UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ------------------ 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 ------- inTEST Corporation - ----------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 22-2370659 - --------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S Employer Identification No.) incorporation or organization) 2 Pin Oak Lane, Cherry Hill, New Jersey 08003 - ---------------------------------------- -------- (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (856) 424-6886 ------------------ Indicate by check X whether the registrants: (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. Yes X No ----- ----- Number of shares of Common Stock, $.01 par value, outstanding as of September 30, 1999: 6,536,034
inTEST CORPORATION INDEX PART 1. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998 1 Consolidated Statements of Earnings (unaudited) for the three months and nine months ended September 30, 1999 and 1998 2 Consolidated Statements of Comprehensive Earnings (unaudited) for the three months and nine months ended September 30, 1999 and 1998 3 Consolidated Statement of Stockholders' Equity (unaudited) for the nine months ended September 30, 1999 4 Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements (unaudited) 6 -11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Changes in Securities and Use of Proceeds 22-23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Securities Holders 24 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24
inTEST CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) <TABLE> <CAPTION> Sept. 30, Dec. 31, 1999 1998 --------- -------- (Unaudited) (Audited) <S> <C> <C> ASSETS: Current assets: Cash and cash equivalents $ 9,689 $ 8,468 Trade accounts and notes receivable, net of allowance for doubtful accounts of $169 and $168, respectively 6,960 3,275 Inventories 3,359 2,521 Deferred tax asset 245 245 Refundable domestic and foreign income taxes - 658 Other current assets 314 137 ------- ------- Total current assets 20,567 15,304 ------- ------- Machinery and equipment: Machinery and equipment 2,265 1,690 Leasehold improvements 297 223 ------- ------- 2,562 1,913 Less: accumulated depreciation (1,335) (1,078) ------- ------- Net machinery and equipment 1,227 835 ------- ------- Other assets 214 195 Goodwill 6,525 6,884 ------- ------- Total assets $28,533 $23,218 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,882 $ 969 Accrued expenses 1,348 1,023 Domestic and foreign income taxes payable 989 - ------- ------- Total current liabilities 5,219 1,992 ------- ------- Commitments 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; 6,536,034 shares issued and outstanding 65 65 Additional paid-in capital 16,647 16,647 Retained earnings 6,576 4,570 Accumulated other comprehensive earnings (expense) 26 (56) ------- ------- Total stockholders' equity 23,314 21,226 ------- ------- Total liabilities and stockholders' equity $28,533 $23,218 ======= ======= </TABLE> See accompanying Notes to Consolidated Financial Statements. - 1 -
inTEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended Sept. 30, Sept. 30, ------------------ ------------------ 1999 1998 1999 1998 ------- ------- -------- -------- <S> <C> <C> Net revenues $10,097 $ 4,449 $21,392 $15,238 Cost of revenues 4,554 2,118 9,811 6,453 ------- ------- ------- ------- Gross margin 5,543 2,331 11,581 8,785 ------- ------- ------- ------- Operating expenses: Selling expense 1,346 862 3,167 2,281 Research and development expense 880 483 2,245 1,338 General and administrative expense 1,191 726 3,072 1,902 ------- ------- ------- ------- Total operating expenses 3,417 2,071 8,484 5,521 ------- ------- ------- ------- Operating income 2,126 260 3,097 3,264 ------- ------- ------- ------- Other income (expense): Interest income 89 111 240 377 Interest expense (17) (1) (17) (3) Other 44 (10) 69 2 ------- ------- ------- ------- Total other income 116 100 292 376 ------- ------- ------- ------- Earnings before income taxes 2,242 360 3,389 3,640 Income tax expense 901 133 1,383 1,351 ------- ------- ------- ------- Net earnings $ 1,341 $ 227 $ 2,006 $ 2,289 ======= ======= ======= ======= Net earnings per common share-basic $0.21 $0.04 $0.31 $0.38 Weighted average common shares outstanding-basic 6,536,034 6,311,849 6,536,034 6,046,107 Net earnings per common share-diluted $0.20 $0.04 $0.30 $0.38 Weighted average common and common share equivalents outstanding-diluted 6,626,342 6,317,578 6,606,902 6,055,217 </TABLE> See accompanying Notes to Consolidated Financial Statements. - 2 -
inTEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (In thousands, except share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended Sept. 30, Sept. 30, ------------------ ----------------- 1999 1998 1999 1998 ------- ------- ------ ------ <S> <C> <C> <C> <C> Net earnings $1,341 $ 227 $2,006 $2,289 Foreign currency translation adjustments 168 19 82 (42) ------ ------ ------ ------ Comprehensive earnings $1,509 $ 246 $2,088 $2,247 ====== ====== ====== ====== </TABLE> See accompanying Notes to Consolidated Financial Statements. - 3 -
inTEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (In thousands, except share data) (Unaudited except Balance, December 31, 1998) <TABLE> <CAPTION> Accumulated Common Stock Additional Other Total ----------------- Paid-In Retained Comprehensive Stockholders' Shares Amount Capital Earnings Earnings(Expense) Equity --------- ------ ---------- -------- ---------------- ------------ <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 1998 6,536,034 $ 65 $16,647 $ 4,570 $ (56) $21,226 Net earnings - - - 2,006 - 2,006 Other comprehensive earnings - - - - 82 82 --------- ---- ------- ------- ----- ------- Balance, Sept. 30, 1999 6,536,034 $ 65 $16,647 $ 6,576 $ 26 $23,314 ========= ==== ======= ======= ===== ======= </TABLE> See accompanying Notes to Consolidated Financial Statements. - 4 -
