InTest 10-Q 2011
For the quarterly period ended March 31, 2011 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission File Number 0-22529
804 East Gate Drive, Suite 200
(Address of principal executive offices, including zip code)
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Large accelerated filer ___ Accelerated filer ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
PART I. FINANCIAL INFORMATION
Mar. 31, Dec. 31, 2011 2010 -------- -------- ASSETS: (Unaudited) Current assets: Cash and cash equivalents $ 5,248 $ 6,895 Trade accounts receivable, net of allowance for doubtful accounts of $151 and $150, respectively 8,833 6,244 Inventories 4,003 3,489 Prepaid expenses and other current assets 267 430 Total current assets 18,351 17,058 Property and equipment: Machinery and equipment 3,627 3,534 Leasehold improvements 507 765 Gross property and equipment 4,134 4,299 Less: accumulated depreciation (2,891) (3,581) Net property and equipment 1,243 718 Goodwill 1,656 1,656 Intangible assets, net 1,043 1,077 Restricted certificates of deposit 700 700 Other assets 211 199 Total assets $23,204 $21,408 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,325 $ 1,672 Accrued wages and benefits 1,296 1,779 Accrued professional fees 358 373 Accrued warranty 298 274 Accrued sales commissions 578 522 Other accrued expenses 687 497 Domestic and foreign income taxes payable 33 30 Deferred rent 118 118 Total current liabilities 5,693 5,265 Deferred rent, net of current portion 10 39 Total liabilities 5,703 5,304 Commitments and contingencies (Notes 9 and 11) Stockholders' equity: Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued or outstanding - - Common stock, $0.01 par value; 20,000,000 shares authorized; 10,463,255 and 10,464,505 shares issued, respectively 105 105 Additional paid-in capital 26,051 25,973 Accumulated deficit (9,292) (10,549) Accumulated other comprehensive earnings 1,373 1,311 Treasury stock, at cost; 119,029 and 119,029 shares, respectively (736) (736) Total stockholders' equity 17,501 16,104 Total liabilities and stockholders' equity $23,204 $21,408 ======= =======
See accompanying Notes to Consolidated Financial Statements.
Three Months Ended March 31, ------------------ 2011 2010 -------- -------- Net revenues $11,704 $ 9,529 Cost of revenues 6,611 4,992 ------- ------- Gross margin 5,093 4,537 ------- ------- Operating expenses: Selling expense 1,385 1,229 Engineering and product development expense 813 701 General and administrative expense 1,634 1,481 ------- ------- Total operating expenses 3,832 3,411 ------- ------- Operating income 1,261 1,126 ------- ------- Other income (expense): Interest income 3 3 Interest expense (1) (18) Other 54 4 ------- ------- Total other income (expense) 56 (11) ------- ------- Earnings before income tax expense 1,317 1,115 Income tax expense 60 3 ------- ------- Net earnings $ 1,257 $ 1,112 ======= ======= Net earnings per common share - basic $0.13 $0.11 Weighted average common shares outstanding - basic 10,067,748 9,993,089 Net earnings per common share - diluted $0.12 $0.11 Weighted average common shares and common share equivalents outstanding - diluted 10,266,644 9,998,892
Three Months Ended March 31, ------------------ 2011 2010 -------- ------- Net earnings $1,257 $1,112 Foreign currency translation adjustments 62 (54) ------ ------ Comprehensive earnings $1,319 $1,058 ====== ======
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Accumulated Total Common Stock Additional Other Stock- ---------------- Paid-In Accumulated Comprehensive Treasury holders' Shares Amount Capital Deficit Earnings Stock Equity ---------- ------ ---------- ----------- ------------- -------- ------- Balance, January 1, 2011 10,464,505 $ 105 $25,973 $(10,549) $1,311 $(736) $16,104 Net earnings - - - 1,257 - - 1,257 Other comprehensive earnings - - - - 62 - 62 Amortization of deferred compensation related to restricted stock - - 48 - - - 48 Stock options exercised 10,000 - 30 - - - 30 Forfeiture of non-vested shares of restricted stock (11,250) - - - - - - ---------- ----- ------- -------- ------ ----- ------- Balance, March 31, 2011 10,463,255 $ 105 $26,051 $ (9,292) $1,373 $(736) $17,501 ========== ===== ======= ======== ====== ===== =======
