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INTT > SEC Filings for INTT > Form 10-Q on 14-May-2014All Recent SEC Filings

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Form 10-Q for INTEST CORP


14-May-2014

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 2013 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 2013 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 2013 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.

ATE market cycles are difficult to predict and in recent years have become more volatile and, in certain cases, shorter in duration. Because the market 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 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.

As part of our diversification strategy to reduce the impact of ATE market volatility on our business operations, we market our Thermostream temperature management systems in markets outside the ATE market, such as the automotive, consumer electronics, defense/aerospace, energy, industrial and telecommunications markets. We believe that these markets usually are less cyclical than the ATE market. However, because we are a recent market entrant in these markets, we have not yet developed meaningful market shares in these non-ATE markets. Consequently, we are continuing to evaluate customer buying patterns or market trends in these non-ATE markets. In addition, our orders or net revenues in any given period in these markets do not necessarily reflect the overall trends in these non-ATE markets due to our limited market shares. The level of our orders and net revenues from these non-ATE markets has varied in the past, and we expect will vary significantly in the future, as we work to build our presence in these markets and establish new markets for our products.

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inTEST CORPORATION

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

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 market, 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 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 chain 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).

In addition, in recent periods we have seen instances where demand for ATE is not consistent for each of our product segments or for any given product within a particular product segment. This inconsistency in demand for ATE can be driven by a number of factors, but in most cases we have found the primary reason is unique customer-specific changes in demand for certain products driven by the needs of their customers or markets served. These shifts in market practices and customer-specific needs 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.

     Orders and Backlog

     The following table sets forth, for the periods indicated, a breakdown of
     the orders received from unaffiliated customers both by product segment and
     market.

                                              Three                      Three
                                           Months Ended              Months Ended
                                             March 31,     Change     December 31,    Change
                                           2014    2013    $     %       2013         $      %
      Orders from unaffiliated customers:
      Thermal Products                    $ 5,644 $4,724 $  920  19%      $5,329   $  315     6%
      Mechanical Products                   2,964  2,225    739  33        2,366      598    25
      Electrical Products                   1,553    759    794 105        1,565      (12)  (1)
                                          $10,161 $7,708 $2,453  32%      $9,260   $  901    10%

      ATE market                          $ 8,219 $6,183 $2,036  33%      $7,025   $1,194    17%

Non-ATE market 1,942 1,525 417 27 2,235 (293) (13) $10,161 $7,708 $2,453 32% $9,260 $ 901 10%

Total consolidated orders for the quarter ended March 31, 2014 were $10.2 million compared to $7.7 million for the same period in 2013 and $9.3 million for the quarter ended December 31, 2013. The increase in consolidated orders primarily reflects improved demand in the ATE market for all of our product segments, as well as new product introductions in our Mechanical and Electrical Products segment and continued penetration into non-ATE markets.

Orders from customers in various markets outside of the ATE market for the quarter ended March 31, 2014, grew by 27% as compared to the same period in 2013, reflecting increased demand from certain customers in the telecommunications and other non-ATE markets. However, as a percent of our total consolidated orders, non-ATE markets orders declined from 20% in the first quarter of 2013 to 19% in the first quarter of 2014, reflecting the significant increase in demand from our customers in the ATE market during the first quarter of 2014 as compared to the same period in 2013. Orders from customers in various markets outside of the ATE market for the quarter ended March 31, 2014 declined 13% as compared to the quarter ended December 31, 2013, reflecting reduced demand from certain customers in both the telecommunications and industrial markets.

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inTEST CORPORATION

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

At March 31, 2014, our backlog of unfilled orders for all products was approximately $4.5 million compared with approximately $2.9 million at March 31, 2013 and $3.1 million at December 31, 2013. Our backlog includes customer orders which we have accepted, substantially all of which we expect to deliver in 2014. 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.

     Net Revenues

     The following table sets forth, for the periods indicated, a breakdown of
     the net revenues from unaffiliated customers both by product segment and
     market.