inTEST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except share data) (Unaudited) <TABLE> <CAPTION> Nine Months Ended Sept. 30, ----------------- 1999 1998 ------- ------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 2,006 $ 2,289 Adjustments to reconcile net earnings to net cash: Depreciation and amortization 620 303 Foreign exchange (gain)loss (15) 6 Changes in assets and liabilities: Trade accounts and notes receivable, net (3,612) 1,507 Inventories (836) (134) Refundable domestic and foreign income taxes 663 (352) Other current assets (178) (94) Accounts payable 1,917 (70) Domestic and foreign income taxes payable 989 (1,482) Accrued expenses 323 (415) ------- ------- Net cash provided by operating activities 1,877 1,558 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of machinery and equipment (651) (165) Acquisition of business, net of cash acquired - (4,629) Other long-term assets (7) (21) ------- ------- Net cash used in investing activities (658) (4,815) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Principal debt repayments - (215) ------- ------- Net cash used in financing activities - (215) ------- ------- Effects of exchange rates on cash 2 (12) ------- ------- Net cash provided by all activities 1,221 (3,484) Cash and cash equivalents at beginning of period 8,468 12,035 ------- ------- Cash and cash equivalents at end of period $ 9,689 $ 8,551 ======= ======= </TABLE> See accompanying Notes to Consolidated Financial Statements. - 5 -
inTEST CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information as of September 30, 1999 and for the three months and nine months ended September 30, 1999 and 1998 is unaudited) (In thousands, except for share data) (1) NATURE OF OPERATIONS inTEST Corporation (the "Company") designs, manufactures and markets docking hardware, test head manipulators and tester interfaces used by semiconductor manufacturers during the testing of wafers and packaged devices. The Company also designs and markets related automatic test equipment interface products. The consolidated entity is comprised of inTEST Corporation (parent) and seven 100% owned subsidiaries: inTEST Limited (Thame, UK), inTEST Kabushiki Kaisha (Kichijoji, Japan), inTEST PTE, Limited (Singapore), inTEST Sunnyvale Corp. (Delaware), inTEST Investments, Inc. (a Delaware holding company), inTEST IP Corp.(a Delaware holding company) and inTEST Licensing Corp. (a Delaware holding company). The Company manufactures its products in the U.S.,U.K. and Singapore (where the company commenced manufacturing during September 1999). Marketing and support activities are conducted worldwide from the Company's facilities in the U.S., U.K., Japan and Singapore. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation --------------------- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. - 6 -
inTEST CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Interim Financial Reporting --------------------------- In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normally recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flows for the interim periods presented. Certain footnote information has been condensed or omitted from these financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and and accompanying footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Net Earnings Per Common Share ----------------------------- Basic earnings per common share is computed by dividing net earnings by the weighted average common shares outstanding during each period. Diluted earnings per common share is computed by dividing net income by the weighted average common and common share equivalents outstanding during each period. Common share equivalents include dilutive stock options using the treasury stock method. As discussed in Note 3, pro forma earnings per common share information for the three months and nine months ended September 30, 1998 includes certain adjustments to reflect results as if the acquisition of inTEST Sunnyvale Corp. (f/k/a TestDesign Corporation) had occurred on January 1, 1998. New Accounting Pronouncements ----------------------------- In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivatives and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company plans to adopt this Statement, as required. The adoption of this Statement is not expected to have a material affect on the results of operations, financial condition or long-term liquidity of the Company. - 7 -
inTEST CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) (3) PRO FORMA STATEMENT OF EARNINGS INFORMATION On August 3, 1998, the Company acquired all of the outstanding capital stock of TestDesign Corporation ("TestDesign"), a privately held California corporation (the "Acquisition"). Subsequent to the Acquisition, the Company changed the name of TestDesign to inTEST Sunnyvale Corp. TestDesign is engaged in the design and manufacture of tester interfaces used by the semiconductor industry. The purchase price was $4.4 million in cash and 625,000 shares of the Company's common stock (subject to certain adjustments). Although the Company's common stock had a market price of $4.75 per share on the closing date of the transaction, all of the 625,000 shares issued in connection with the Acquisition are subject to legal restrictions on transfer and have been