Three Months Ended March 31, ------------------ 2011 2010 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 1,257 $ 1,112 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 104 95 Foreign exchange (gain) loss (9) 5 Amortization of deferred compensation related to restricted stock 48 40 Gain on sale of property and equipment (40) - Changes in assets and liabilities: Trade accounts receivable (2,576) (1,153) Inventories (504) (563) Prepaid expenses and other current assets 164 (20) Restricted certificates of deposit - (250) Other assets (5) 1 Accounts payable 653 479 Accrued wages and benefits (492) 422 Accrued professional fees (16) 5 Accrued warranty 23 (17) Accrued sales commissions 56 90 Accrued restructuring and other charges - (97) Other accrued expenses 190 177 Domestic and foreign income taxes payable 3 2 Deferred rent (29) (29) ------- ------- Net cash provided by (used in) operating activities (1,173) 299 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (574) (54) Proceeds from sale of property and equipment 40 - ------- ------- Net cash used in investing activities (534) (54) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from stock options exercised 30 - ------- ------- Net cash provided by financing activities 30 - ------- ------- Effects of exchange rates on cash 30 (19) ------- ------- Net cash provided by (used in) all activities (1,647) 226 Cash and cash equivalents at beginning of period 6,895 2,647 ------- ------- Cash and cash equivalents at end of period $ 5,248 $ 2,873 ======= ======= Cash payments for: Domestic and foreign income taxes $ 26 $ 1 Interest $ - $ - SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of non-vested shares of restricted stock $ - $ 355 Forfeiture of non-vested shares of restricted stock $ (20) $ (11)
See accompanying Notes to Consolidated Financial Statements.
(1) NATURE OF OPERATIONS
We are an independent designer, manufacturer and marketer of mechanical, thermal and electrical products that are primarily used by semiconductor manufacturers in conjunction with automatic test equipment ("ATE") in the testing of integrated circuits ("ICs" or "semiconductors").
Basis of Presentation and Use of Estimates
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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill, Intangible and Long-Lived Assets
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(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
not engaged in any negotiations regarding any acquisition. On May 12, 2011, we received correspondence from the Securities and Exchange Commission indicating that it will not conduct a review of the shelf registration on Form S-3 and that we were permitted to request acceleration of the effective date of this registration statement.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Earnings Per Common Share
Effect of Recently Adopted Amendments to Authoritative Accounting Guidance
In January 2010, the Financial Accounting Standards Board (the "FASB") issued an amendment to an accounting standard regarding disclosure guidance with respect to fair value measurements. Specifically, the new guidance requires disclosure of amounts transferred in and out of Levels 1 and 2 fair value measurements, a reconciliation presented on a gross basis rather than a net basis of activity in Level 3 fair value measurements, greater disaggregation of the assets and liabilities for which fair value measurements are presented and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and 3 fair value measurements. This amendment is effective for interim and annual reporting periods beginning after December 15, 2009, with the exception of the new guidance around the Level 3 activity reconciliations, which is effective for fiscal years beginning after December 15, 2010. The adoption of this amendment did not have any impact on our consolidated financial statements.
In July 2010, the FASB issued an amendment to an accounting standard that requires additional disclosure about the credit quality of financing receivables, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class, if applicable. The disaggregation of information is based on how allowances for credit losses are developed and how credit exposure is managed. This amendment is effective for interim periods and fiscal years ending after December 15, 2010. The adoption of this amendment did not have any impact on our consolidated financial statements.
In December 2010, the FASB issued an amendment to goodwill impairment testing. The amendment modifies Step I of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step II of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of this guidance did not have any impact on our consolidated financial statements.
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In December 2010, the FASB issued an amendment to the disclosure of supplementary pro forma information for business combinations. The amendment specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendment also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendment is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We will implement this guidance in the event we consummate a business acquisition in the future.
As of March 31, 2011 and December 31, 2010, our goodwill totaled $1,656 and our indefinite-lived intangible asset totaled $510. The goodwill and indefinite-lived intangible asset are both a result of our acquisition of Sigma Systems Corp. ("Sigma") in October 2008 and are allocated to our Thermal Products reporting unit.
