variety of other industries including the automotive, consumer electronics, defense/aerospace, energy and telecommunications industries. The mix of customers during any given period will affect our gross margin due to differing sales discounts and commissions. For the six months ended June 30, 2013 and 2012, our OEM sales as a percentage of net revenues were 10% and 16%, respectively.

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inTEST CORPORATION

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Continued)

OEM sales generally have a lower gross margin than end user sales, as OEM sales historically have had a more significant discount. Our current net operating margins on most OEM sales, however, are only slightly less than margins on end user sales because of the payment of third party sales commissions on most end user sales. We have also continued to experience demands from our OEM customers' supply line managers to reduce our sales prices to them. If we cannot further reduce our manufacturing and operating costs, these pricing pressures will continue to reduce our gross and operating margins.

Results of Operations

The results of operations for our three product segments are generally affected by the same factors. Separate discussions and analyses for each product segment would be repetitive and obscure any unique factors that affected the results of operations of our different product segments. The discussion and analysis that follows, therefore, is presented on a consolidated basis and includes discussion of factors unique to each product segment where significant to an understanding of that segment.

The following table sets forth, for the periods indicated, the principal items included in the Consolidated Statements of Operations as a percentage of total net revenues.

                                                                Percentage of Net Revenues
                                                  Quarters Ended June 30,   Six Months Ended June 30,
                                                      2013        2012         2013          2012
      Net revenues                                     100.0%      100.0%        100.0%        100.0%
      Cost of revenues                                  51.3        54.4          52.6          55.6
      Gross margin                                      48.7        45.6          47.4          44.4
      Selling expense                                   13.6        11.4          13.5          12.2
      Engineering and product development expense        8.2         7.2           9.5           7.8
      General and administrative expense                13.6        12.3          15.2          15.0
      Restructuring and other charges                    0.0         0.0           0.0           1.5
      Operating income                                  13.3        14.7           9.2           7.9
      Other income (expense)                             0.0         0.0           0.0           0.0
      Earnings before income tax expense                13.3        14.7           9.2           7.9
      Income tax expense                                 4.4         4.9           2.8           2.6
      Net earnings                                       8.9%        9.8%          6.4%          5.3%

Quarter Ended June 30, 2013 Compared to Quarter Ended June 30, 2012

Net Revenues. Net revenues were $11.2 million for the quarter ended June 30, 2013 compared to $13.6 million for the same period in 2012, a decrease of $2.4 million or 17%. We believe the decrease in our net revenues during the second quarter of 2013 primarily reflects the factors previously discussed in the Overview.

During the quarter ended June 30, 2013, our net revenues from customers in the U.S. decreased 6% and our net revenues from foreign customers decreased 22%, respectively, as compared to the same period in 2012. The impact of changes in foreign currency exchange rates on the decrease in net revenues from foreign customers was less than 1%.

Gross Margin. Gross margin was 49% for the quarter ended June 30, 2013 compared to 46% for the same period in 2012. The improvement in the gross margin was primarily the result of a reduction in our component material costs as a percentage of net revenues, which decreased from 38% of net revenues in the second quarter of 2012 to 36% of net revenues in the second quarter of 2013. We attribute the decrease to changes in customer and product mix. In addition, the improvement in gross margin reflects a lower level of charges for obsolete and excess inventory in the second quarter of 2013 as compared to the same period in 2012. The reduction in these charges primarily reflects fewer items falling into our standard objective criteria. Finally, although our fixed operating costs were relatively unchanged as a percentage of net revenues, in absolute dollar terms these costs declined $345,000 in the second quarter of 2013 as compared to the same period in 2012. This decrease primarily reflects reduced staff in the manufacturing operations of our Thermal Products segment. During the second quarter of 2012, we had higher staffing levels as a result of the integration of the Thermonics acquisition.

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inTEST CORPORATION

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Continued)

Selling Expense. Selling expense was $1.5 million for the quarter ended June 30, 2013 compared to $1.6 million for the same period in 2012, a decrease of $27,000 or 2%. The decrease primarily reflects lower levels of advertising, trade show and travel expenses which were partially offset by an increase in salary and benefits expense as a result of increases in our sales staff in our Thermal Products segment.

Engineering and Product Development Expense. Engineering and product development expense was $925,000 for the quarter ended June 30, 2013 compared to $980,000 for the same period in 2012, a decrease of $55,000 or 6%. The decrease primarily reflects reduced spending on materials used in product development projects, as well as third party product development consultants.