valued at a 10% discount to the market price of the shares. In addition, the Company incurred transaction costs of approximately $425,000 in completing the Acquisition. The following is an allocation of the purchase price: <TABLE> <S> <C> Cash payment $4,400 Transaction costs 425 625,000 common shares at $4.28 2,672 ------ 7,497 Estimated fair value of identifiable assets acquired net of liabilities assumes 1,650 ------ Goodwill to be amortized over 15 years $5,847 ====== </TABLE> The Acquisition has been accounted for as a purchase and the results of operations of the acquired business have been included in the Company's consolidated financial statements since the date of the Acquisition. The following unaudited pro forma information presents a summary of consolidated results of operations for the Company and TestDesign for the three months and nine months ended September 30, 1998 as if the Acquisition had occurred on January 1, 1998: - 8 -
inTEST CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) (3) PRO FORMA STATEMENT OF EARNINGS INFORMATION (Continued) <TABLE> <CAPTION> Three Months Ended Nine Months Ended Sept 30, 1998 Sept 30, 1998 ------------------ ---------------- <S> <C> <C> Pro forma net revenues $ 4,817 $19,498 Pro forma net earnings 144 2,173 Pro forma net earnings per common share-diluted $ 0.02 $ 0.33 </TABLE> (4) SEGMENT INFORMATION The various products the Company designs, manufactures and markets, which include docking hardware, test head manipulators and tester interfaces, are considered by management to be a single operating segment. Included in this segment are products the Company designs and markets which are manufactured by third parties, which include high performance test sockets and interface boards. The Company operates its business worldwide and divides the world into three geographic operating segments: North America, Asia-Pacific and Europe. The North America segment includes the Company's manufacturing, design and service facilities in New Jersey and California; the Asia-Pacific segment includes the Company's design and service facilities in Singapore and Japan; and the Europe segment includes the Company's manufacturing, design and service facility in the UK. - 9 -
inTEST CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) (4) SEGMENT INFORMATION (Continued) <TABLE> <CAPTION> Three Months Ended Nine Months Ended Sept 30, Sept 30, ------------------ ----------------- 1999 1998 1999 1998 -------- ------- ------- ------- <S> <C> <C> <C> <C> Net revenues from unaffiliated customers: North America $ 7,589 $2,748 $15,852 $ 9,918 Asia-Pacific 1,596 1,049 3,979 3,879 Europe 912 652 1,561 1,441 ------- ------ ------- ------- $10,097 $4,449 $21,392 $15,238 ======= ====== ======= ======= Affiliate sales or transfers from: North America $ 442 $ 179 $ 1,074 $ 742 Asia-Pacific - - - - Europe 290 56 724 323 ------- ------ ------- ------- $ 732 $ 235 $ 1,798 $ 1,065 ======= ====== ======= ======= Operating income (loss): North America $ 1,579 $ (63) $ 2,200 $ 2,292 Asia-Pacific 26 47 230 421 Europe 521 276 667 551 ------- ------ ------- ------- $ 2,126 $ 260 $ 3,097 $ 3,264 ======= ====== ======= ======= Earnings before income taxes: North America $ 1,641 $ 28 $ 2,387 $ 2,620 Asia-Pacific 77 47 321 444 Europe 524 285 681 576 ------- ------ ------- ------- $ 2,242 $ 360 $ 3,389 $ 3,640 ======= ====== ======= ======= Net earnings (loss): North America $ 972 $ (5) $ 1,402 $ 1,684 Asia-Pacific (21) 6 62 137 Europe 390 226 542 468 ------- ------ ------- ------- $ 1,341 $ 227 $ 2,006 $ 2,289 ======= ====== ======= ======= </TABLE> -10-
inTEST CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Unaudited) (5) LEGAL PROCEEDINGS As reported in the Company's prior periodic reports filed with the Securities and Exchange Commission during 1999, on November 18, 1998 the Company and its subsidiary inTEST IP Corp. (which holds title to all Company intellectual property) filed suit against Reid-Ashman Manufacturing, Inc. for infringement of a United States patent held by the Company. The matter is presently in the discovery stage. In addition, the parties are pursuing court facilitated mediation. - 11 -
inTEST CORPORATION AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview - -------- The Company designs, manufactures and markets docking hardware, test head manipulators and tester interfaces, which are used with automatic test equipment ("ATE") by semiconductor manufacturers during the testing of wafers and packaged devices. The Company also designs and markets related ATE interface products including high performance test sockets and interface boards. The Company's products are designed to improve the utilization and cost-effectiveness of ATE (including testers, wafer probers and device handlers) during the testing of linear, digital and mixed signal integrated circuits ("ICs"). The Company's revenues are substantially dependent upon the demand for ATE by semiconductor manufacturers and, therefore, fluctuate generally as a result of cyclicality in the semiconductor manufacturing industry. During the past several years, the demand for ATE by the semiconductor industry exhibited a high degree of cyclicality. 1996 represented a year of sequential quarterly declines in orders for and sales of the Company's products due to a reduced level of semiconductor manufacturing activity which caused cutbacks in semiconductor manufacturers' capital budgets. 1997 marked a turnaround in the semiconductor industry, which was evidenced by renewal in demand for ATE and related equipment, which resulted in sequential quarterly increases in orders for and sales of the Company's products. 