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INTT > SEC Filings for INTT > Form 10-Q on 13-Aug-2014All Recent SEC Filings

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Form 10-Q for INTEST CORP


13-Aug-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
                                             June 30,        Change     March 31,      Change
                                           2014    2013      $     %       2014        $     %
      Orders from unaffiliated customers:
      Thermal Products                    $ 6,094 $ 5,366  $  728  14%    $ 5,644    $  450   8%
      Mechanical Products                   4,178   3,687     491  13%      2,964     1,214  41%
      Electrical Products                   2,366   1,919     447  23%      1,553       813  52%
                                          $12,638 $10,972  $1,666  15%    $10,161    $2,477  24%

      ATE market                          $ 9,040 $ 8,347  $  693   8%    $ 8,219    $  821  10%
      Non-ATE market                        3,598   2,625     973  37%      1,942     1,656  85%
                                          $12,638 $10,972  $1,666  15%    $10,161    $2,477  24%



                                                Six
                                           Months Ended
                                             June 30,       Change
                                           2014    2013     $     %
      Orders from unaffiliated customers:
      Thermal Products                    $11,738 $10,090 $1,648  16%
      Mechanical Products                   7,142   5,912  1,230  21%
      Electrical Products                   3,919   2,678  1,241  46%
                                          $22,799 $18,680 $4,119  22%

      ATE market                          $17,259 $14,530 $2,729  19%
      Non-ATE market                        5,540   4,150  1,390  33%
                                          $22,799 $18,680 $4,119  22%

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inTEST CORPORATION

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

Total consolidated orders for the quarter ended June 30, 2014 were $12.6 million compared to $11.0 million for the same period in 2013 and $10.2 million for the quarter ended March 31, 2014. The increase in consolidated orders primarily reflects continued penetration into non-ATE markets by our Thermal Products segment, as well as improved demand in the ATE market for our Mechanical and Electrical Products segments. We believe the improved ATE market demand we have seen in both our Mechanical and Electrical Products segments reflects the overall improvement in demand being experienced by the broader ATE market, which had been in a period of reduced demand during 2012 and 2013.

Our Thermal Products segment experienced declines in demand from the ATE market during the second quarter of 2014 as compared to both the prior quarter and the comparable prior period. We believe the reduced ATE market demand experienced by our Thermal Products segment reflects a number of factors including instances where there was reduced demand due to customer-specific needs or events that drove higher than expected demand in prior periods that did not continue into the current period or where certain of our customers had made large purchases of ATE within the past year that have not yet been utilized to a level high enough to justify additional purchases of ATE.

Orders from customers in various markets outside of the ATE market for the quarter ended June 30, 2014, grew by 37% as compared to the same period in 2013, reflecting increased demand from certain customers in the telecommunications and other non-ATE markets. As a percent of our total consolidated orders, non-ATE markets orders increased to 28% of consolidated orders in the second quarter of 2014 as compared to 24% in the second quarter of 2013 and 19% in the first quarter of 2014.

At June 30, 2014, our backlog of unfilled orders for all products was approximately $4.8 million compared with approximately $2.7 million at June 30, 2013 and $4.5 million at March 31, 2014. 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
                                          June 30,        Change     March 31,     Change
                                        2014    2013      $     %       2014       $     %
      Net revenues from unaffiliated
      customers:
      Thermal Products                 $ 6,116 $ 5,772  $  344   6%     $5,243   $  873  17%
      Mechanical Products                4,137   3,798     339   9%      2,047    2,090 102%
      Electrical Products                2,090   1,648     442  27%      1,507      583  39%
                                       $12,343 $11,218  $1,125  10%     $8,797   $3,546  40%

      ATE market                       $ 9,482 $ 8,394  $1,088  13%     $7,607   $1,875  25%
      Non-ATE market                     2,861   2,824      37   1%      1,190    1,671 140%

$12,343 $11,218 $1,125 10% $8,797 $3,546 40%

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inTEST CORPORATION

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

                                                      Six
                                                 Months Ended
                                                   June 30,         Change
                                                 2014    2013      $       %
      Net revenues from unaffiliated customers:
      Thermal Products                          $11,359 $11,670 $ (311)   (3)%
      Mechanical Products                         6,184   5,591     593   11 %
      Electrical Products                         3,597   2,930     667   23 %
                                                $21,140 $20,191   $ 949    5 %

      ATE market                                $17,089 $15,204  $1,885   12 %
      Non-ATE market                              4,051   4,987   (936)  (19)%
                                                $21,140 $20,191   $ 949    5 %

Our consolidated net revenues for the quarter ended June 30, 2014 increased $1.1 million as compared to the same period in 2013. For the quarter ended June 30, 2014, the net revenues of our Thermal, Mechanical and Electrical Products segments increased $344,000, $339,000 and $442,000, respectively, as compared to the same period in 2013. The increases reflect the aforementioned increase in demand experienced during the second quarter of 2014 from the ATE market. Net revenues from customers outside the ATE market for the quarter ended June 30, 2014 were relatively flat as compared to the same period in 2013.

Our consolidated net revenues for the quarter ended June 30, 2014 increased $3.5 million as compared to the quarter ended March 31, 2014. The net revenues of our Thermal, Mechanical and Electrical Products segments increased $873,000, $2.1 million and $583,000, respectively, for the second quarter of 2014 as compared to the first quarter of 2014. Net revenues from customers outside the ATE market for the quarter ended June 30, 2014 increased $1.7 million as compared to the first quarter of 2014. The increases reflect the aforementioned increase in demand experienced during the second quarter of 2014 as compared to the first quarter of 2014 from both the ATE and non-ATE markets.

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.

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 six months ended June 30, 2014 and 2013, our OEM sales as a percentage of net revenues were 11% and 10%, 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.