The following table sets forth the estimated annual amortization expense for our finite-lived intangible assets for each of the next five years:
In response to the significant decline in our orders and net revenues during 2008 and 2009, we took actions to reduce our cost structure, including facility closures, workforce reductions and temporary salary and benefits reductions. We consider some of the actions we took to be temporary in nature, such as certain salary and benefits reductions for current employees. At the time we took these temporary actions, it was generally our intent to restore all or a portion of the reduced salary and benefits in future periods when our results of operations and our cash flows improved sufficiently so as to allow us to do so. Any such restoration would impact the ultimate level of savings which will result from our restructuring actions. Effective January 1, 2010, we restored all of the temporary salary reductions we implemented in 2008 and 2009 for our domestic employees, with
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the exception of the salary of our Executive Chairman, which was restored to approximately 65% of its full reinstated level, reflecting a voluntary continued 35% reduction in his salary. Effective April 1, 2010, we restored the 401(k) Plan discretionary matching contribution for all domestic employees and the Temptronic profit sharing contributions which had been suspended for most of these employees at the beginning of 2009. There are no other temporary actions remaining to be restored.
During the three months ended March 31, 2011, no customer accounted for 10% or more of our consolidated net revenues. During the three months ended March 31, 2010, Teradyne, Inc. accounted for 19% of our consolidated net revenues. These revenues were generated by both our Mechanical and Electrical Products segments. During the three months ended March 31, 2010, Texas Instruments Incorporated accounted for 18% of our consolidated net revenues. While all three of our operating segments sold products to this customer, these revenues were primarily generated by our Mechanical Products segment. No other customer accounted for 10% or more of our consolidated net revenues during the three months ended March 31, 2010.
Inventories held at March 31, 2011 and December 31, 2010 were comprised of the following:
Line of Credit
At each of March 31, 2011 and December 31, 2010, we had a secured credit facility that provides for maximum borrowings of $250. We have not used this credit facility to borrow any funds. Our usage consists of the issuance of letters of credit in the face amount of $250. This facility is secured by pledged certificates of deposit totaling $250. These certificates of deposit are included in Restricted Certificates of Deposit on our balance sheet. We pay a quarterly fee of 1.5% per annum on the total amount of the outstanding letters of credit. This credit facility expires on September 30, 2011.
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Letters of Credit
We record tenant improvements made to our leased facilities based on the amount of the total cost to construct the improvements regardless of whether a portion of that cost was paid through an allowance provided by the facility's landlord. The amount of the allowance, if any, is recorded as deferred rent. We amortize deferred rent on a straight-line basis over the lease term and record the amortization as a reduction of rent expense. Amortization of deferred rent for the three months ended March 31, 2011 and 2010 was $29 and $29, respectively.
As of March 31, 2011, we had outstanding stock options and unvested restricted stock awards granted under stock-based employee compensation plans that are described more fully in Note 15 to the consolidated financial statements in our 2010 Form 10-K.
There was no compensation expense capitalized in the three months ended March 31, 2011 or 2010.
The following table summarizes the activity related to nonvested shares for the three months ended March 31, 2011:
We have a defined contribution 401(k) plan (the "inTEST 401(k) Plan") for our employees who work in the U.S. As a part of this plan, we may match a portion of employee contributions. This plan, including our discretionary employer matching contributions, is more fully discussed in Note 16 to the consolidated financial statements in our 2010 Form 10-K. Effective April 1, 2010, we restored the 401(k) Plan discretionary matching contribution for all domestic employees which had been eliminated for most of these employees at the beginning of 2009.
We have three reportable segments, which are also our reporting units: Mechanical Products, Thermal Products and Electrical Products.
(12) SEGMENT INFORMATION (Continued)
The Electrical Products segment includes the operations of inTEST Silicon Valley Corporation. Sales of this segment consist primarily of tester interface products which we design, manufacture and market.
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The following table provides information about our geographic areas of operation. Net revenues from unaffiliated customers are based on the location to which the goods are shipped.
Risk Factors and Forward-Looking Statements
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Our consolidated net revenues for the quarter ended March 31, 2011 increased $2.2 million or 23% as compared to the same period in 2010. For the quarter ended March 31, 2011, net revenues (net of intersegment sales) of our Mechanical, Thermal and Electrical Products segments increased $274,000 or 6%, $1.8 million or 52% and $59,000 or 5%, respectively, as compared to the same period in 2010. We believe the increase in our net revenues reflects continued strong demand in the ATE industry. We believe the more significant increase in the net revenues of our Thermal Products segment reflects that this segment lagged our other two product segments in coming out of the downturn that started in late 2008 and continued throughout the first half of 2009 and, as a result, did not experience as significant an increase in the levels of its net revenues until the second quarter of 2010. Historically, this segment has lagged our other two product segments in both entering and exiting industry cycles.
Business Restructuring Initiatives
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.