1998, like 1996, represented a year of sequential quarterly declines in orders for and sales of the Company's products, however, to a more significant degree than in 1996. During 1998, worldwide demand for ICs fell dramatically due to excess inventory of older IC designs, and slower transition to new IC designs resulting from softening demand for end user products. In addition, the economic downturns in many world economies, especially those in Southeast Asia and Japan, exacerbated the semiconductor industry downturn. The combination of these conditions contributed to a reduced demand for products manufactured by semiconductor manufacturers, which in turn significantly reduced their need for new or additional ATE equipment. 1999, like 1997, marked a turnaround in the semiconductor industry. During the first nine months of 1999, the Company has seen significant quarterly increases in the level of orders for its products ("bookings"). Bookings were $7.2 million for the quarter ended March 31, 1999, $10.7 million for the quarter ended June 30, 1999, and a record $13.1 million for the quarter ended September 30, 1999. As a result of the increased booking activity, the Company's backlog increased from $3.4 million at December 31, 1998 to a record $11.4 million at September 30, 1999. During the same period the Company experienced a significant increase in its net revenues, which grew from $3.8 million for the quarter ended December 31, 1999 to a record $10.1 million for the quarter ended September 30, 1999. The increase in the Company's bookings, net revenues and backlog reflects the increased demand for ATE by semiconductor manufacturers resulting from increased worldwide demand for ICs combined with back end ATE capacity constraints caused by the significantly reduced capital spending during 1998. While bookings and - 12 -
inTEST CORPORATION AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) backlog are calculated on the basis of firm orders, no assurance can be given that customers will purchase the equipment subject to such orders. As a result, the Company's bookings for any period and backlog at any particular date are not necessarily indicative of actual sales for any succeeding period. Results of Operations - --------------------- Three Months Ended September 30, 1999 Compared to Three Months Ended September 30,1998: Net Revenues. Net revenues were a record $10.1 million for the quarter ended September 30, 1999 compared to $4.4 million for the same period in 1998, an increase of $5.6 million or 127%. The significant increase in net revenues over the comparable prior period is principally the result of the aforementioned turnaround in the demand for ATE in 1999 compared to 1998. Gross Margin. Gross margin increased to 55% for the quarter ended September 30, 1999 compared to 52% for the comparable period in 1998. The improvement in gross margin was primarily the result of better absorption of fixed manufacturing costs by higher net revenue levels. The improvement in the gross margin was offset by the increase in manufacturing costs associated with the acquisition of inTEST Sunnyvale, which was acquired on August 3, 1998 (the "Acquisition"). Selling Expense. Selling expense was $1.3 million for the quarter ended September 30, 1999 compared to $862,000 for the same period in 1998, an increase of $484,000 or 56%. The increase was attributable to several factors including the salary expense of new sales and marketing staff, increased expenditures for travel, increased commission expenses for external sales representatives resulting from the higher sales levels, increased advertising costs and higher levels of freight expenses. Research and Development Expense. Research and development expense was $880,000 for the quarter ended September 30, 1999 compared to $483,000 for the same period in 1998, an increase of $397,000 or 82%. The increase was attributable to the additional salary expense of inTEST Sunnyvale engineering and technical staff coupled with an increase in the Company's total number of engineering and technical staff. In addition, expenditures for research and development materials and travel expenses associated with new product development comprised a significant portion of the increase as compared to the prior comparable period. General and Administrative Expense. General and administrative expense was $1.2 million for the quarter ended September 30, 1999 compared to $726,000 for the same period in 1998, an increase of $465,000 or 64%. The increase was primarily attributable to legal costs related to the Company's patent infringement suit, costs to maintain existing patents and file for new patents worldwide, accruals for incentive compensation for certain executive officers and the additional salary and other administrative costs of inTEST Sunnyvale. - 13 -