                                              Three                       Three
                                          Months Ended                Months Ended
                                            March 31,      Change      December 31,    Change
                                           2014   2013     $      %       2013         $      %
      Net revenues from unaffiliated
      customers:
      Thermal Products                    $5,243 $5,898 $(655)  (11)%      $5,449   $(206)   (4)%
      Mechanical Products                  2,047  1,793    254   14         2,177    (130)   (6)
      Electrical Products                  1,507  1,282    225   18         1,709    (202)  (12)
                                          $8,797 $8,973 $(176)   (2)%      $9,335   $(538)   (6)%

      ATE market                          $7,607 $6,810  $ 797   12 %      $7,192    $ 415    6 %
      Non-ATE market                       1,190  2,163  (973)  (45)        2,143    (953)  (44)
                                          $8,797 $8,973 $(176)   (2)%      $9,335   $(538)   (6)%

Our consolidated net revenues for the quarter ended March 31, 2014 decreased $176,000 as compared to the same period in 2013. For the quarter ended March 31, 2014, the net revenues of our Thermal Products segment decreased $655,000 while the net revenues of our Mechanical and Electrical Products segments increased $254,000 and $225,000, respectively, as compared to the same period in 2013. The increases in our Mechanical and Electrical Products segments reflect the aforementioned increase in demand experienced during the first quarter of 2014 from the ATE market. Although our Thermal Products segment also experienced increased levels of demand from its customers within the ATE market during the first quarter of 2014, these increases were offset by reduced demand from one particular customer within the industrial market as this customer is currently temporarily capacity-constrained. This resulted in the overall decline in both our consolidated net revenues and the net revenues of our Thermal Products segment during the first quarter of 2014 as compared to the same period in 2013.

Our consolidated net revenues for the quarter ended March 31, 2014 decreased $538,000 as compared to the quarter ended December 31, 2013. The net revenues of our Thermal, Mechanical and Electrical Products segments decreased $206,000, $130,000 and $202,000, respectively, for the first quarter of 2014 as compared to the fourth quarter of 2013. We believe the decrease in our net revenues reflects weakened demand in the fourth quarter of 2013 which resulted in lower order levels during that period and a lower backlog at the beginning of the first quarter of 2014. Although demand improved and our order activity increased during the first quarter of 2014, as previously discussed, many of the orders were not received in time to be shipped within the first quarter of 2014.

Product/Customer Mix

Our three product segments each have multiple products that we design, manufacture and market to our customers. Due to a number of factors, our products have varying levels of 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.

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inTEST CORPORATION

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

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 markets including the automotive, consumer electronics, defense/aerospace, energy, industrial and telecommunications markets. The mix of customers during any given period will affect our gross margin due to differing sales discounts and commissions. For the quarters ended March 31, 2014 and 2013, our OEM sales as a percentage of net revenues were 16% and 9%, respectively.

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 negatively affect 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. 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.

Quarter Ended March 31, 2014 Compared to Quarter Ended March 31, 2013

Net Revenues. Net revenues were $8.8 million for the quarter ended March 31, 2014 compared to $9.0 million for the same period in 2013, a decrease of $176,000 or 2%. We believe the decrease in our net revenues during the first quarter of 2014 primarily reflects the factors previously discussed in the Overview.

Gross Margin. Our consolidated gross margin was 48% for the quarter ended March 31, 2014 compared to 46% for the same period in 2013. The improvement in our gross margin was primarily the result of a reduction in our fixed operating costs combined with lower charges for excess and obsolete inventory during the first quarter of 2014 as compared to the same period in 2013. Our fixed operating costs decreased $99,000, primarily as a result of lower salary and benefits expense in our Thermal Products segment reflecting lower headcount. Our charges for excess and obsolete inventory decreased $75,000, reflecting fewer items falling into our standard excess and obsolete criteria.

Selling Expense. Selling expense was $1.3 million for the quarter ended March 31, 2014 compared to $1.2 million for the same period in 2013, an increase of $137,000 or 12%. The increase primarily reflects higher salaries and benefits expense as a result of an increase in headcount in our Thermal and Electrical Products segments.

Engineering and Product Development Expense. Engineering and product development expense was $923,000 for the first quarter of 2014 compared to $996,000 for the same period in 2013, a decrease of $73,000 or 7%. The decrease in engineering and product development expense primarily reflects decreased spending on matters related to our intellectual property.