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inTEST CORPORATION

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

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 June 30, 2014 Compared to Quarter Ended June 30, 2013

Net Revenues. Net revenues were $12.3 million for the quarter ended June 30, 2014 compared to $11.2 million for the same period in 2013, an increase of $1.1 million or 10%. We believe the increase in our net revenues during the second quarter of 2014 primarily reflects the factors previously discussed in the Overview.

Gross Margin. Our consolidated gross margin was 49% in each of the quarters ended June 30, 2014 and 2013, respectively. There was a slight improvement in our material costs as a percentage of net revenues, reflecting changes in product and customer mix. This improvement was offset by higher fixed operating costs for our Thermal Products segment, primarily reflecting increased facility related costs.

Selling Expense. Selling expense was $1.5 million in each of the quarters ended June 30, 2014 and 2013, respectively. Higher salaries and benefits expense, as a result of an increase in headcount in our Thermal and Electrical Products segments, was offset by a reduction in the level of accruals for product warranties in our Thermal Products segment.

Engineering and Product Development Expense. Engineering and product development expense was $887,000 for the quarter ended June 30, 2014 compared to $925,000 for the same period in 2013, a decrease of $38,000 or 4%. The decrease in engineering and product development expense primarily reflects decreased spending on third party consultants, material used in new product development and matters related to our intellectual property. These decreases were partially offset by an increase in salaries and benefits expense, primarily reflecting an increase in headcount in our Thermal and Electrical Products segments.

General and Administrative Expense. General and administrative expense was $1.6 million for the quarter ended June 30, 2014 compared to $1.5 million for the same period in 2013, an increase of $98,000 or 6%. The increase primarily reflects higher accruals for profit-based bonuses and an increase in the use of third-party professionals who assist us with certain of our strategic initiatives.

Income Tax Expense. For the quarter ended June 30, 2014, we recorded income tax expense of $697,000 compared to $484,000 for the same period in 2013. Our effective tax rate for the quarter ended June 30, 2014 was 34% compared to 33% 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.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Net Revenues. Net revenues were $21.1 million for the six months ended June 30, 2014 compared to $20.2 million for the same period in 2013, an increase of $949,000 or 5%. For the six months ended June 30, 2014, the net revenues of our Thermal Products segment decreased $311,000 while the net revenues of our Mechanical and Electrical Products segments increased $593,000 and $667,000, respectively, as compared to the same period in 2013. Net revenues from customers outside the ATE market for the six months ended June 30, 2014 decreased $936,000 as compared to the same period in 2013. We believe the decrease in the net revenues of our Thermal Products segment during the first half of 2014 reflects reduced demand from our customers outside the ATE market, primarily during the first quarter of 2014. We believe the increases in the net revenues of our Mechanical and Electrical Products segments during the first six months of 2014 primarily reflect increased demand from our customers in the ATE market as previously discussed in the Overview.

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inTEST CORPORATION

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

Gross Margin. Our consolidated gross margin was 49% for the six months ended June 30, 2014 compared to 47% for the same period in 2013. The improvement in our gross margin reflects a reduction in both our material costs and our fixed operating costs as a percentage of net revenues. Our material costs declined from 35% of net revenues for the six months ended June 30, 2013 to 34% for the same period in 2014, reflecting changes in product and customer mix. Although our fixed operating costs increased $33,000 in absolute dollar terms, they were more fully absorbed by the higher net revenue levels in 2014 and, as a result, these costs declined from 15% of net revenues for the six months ended June 30, 2013 to 14% for the same period in 2014. The $33,000 increase in our fixed operating costs primarily reflects an increase in facility related costs for our Thermal Products segment which was partially offset by lower levels of depreciation and a reduction in salaries and benefits expense, reflecting headcount reductions in our Thermal Products segment.

Selling Expense. Selling expense was $2.9 million for the six months ended June 30, 2014 compared to $2.7 million for the same period in 2013 an increase of $139,000 or 5%. The increase primarily reflects higher salaries and benefits expense as a result of an increase in headcount in our Thermal and Electrical Products segments which was partially offset by a reduction in accruals for product warranties and lower commission expense in our Thermal and Electrical Products segments.

Engineering and Product Development Expense. Engineering and product development expense was $1.8 million for the six months ended June 30, 2014 compared to $1.9 million for the same period in 2013 a decrease of $111,000 or 6%. The decrease in engineering and product development expense primarily reflects decreased spending on matters related to our intellectual property and third party consultants. These decreases were partially offset by an increase in salaries and benefits expense, primarily reflecting an increase in headcount in our Thermal and Electrical Products segments.

General and Administrative Expense. General and administrative expense was $3.2 million for the six months ended June 30, 2014 compared to $3.1 million for the same period in 2013 an increase of $74,000 or 2%. The increase primarily reflects an increase in the use of third-party professionals which was partially offset by a reduction in amortization expense related to our intangible assets.

Income Tax Expense. For the six months ended June 30, 2014, we recorded income tax expense of $822,000 compared to $562,000 for the same period in 2013. Our effective tax rate for the six months ended June 30, 2014 was 33% compared to 30% 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 six months 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 for both 2013 and 2012, which was enacted in January 2013. There was no similar item to record in 2014.

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:

June 30, 2014 Dec. 31, 2013 Cash and cash equivalents $19,616 $19,018 Working capital $26,671 $24,749

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inTEST CORPORATION

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

As of June 30, 2014, $3.0 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. Our current intent is to indefinitely reinvest 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 six months ended June 30, 2014 was $1.0 million. During the six months ended June 30, 2014, we recorded net earnings of $1.6 million, which included non-cash charges of $438,000 for depreciation and amortization. During the six . . .

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