inTEST CORPORATION AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In addition, administrative salary expense increased due to both staffing increases and salary increases for existing staff, as well as increases in investor relations expenses and the amortization of goodwill resulting from the Acquisition. Income Tax Expense. Income tax expense increased to $901,000 for the quarter ended September 30, 1999 from $133,000 for the comparable period in 1998, an increase of $768,000. The Company's effective tax rate was 40% for the third quarter of 1999 compared to 37% for the same period in 1998. The increase in the effective tax rate is primarily the result of goodwill amortization related to the Acquisition, which is not deductible for tax purposes, and a higher effective tax rate in Japan, caused by certain recurring expenses which are not deductible for tax purposes, which was compounded by the reduced profitability of the Company's Japanese operations in 1999 compared to 1998. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Net Revenues. Net revenues were $21.4 million for the nine months ended September 30, 1999 compared to $15.2 million for the same period in 1998, an increase of $6.2 million or 40%. The significant increase in net revenues over the comparable prior period is a result of the aforementioned turnaround in demand for ATE in 1999 compared to 1998, as well as the Acquisition of inTEST Sunnyvale. Gross Margin. Gross margin declined to 54% for the nine months ended September 30, 1999 compared to 58% for the comparable period in 1998. The reduction in gross margin was primarily the result of the additional fixed costs of manufacturing and direct labor costs of inTEST Sunnyvale. Selling Expense. Selling expense was $3.2 million for the nine months ended September 30, 1999 compared to $2.3 million for the same period in 1998, an increase of $886,000 or 39%. The increase was attributable to several factors including the additional salary expense of inTEST Sunnyvale sales staff and new sales and marketing staff, increased expenditures for travel, higher levels of warranty replacement expenses and increased advertising costs offset by a reduction in commission expenses for external sales representatives. Research and Development Expense. Research and development expense was $2.2 million for the nine months ended September 30, 1999 compared to $1.3 million for the same period in 1998, an increase of $907,000 or 68%. The increase was attributable to the additional salary expense of inTEST Sunnyvale engineering and technical staff coupled with an increase in the number of engineering and technical staff and higher levels of travel expenses which were offset in part by reductions in spending on research and development materials in 1999 as compared to 1998. - 14 -
inTEST CORPORATION AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) General and Administrative Expense. General and administrative expense was $3.1 million for the nine months ended September 30, 1999 compared to $1.9 million for the same period in 1998, an increase of $1.2 million or 62%. The increase was primarily attributable to legal costs related to the Company's patent infringement suit, costs to maintain existing patents and file for new patents worldwide and the amortization of goodwill resulting from the Acquisition. In addition, there were increases in administrative salary expense due to staffing increases and salary increases for existing staff, accruals for incentive compensation for certain executive officers and communications expense. Income Tax Expense. Income tax expense remained constant at $1.4 million for the nine months ended September 30, 1999 and 1998. The Company's effective tax rate was 41% for the first nine months of 1999 compared to 37% for the same period in 1998. The increase in the effective tax rate is primarily the result of goodwill amortization related to the Acquisition, which is not deductible for tax purposes, and a higher effective tax rate in Japan, caused by certain recurring expenses which are not deductible for tax purposes, which was compounded by the reduced profitability of the Company's Japanese operations in 1999 compared to 1998. Liquidity and Capital Resources - ------------------------------- Net cash provided from operations for the nine months ended September 30, 1999 was $1.9 million. Accounts receivable increased $3.6 million from December 31, 1998 to September 30, 1999 due to the increase in sales activity during the first nine months of 1999. Inventories increased $836,000 as a result of materials purchases for future product shipments. Refundable domestic and foreign income taxes decreased $663,000 due to a refund of excess Federal taxes paid during 1998. Other current assets increased $178,000, primarily as a result of increases in prepaid expenses. Accounts payable increased $1.9 million due to the higher production levels during the first nine months of 1999. Accrued expenses increased $323,000 primarily as a result of the increased sales activity and staffing additions and their related expense accruals. Domestic and foreign income taxes payable increased $989,000 as a result of the refund of excess Federal taxes received during the first quarter and the accrual of income taxes on the earnings for the first nine months of 1999. Purchases of machinery and equipment were $651,000 for the nine months ended September 30, 1999, which consisted primarily of improvements to the Company's facilities in the United States and, to a lesser extent, the UK. The Company began the renovation of its UK manufacturing facility during the second quarter and plans to spend approximately $200,000 during the fourth quarter of 1999 to complete the renovations and to purchase a coordinate measuring machine for this facility. During the third quarter of 1999, the Company increased its domestic fabrication capacity through the addition of a - 15 -
