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At inTEST Thermal Transformation Continues.

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At inTEST Thermal Transformation Continues.

By Ken Nagy, CFA

On March 6, 2013, inTest Corporation (Nasdaq-small:), an independent designer, manufacturer and marketer of semiconductor automatic test equipment interface solutions and temperature management products, reported financial results for its fiscal 2012 fourth quarter and full year, ended December 31, 2012.

Revenues during the fourth quarter 2012 were $8.270 million compared to revenues of $10.799 million for the three months ended September 30, 2012 and revenues of $10.081 million during the fourth quarter ended December 31, 2011.

15 percent of fourth quarter 2012 net revenues were derived from non-semiconductor test compared to 10 percent of third quarter 2012 net revenues being derived from non-semiconductor test. Sequentially, fourth quarter non-semiconductor test net revenues increased 16 percent.

Over the last few years inTest has been transforming itself through the strategic diversification of its Thermal products segment.

The diversification strategy outside of inTest’s traditional semiconductor markets helps to mitigate the cyclicality that's so closely tied to that industry and affords the Company several exciting new opportunities with multiple new customers.

As a result the Company now addresses growth markets in both the semiconductor and non-semiconductor areas, which include automotive, consumer electronics, defense aerospace, telecommunications and most recently the nuclear market.

inTest reported fourth quarter bookings were $9.3 million, up from third quarter 2012 bookings of $8.7 million and from fourth quarter 2011 bookings of $8.1 million.

Similarly, 20 percent of the Company’s third quarter 2012 bookings were derived from non-semiconductor test which was solidly above the 17 percent from the third quarter 2012 and the highest percentage recorded this year. Additionally, fourth quarter non-semiconductor test bookings increased 23 percent sequentially.

Backlog at the end of the fourth quarter was $4.2 million, up from $3.2 million at the end of the third quarter.

However, gross margin during the fourth quarter fell to 42.4 percent compared to 44.1 percent from the third quarter fiscal 2012 and 48.3 percent for the three months ended December 31, 2011.

The quarter over quarter reduction in gross margin was driven by a less favorable absorption of the Company’s fixed manufacturing cost in the fourth quarter of 2012 which increased to 20% of revenues in the fourth quarter from 15% of revenues in the third quarter.

However, while inTest’s fixed manufacturing cost increased as a percentage of revenue quarter over quarter, they were essentially flat sequentially at $1.6 million.

Similarly, the increase in fixed manufacturing costs as a percentage of net revenues in the fourth quarter was almost fully offset by a reduction in consolidated material costs, which declined from 37.0% in the third quarter to 32.4 percent in the fourth quarter. Additionally, all 3 of the Company’s product segments experienced decreases in their component material costs sequentially, with the Electrical Products segment experiencing the largest reduction, from 45.5 percent of net revenues in the third quarter, to 37.3 percent of net revenues in the fourth quarter.

inTest reported fourth quarter 2012 net income of  $201,000 compared to third quarter 2012 net income of $664,000 and net income of $769,000 for the three months ended December 31,2011.

The year over year drop in net income was primarily due to lower revenues and margins.

Based on a weighted average number of diluted shares outstanding of 10.344 million, diluted net income per share resulted in net income of $0.02 per share for the quarter.  This compared to diluted net income per share of $0.06 on a weighted average number of diluted shares of 10.360 million during the three months, ended September 30, 2012 and diluted net income per share of $0.08 on a weighted average number of diluted shares of 10.281 million during the fourth quarter ended December 31, 2011.

During the quarter, inTEST declared a special one-time cash dividend of $0.08 per share, which was paid on December 17, 2012 to stockholders of record at close of business on December 10, 2012. The special dividend was economically advantageous to stockholders due to the increase in 2013 tax rates, and was funded with $834,000 of available cash on hand.

Revenues for the full year fiscal 2012 were $43.376 million compared to revenues of $47.266 million for the twelve months ended December 31, 2011.

Full year 2012 revenue in the Electrical segment was up substantially by 79 percent over fiscal 2011.
Likewise, during the fourth quarter, the segment developed a new wafer probe interface at the request of a major IDM which has been field-tested and approved. Consequently, orders should come in, starting in 2013.

Gross margin during the year dropped to 43.9 percent compared to 48.4 percent from fiscal 2011.

Net income for the twelve months ended December 31, 2012 was $2.156 million, marking the Company’s third consecutive year of profitability. This compares to net income of $9.863 million for the full year ended December 31, 2011.

Fiscal 2012 net earnings consists of approximately $650,000 in non-recurring costs related to the acquisition of Thermonics including restructuring costs of $313,000 (related to facility closure costs) and acquisition related expenses of $337,000. Fiscal 2011 net earnings reflect a reversal of $3.1 million of valuation allowance against inTest’s deferred tax assets. The impact of the reversal of the valuation allowance was an increase in the Company’s diluted earnings per share of $0.30. Absent the reversal of the deferred tax valuation allowance, 2011 net earnings would have been $0.66 per diluted share.

Based on a weighted average number of diluted shares outstanding of 10.347 million, diluted net income per share resulted in net income of $0.21 per share for the full year ended December 31, 2012.  This compared to diluted net income per share of $0.96 on a weighted average number of diluted shares of 10.286 million during the twelve months, ended December 31, 2011.

inTest’s balance sheet  continued to improve during the fourth quarter with cash and equivalents of $15.576 million, working capital of $21.000 million.  This compares to $14.700 million in cash and equivalents and working capital of $20.959 million for the period ended September 30, 2012.

Furthermore, management currently expects this strong cash generation to continue with cash and cash equivalents increasing sequentially throughout 2013.

Accounts receivable at the end of the fourth quarter were $6.892 million which decreased $1.391 million quarter over quarter, primarily driven by lower levels of net revenues in the fourth quarter compared to the third quarter, as well as a decrease in days sales outstanding which were 58 days at December 31, 2012 compared to 60.4 days at September 30, 2012.

Likewise, inventory declined by approximately $708,000 to $3.135 million at the end of December and capital expenditures during the fourth quarter were $148,000, compared to $154,000 in the third quarter.

While industry conditions were increasingly challenging throughout the year as a result of a number of capital equipment suppliers and semiconductor companies delaying certain capital expenditures, inTEST maintained profitability, generated cash and continue to carry no debt. .

Still, while the Company’s long-term objective is to grow and evolve inTEST Corporation into a broad-based industrial test company as it executes on its differentiated product strategy, due to the softening economy, the Company strategically repositioned its sales force by integrating its sales channel and consolidating products in its Thermal division during the year.

Similarly, the Company continues to maintain fiscal discipline and cost controls and is benefitting from the restructuring activities that it undertook in the 2008 - 2009 timeframe, coupled with the past sales channel integration and Thermal product consolidation.

The Company has added 5 companies to our operations in the last 15 years which have bolstered its growth opportunities. This past year, inTest acquired Thermonics, which further enhanced its presence in the ATE industry, while at the same time, providing additional leverage into growth industries outside of the semi industry. 

Management intends to continue to leverage the Thermal division and Sigma Systems acquisition and expects that on an overall basis, non-semiconductor related products will play an even greater role in the Company’s success as it diversifies its end market penetration.

As a result, management is confident in its long-term growth prospects and believes inTEST is well positioned to capture new opportunities as industry conditions improve.

Correspondingly, management reported that it anticipates that net revenues for the first quarter ending March 31, 2013 will be in the range of $8.0 million to $9.0 million and that financial results will range from a net loss of $(0.02) per diluted share to net earnings of $0.03 per diluted share. 

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