General and Administrative Expense. General and administrative expense was $1.5 million for the quarter ended June 30, 2013 compared to $1.7 million for the same period in 2012, a decrease of $142,000 or 9%. The decrease primarily reflects reduced levels of profit-based bonus accruals reflecting the lower level of earnings in the second quarter of 2013 as compared to the same period in 2012.

Income Tax Expense. For the quarter ended June 30, 2013, we recorded income tax expense of $484,000 compared to income tax expense of $660,000 for the same period in 2012. Our effective tax rate was relatively unchanged at 33% for each of the quarters ended June 30, 2013 and 2012, respectively. On a quarterly basis, we record income tax expense or benefit based on the expected annualized effective tax rate for the various taxing jurisdictions in which we operate our businesses.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Net Revenues. Net revenues were $20.2 million for the six months ended June 30, 2013 compared to $24.3 million for the same period in 2012, a decrease of $4.1 million or 17%. We believe the decrease in our net revenues during the first six months of 2013 primarily reflects the factors previously discussed in the Overview.

During the six months ended June 30, 2013, our net revenues from customers in the U.S. decreased 15% and our net revenues from foreign customers decreased 18%, respectively, as compared to the same period in 2012. The impact of changes in foreign currency exchange rates on the decrease in net revenues from foreign customers was less than 1%.

Gross Margin. Gross margin was 47% for the six months ended June 30, 2013 compared to 44% for the same period in 2012. The improvement in the gross margin was primarily the result of a reduction in our component material costs as a percentage of net revenues, which decreased from 37% of net revenues for the first six months of 2012 to 35% of net revenues for the same period in 2013. We attribute the decrease to changes in customer and product mix. In addition, our fixed operating costs declined from 15% of net revenues for the first six months of 2012 to 14% of net revenues for the same period in 2013. In absolute dollar terms these costs declined $709,000. This decrease primarily reflects reduced headcount in our Thermal Products segment. Finally, the improvement in gross margin reflects a lower level of charges for obsolete and excess inventory in the first six months of 2013 as compared to the same period in 2012. The reduction in these charges primarily reflects fewer items falling into our standard objective criteria.

Selling Expense. Selling expense was $2.7 million for the six months ended June 30, 2013 compared to $3.0 million for the same period in 2012, a decrease of $244,000 or 8%. The decrease primarily reflects lower levels of commission expense reflecting the lower net revenue levels in the first six months of 2013 as compared to the same period in 2012.

Engineering and Product Development Expense. Engineering and product development expense was relatively unchanged at $1.9 million for each of the six months ended June 30, 2013 and 2012, respectively. Increases in spending on matters related to our intellectual property were offset by reductions in the use of third party consultants.

General and Administrative Expense. General and administrative expense was $3.1 million for the six months ended June 30, 2013 compared to $3.7 million for the same period in 2012, a decrease of $577,000 or 16%. During the first six months of 2012, we recorded $337,000 in costs associated with the acquisition of Thermonics and $55,000 in costs related to the relocation of our Electrical Products segment's operation in California. There were no similar costs recorded in the first six months of 2013. To a lesser extent, the decrease also reflects lower levels of professional fees and a reduction in salary and benefits expense.

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inTEST CORPORATION

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (Continued)

Restructuring and Other Charges. Restructuring and other charges were $359,000 for the first six months of 2012. There were no similar charges for the first six months of 2013. The restructuring and other charges recorded during the first six months of 2012 represent facility closure costs related to the closure of the Sunnyvale, California facility occupied by Thermonics at the time of our acquisition of this operation.

Income Tax Expense. For the six months ended June 30, 2013, we recorded income tax expense of $562,000 compared to income tax expense of $632,000 for the same period in 2012. Our effective tax rate was 30% for the first six months of 2013 compared to 33% for the same period in 2012. On a quarterly basis, we record income tax expense or benefit based on the expected annualized effective tax rate for the various taxing jurisdictions in which we operate our businesses. The reduction in our effective tax rate in the first six months of 2013 as compared to the same period in 2012 primarily reflects the recording of the effect of the reinstatement of certain domestic research and development tax credits; this change was enacted in January 2013.

Liquidity and Capital Resources

Net cash provided by operations for the six months ended June 30, 2013 was $541,000 compared to $1.7 million for the same period in 2012. During the first six months of 2013, we recorded net earnings of $1.3 million. However, the positive impact on cash of our net earnings was offset by an increase of $1.8 million in accounts receivable and $423,000 in inventories. These increases reflect increased business activity, particularly during the second quarter of 2013 as compared to the fourth quarter of 2012. These increases were partially offset by a $287,000 increase in accounts payable during the first six months of 2013, also reflecting the increased business activity as compared to the fourth . . .

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