inTEST CORPORATION AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) machining operation in Cherry Hill. The Company estimates the costs to acquire equipment for this new machining operation at between $600,000 and $800,000; approximately $200,000 of this amount was spent during the third quarter of 1999. The Company commenced manufacturing operations at its Singapore facility late in the third quarter of 1999 and does not foresee significant capital expenditures related to this operation. The Company believes that existing cash and cash equivalents, its $1.5 million unused line of credit and the anticipated net cash provided from operations will be sufficient to satisfy the Company's cash requirements including those of its new subsidiary for the foreseeable future. However, additional acquisitions may require additional equity or debt financing to meet working capital requirements or capital expenditure needs. The Company does not anticipate that it will pay dividends in the foreseeable future. Year 2000 - --------- The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, a temporary inability to process transactions, send invoices, or engage in normal business activities. Currently, the Company has a program in process to analyze potentially affected business and process systems and replace or correct all non- compliant critical business and process systems that it will require in the new millennium. Prior to the acquisition of inTEST Sunnyvale, the Company had completed its review and testing of its then existing systems and determined that they were Year 2000 compliant. The Company has identified those systems of inTEST Sunnyvale which were not yet Year 2000 compliant and has converted them to systems which are Year 2000 compliant. The Company completed the system modifications at inTEST Sunnyvale during the third quarter of 1999. The products that the Company has sold and currently sells are not date-sensitive, and therefore the Company believes its product related exposures are low. In conjunction with the Company's Year 2000 effort, all suppliers that are critical to the function of the Company are being surveyed to ensure readiness and non-disruption to the Company supply chain. The Company relies on subcontractors for fabrication and certain other processes performed on its products and utilizes third-party network equipment and software products which may or may not be Year 2000 compliant. In addition, the Company relies on utility and telecommunications suppliers to operate its businesses - 16 -
inTEST CORPORATION AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) worldwide. The Company has sent questionnaires to these critical suppliers to determine the extent to which the Company's operations are exposed to failure of Year 2000 issues. The Company has received responses from virtually all of its domestic suppliers and is still awaiting responses from many of its foreign suppliers. The Company has identified new critical raw materials and fabrication suppliers to replace those which cannot demonstrate Year 2000 compliance before the end of the fourth quarter of 1999. There can be no assurance that the Company will be successful in its efforts to identify and resolve any Year 2000 issues involving its suppliers or to continue receiving products and services from these suppliers if Year 2000 problems were to materialize. The failure to resolve these issues could result in the shut-down of some or all of the Company's operations, which would have a material adverse effect on the Company. The total expense of the Company's Year 2000 effort is currently estimated at less than $100,000 for the identification and remediation of any Year 2000 problems related to the Company's internal systems. If required modifications to existing software and hardware are not made, or are not completed in a timely manner, the Year 2000 issue could have a material impact on the operations of the Company. There can be no assurance that the costs to remediate any Year 2000 problems which may be identified in the future will not exceed the Company's current estimate or that the Company will be able to resolve these issues in a timely manner. The expenses of the Year 2000 project are being funded through operating cash flows. The Company does not currently have any information concerning Year 2000 compliance status of its customers. If any of the Company's significant customers and suppliers do not successfully and in a timely manner achieve Year 2000 compliance, and as a result of such non-compliance such customers operations are disrupted, shut-down or otherwise impacted, the Company's business or operations could be adversely affected. There can be no assurance that another company's failure to ensure Year 2000 capability would not have an adverse effect on the Company. The Company has not yet developed a comprehensive contingency plan to address situations which it believes to be beyond its control (i.e. such as utilities and telecommunications). There can be no assurance that the Company will be able to develop a contingency plan that will adequately address issues that may arise in the Year 2000. The failure of the Company to successfully resolve such issues could result in a shutdown of some or all of the Company's operations, which would have a material adverse effect on the Company. International Operations - ------------------------ Revenues generated by the Company's foreign subsidiaries were 26% and 35% of consolidated revenues for the nine months ended September 30, 1999 and 1998, respectively. The Company anticipates that revenues generated by the - 17 -