Quarter Ended March 31, 2011 Compared to Quarter Ended March 31, 2010
Net Revenues. Net revenues were $11.7 million for the quarter ended March 31, 2011 compared to $9.5 million for the same period in 2010, an increase of $2.2 million or 23%. We believe the increase in our net revenues during the first quarter of 2011 primarily reflects continued strong demand in the ATE industry in the first quarter of 2011, as previously discussed in the Overview.
During the quarter ended March 31, 2011, our net revenues from customers in the U.S. increased 52% and our net revenues from foreign customers increased 11%, respectively, as compared to the same period in 2010. The impact of changes in foreign currency exchange rates on the increase in net revenues from foreign customers was less than 1%. The higher percentage increase for our U.S. customers primarily reflects greater levels of demand from US-based customers.
Gross Margin. Gross margin was 44% for the first quarter of 2011 compared to 48% for the same period in 2010. The decline in gross margin is primarily the result of an increase in component material costs from 34% of net revenues for the quarter ended March 31, 2010 to 37% of net revenues for the quarter ended March 31, 2011. This increase primarily reflects changes in product mix for our Mechanical Products segment. To a lesser extent, there were also increases in our fixed operating costs and direct labor costs. Our fixed operating costs represented 16% of net revenues in the first quarter of 2011 compared to 15% of net revenues for the same period in 2010. In absolute dollar terms, these costs increased $475,000 from the first quarter of 2010 to the first quarter of 2011. Our direct labor costs, which were 3% of net revenues in both the first quarter of 2011 and 2010, increased $77,000 in absolute dollar terms over the comparable prior period. These increases were primarily the result of higher salary and benefits expense during the first quarter of 2011 as compared to the same period in 2010, reflecting additional headcount and, to a lesser extent, the restoration of 401(k) Plan discretionary matching contributions effective April 1, 2010 and annual raises for employees which generally occur each July. We also incurred additional rent and maintenance costs associated with the relocation of our domestic Mechanical and Thermal product segments during the first quarter of 2011. The move-related costs included in our fixed operating costs for the first quarter of 2011 were $74,000.
Selling Expense. Selling expense was $1.4 million for the first quarter of 2011 compared to $1.2 million for the same period in 2010, an increase of $156,000 or 13%. The increase in selling expense primarily reflects an increase in accruals for warranty expense combined with higher levels of commissions, both of which are primarily a result of the increase in net revenue levels in the first quarter of 2011 as compared to the first quarter of 2010.
Engineering and Product Development Expense. Engineering and product development expense was $813,000 for the first quarter of 2011 compared to $701,000 for the same period in 2010, an increase of $112,000 or 16%. The increase in engineering and product development expense primarily reflects the restoration of 401(k) Plan discretionary matching contributions effective April 1, 2010 and, to a lesser extent, increased spending on materials used in new product development.
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General and Administrative Expense. General and administrative expense was $1.6 million for the first quarter of 2011 compared to $1.5 million for the same period in 2010, an increase of $153,000 or 10%. This increase was primarily a result of higher salary and benefits expense reflecting the restoration of 401(k) Plan discretionary matching contributions effective April 1, 2010 and annual raises for employees which generally occur each July. Also contributing to the increase, but to a lesser extent, were $54,000 of costs associated with the relocation of our domestic Mechanical and Thermal product segments during the first quarter. These increases were offset by reductions in professional fees.
Critical Accounting Policies
There were no off-balance sheet arrangements during the three months ended March 31, 2011 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.
This disclosure is not required for a smaller reporting company.
CEO and CFO Certifications. Included with this Quarterly Report as Exhibits 31.1 and 31.2 are two certifications, one by each of our Chief Executive Officer and our Chief Financial Officer (the "Section 302 Certifications"). This Item 4 contains information concerning the evaluations of our disclosure controls and procedures that are referred to in the Section 302 Certifications. This information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics addressed therein.
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any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a system of controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, our management has designed the disclosure controls and procedures to provide reasonable assurance that the objectives of the control system were met.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we may be a party to legal proceedings occurring in the ordinary course of business. We are not currently involved in any material legal proceedings.
Item 1A. Risk Factors
Information regarding the primary risks and uncertainties that could materially and adversely affect our future performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements, appears in Part I, Item 1A -- "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. [Removed and Reserved]
Item 5. Other Information
Item 6. Exhibits
A list of the Exhibits which are required by Item 601 of Regulation S-K and filed with this Report is set forth in the Index to Exhibits immediately following the signature page, which Index to Exhibits is incorporated herein by reference.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Index to Exhibits
3.1* Articles of Incorporation: Previously filed by the Company as an Exhibit
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