General and Administrative Expense. General and administrative expense was $1.5 million for the first quarter of 2014 compared to $1.6 million for the same period in 2013, a decrease of $24,000 or 2%. Decreases in salary and benefits expense and lower levels of amortization of our intangible assets were partially offset by increases in costs related to various third party professional services we utilize.

Income Tax Expense. For the quarter ended March 31, 2014, we recorded income tax expense of $125,000 compared to income tax expense of $78,000 for the same period in 2013. Our effective tax rate for the quarter ended March 31, 2013 was 30% compared to an effective tax rate of 21% for the same period in 2013. 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 increase in our effective tax rate in the first quarter of 2014 as compared to the same period in 2013 primarily reflects the recording of the effect of the reinstatement of certain domestic research and development tax credits in the first quarter of 2013. This change was enacted in January 2013. There was no similar item to record in 2014.

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inTEST CORPORATION

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

Liquidity and Capital Resources

As discussed more fully in the Overview, 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. The cyclical and volatile nature of demand for ATE makes estimates of future revenues, results of operations and net cash flows difficult.

Our primary historical source of liquidity and capital resources has been cash flow generated by our operations and we manage our businesses to maximize operating cash flows as our primary source of liquidity. We use cash to fund growth in our operating assets, for new product research and development and for acquisitions.

Liquidity

Our cash and cash equivalents and working capital were as follows:

Mar. 31, 2014 Dec. 31, 2013 Cash and cash equivalents $18,853 $19,018 Working capital $25,058 $24,749

As of March 31, 2014, $3.1 million of our cash and cash equivalents was held by our foreign subsidiaries. When these funds are needed for our operations in the U.S., we may be required to accrue and pay U.S. taxes if we repatriate certain of these funds. We currently plan to repatriate approximately $1.5 million of our cash and cash equivalents held by our German subsidiary during the second quarter of 2014. Our current intent is to indefinitely reinvest the balance of these funds in our foreign operations.

We currently expect our cash and cash equivalents and projected future cash flow to be sufficient to support our short term working capital requirements. We do not currently have any credit facilities under which we can borrow to help fund our working capital or other requirements.

Cash Flows

Operating Activities. Net cash provided by operations for the three months ended March 31, 2014 was $29,000. During the three months ended March 31, 2014, we recorded net earnings of $286,000, which included non-cash charges of $217,000 for depreciation and amortization. During the three months ended March 31, 2014, accounts payable and inventories increased $497,000 and $595,000, respectively, compared to the levels at the end of 2013. These increases primarily reflect increased business activity during the first quarter of 2014 as compared to the fourth quarter of 2013. During the three months ended March 31, 2014, accrued wages and benefits decreased $407,000 compared to the level at December 31, 2013 reflecting the payment of profit-based bonuses accrued during 2013.

Investing Activities. During the three months ended March 31, 2014 purchases of property and equipment were $200,000 which primarily represent additions to leased systems in our Thermal and Mechanical Products segments. We have no significant commitments for capital expenditures for the balance of 2014, however, depending upon changes in market demand or manufacturing and sales strategies, we may make such purchases or investments as we deem necessary and appropriate.

Financing Activities. During the three months ended March 31, 2014 there were no cash flows from financing activities.

New or Recently Adopted Accounting Standards

See the Notes to the consolidated financial statements for information concerning the implementation and impact of new or recently adopted accounting standards.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including

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inTEST CORPORATION

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

those related to inventories, long-lived assets, goodwill, identifiable intangibles, deferred income tax valuation allowances and product warranty reserves. We base our estimates on historical experience and on appropriate and customary assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Some of these accounting estimates and assumptions are particularly sensitive because of their significance to our consolidated financial statements and because of the possibility that future events affecting them may differ markedly from what had been assumed when the financial statements were prepared. As of March 31, 2014, there have been no significant changes to the accounting policies that we have deemed critical. These policies are more fully described in our 2013 Form 10-K.

Off -Balance Sheet Arrangements

There were no off-balance sheet arrangements during the three months ended March 31, 2014 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.

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