inTEST CORPORATION AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Company's foreign subsidiaries will continue to account for a significant portion of consolidated revenues in the foreseeable future. These revenues generated by the Company's foreign subsidiaries will continue to be subject to certain risks, including changes in regulatory requirements, tariffs and other barriers, political and economic instability, an outbreak of hostilities, foreign currency exchange rate fluctuations, potentially adverse tax consequences and the possibility of difficulty in accounts receivable collection. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions will be implemented by the United States or any other country upon the importation or exportation of the Company's products in the future. Any of these factors or the adoption of restrictive policies could have a material adverse effect on the Company business, financial condition or results of operations. Revenues denominated in foreign currencies were 16% and 26% of consolidated revenues for the nine months ended September 30, 1999 and 1998, respectively. Although the Company operates its business such that a significant portion of its product costs are denominated in the same currency that the associated sales are made in, there can be no assurance that the Company will not be adversely impacted in the future due to its exposure to foreign operations. Revenues denominated in currencies other than U.S. dollars expose the Company to currency fluctuations, which can adversely affect results of operations. The portion of the Company's consolidated revenues that were derived from sales to the Asia Pacific region were 19% and 26% for the nine months ended September 30, 1999 and 1998, respectively. Countries in the Asia Pacific region, including Japan, have experienced economic instability resulting in weaknesses in their currency, banking and equity markets. Although the past economic instability in the Asia Pacific region has not materially adversely affected the Company's order backlog, balance sheet, or results of operations to date, there can be no assurance that continued economic instability will not in the future have a material adverse affect on demand for the Company's products and its consolidated results of operations. Cautionary Statement Regarding Forward Looking Statements - --------------------------------------------------------- This Report contains certain statements of a forward-looking nature relating to future events, such as statements regarding the Company's plans and strategies or future financial performance. Such statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "should" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Investors and prospective investors are cautioned that such statements are only projections and that actual events or results may differ materially from those expressed in any such forward-looking statements. In addition to the factors described - 18 -
inTEST CORPORATION AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) in this Report, the Company's actual consolidated quarterly or annual operating results have been affected in the past, or could be affected in the future, by additional factors, including, without limitation: changes in business conditions and the economy, generally; the ability of the Company to obtain patent protection, and enforce its patent rights, for existing and developing proprietary technologies; the ability of the Company to integrate successfully businesses, technologies or products which it may acquire; the effect of the loss of, or reduction in orders from, a major customer; and competition from other manufacturers of docking hardware, test head manipulators, tester interfaces and related ATE interface products. - 19 -
inTEST CORPORATION AND SUBSIDIARIES Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to currency exchange rate risk in the normal course of its business. The Company employs risk management strategies including the use of forward exchange rate contracts to manage this exposure. The Company's objective in managing currency exchange risk is to minimize the impact of significant currency exchange rate fluctuations primarily in the Japanese Yen. The Company's Japanese operations expose its earnings to changes in currency exchange rates because its Japanese subsidiary makes its sales in Japanese Yen and purchases its sales inventory in U.S. dollars. Forward exchange rate contracts are used to establish a fixed conversion rate between the Japanese Yen and the U.S. dollar so that the level of the Company's gross margin from sales in Japan is not negatively impacted from significant movements in the Japanese Yen to U.S. dollar exchange rate. The Company purchases forward exchange rate contracts on a monthly basis in the amounts necessary to pay the U.S. dollar denominated obligations of its Japanese subsidiary. As of September 30, 1999, there were no forward exchange rate contracts outstanding. It is the Company's policy to enter into forward exchange rate contracts only to the extent necessary to achieve the desired objectives of management in limiting the Company's exposure to significant fluctuations in currency exchange rates. The Company does not hedge all of its currency exchange rate risk exposures in a manner that would completely eliminate the impact of changes in currency exchange rates on its net earnings. The Company does not expect that its results of operations or liquidity will be materially affected by these risk management activities. The notional amounts of the Company's forward exchange rate contracts are used only to satisfy current payments to material vendors to be exchanged and are not a measure of the Company's credit risk or its future cash requirements. Exchange risk related to forward exchange rate contracts is limited to movement in the exchange rates that would provide a more favorable exchange rate than that locked in the forward contract and forward contract amounts purchased in excess of the amount needed by the Company to satisfy its obligations. The Company manages that rate risk by limiting the size of the forward contracts purchased to the known amount of obligations due and not purchasing forward contracts with settlement dates beyond 30 days. The Company believes that the risk of loss due to exchange rate fluctuations is remote and that any losses would not be material to its financial condition or results of operations. - 20 -
inTEST CORPORATION PART II. OTHER INFORMATION Item 1. Legal Proceedings As reported in the Company's prior periodic reports filed with the Securities and Exchange Commission during 1999, on November 18, 1998 the Company and its subsidiary inTEST IP Corp. (which holds title to all Company intellectual property) filed suit against Reid-Ashman Manufacturing, Inc. for infringement of a United States patent held by the Company. The matter is presently in the discovery stage. In addition, the parties are pursuing court facilitated mediation. - 21 -
inTEST CORPORATION PART II. OTHER INFORMATION (Continued) Item 2. Changes in Securities and Use of Proceeds On June 17, 1997, the Company's Registration Statement on Form S-1 covering the Offering of 2,275,000 shares of the Company's Common Stock, Commission file number 333-26457, was declared effective. The Offering commenced on June 20, 1997, managed by Janney Montgomery Scott, Inc. and Needham & Company, Inc. as representatives of the several underwriters named in the Registration Statement (the "Underwriters"). Of the 2,275,000 shares sold pursuant to the Offering, 1,820,000 shares were sold by the Company and 455,000 were sold by certain selling stockholders (the "Selling Stockholders"). In addition, the Underwriters exercised an over-allotment option to purchase an additional 341,250 shares of the Company's Common Stock from the Selling Stockholders. The total price to the public for the shares offered and sold by the Company and the Selling Stockholders was $13,650,000 and $5,971,875, respectively. The amount of expenses incurred for the Company's account in connection with the Offering are as follows: <TABLE> <S> <C> Underwriting discounts and commissions: $1,023,750 Finders' fees: None Expenses paid to or for the Underwriters: 16,650 Other expenses: 954,758 ---------- Total expenses: $1,995,158 ========== </TABLE> All of the foregoing expenses were direct or indirect payments to persons other than (i) directors, officers or their associates; (ii) persons owning ten percent (10%) or more of the Company's Common Stock; or (iii) affiliates of the Company. The net proceeds of the Offering to the Company (after deducting the foregoing expenses) was $11,654,842. From the effective date of the Registration Statement, the net proceeds have been used for the following purposes: - 22 -
inTEST CORPORATION PART II. OTHER INFORMATION (Continued) Item 2. Changes in Securities and Use of Proceeds (Continued) <TABLE> <S> <C> Construction of plant, building and facilities $ - Purchase and installation of machinery and equipment 949,538 Purchase of real estate - Acquisition of other business (including transaction costs 4,825,000 Repayment of indebtedness 388,098 Working capital 599,725 Temporary investments, including cash & cash equivalents 4,291,716 Other purposes (for which at least $100,000 has been used), including: Payment of final S corporation distribution 600,765 ----------- $11,654,842 =========== </TABLE> In connection with the termination of the Company's status as an S corporation, the Company used $601,000 of the net proceeds to pay a portion of the $4.3 million final distribution of previously taxed but undistributed earnings of the Company. All of the foregoing payments with the exception of the final S corporation distribution were direct or indirect payments to persons other than (i) directors, officers or their associates; (ii) persons owning ten percent (10%) or more of the Company's Common Stock; or (iii) affiliates of the Company. Item 3. Defaults Upon Senior Securities None - 23 -
inTEST CORPORATION PART II. OTHER INFORMATION (Continued) Item 4. Submission of Matters to a Vote of Securities Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3.1 Articles of Incorporation: Previously filed by the Company as an Exhibit to the Company's Registration Statement on Form S-1, File No. 333-26457, and Incorporated herein by reference. 3.2 By-Laws: Previously filed by the Company as an Exhibit to the Company's Registration Statement on Form S-1, File No. 333-26457, and incorporated herein by reference. 10 Lease Agreement between the Company and Hoot Owl Farms, Inc. dated July 28, 1999 27 Financial Data Schedule (b) Reports on Form 8-K None - 24-
Signatures 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. inTEST Corporation Date: November 15, 1999 /s/ Robert E. Matthiessen ------------------ ------------------------------------ Robert E. Matthiessen President and Chief Executive Officer Date: November 15, 1999 /s/ Hugh T. Regan, Jr. ------------------ ------------------------------------ Hugh T. Regan, Jr. Treasurer and Chief Financial Officer
Index to Exhibits Item 6. Exhibits and Reports on Form 8-K 3.1 Articles of Incorporation: Previously filed by the Company as an Exhibit to the Company's Registration Statement on Form S-1, File No. 333-26457, and Incorporated herein by reference. 3.2 By-Laws: Previously filed by the Company as an Exhibit to the Company's Registration Statement on Form S-1, File No. 333-26457, and incorporated herein by reference. 10 Lease Agreement between the Company and Hoot Owl Farms, Inc. dated July 28, 1999 27 Financial Data Schedule