UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-22529
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inTEST Corporation
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(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2370659
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2 Pin Oak Lane, Cherry Hill, New Jersey 08003
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (609) 424-6886
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Indicate by check X 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.
Yes X No
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Number of shares of Common Stock, $.01 par value, outstanding as of September
30, 1998:
6,536,034
INTEST CORPORATION
INDEX
Part I. Financial Information
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 1
Consolidated Statements of Earnings (unaudited) for the
three months and nine months ended September 30, 1998
and 1997 2
Consolidated Statement of Stockholders' Equity (unaudited)
for the nine months ended September 30, 1998 3
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 30, 1998 and 1997 4
Notes to consolidated financial statements (unaudited) 5 -10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 -19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20 -21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Securities
Holders 21
Item 5. Other information 21
Item 6. Exhibits and Reports on Form 8-K 22
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Sept. 30, Dec. 31,
1998 1997
--------- ---------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 8,551 $12,035
Trade accounts and notes receivable, net of allowance for doubtful
accounts of $197 at September 30, 1998 and $144 at December 31,
1997 3,293 4,058
Inventories 2,631 1,649
Prepaid income taxes 352 -
Other current assets 629 301
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Total current assets 15,456 18,043
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Property and equipment:
Machinery and equipment 2,331 1,129
Leasehold improvements 218 179
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2,549 1,308
Less: accumulated depreciation (1,745) (831)
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Net property and equipment 804 477
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Other assets 151 136
Goodwill 7,004 1,289
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Total assets $23,415 $19,945
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,136 $ 1,142
Accrued expenses 803 955
Domestic and foreign income taxes payable - 1,291
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Total current liabilities 1,939 3,388
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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 at September 30, 1998;
5,911,034 shares issued and outstanding at December 31, 1997 65 59
Additional paid-in capital 16,647 13,981
Retained earnings 4,932 2,643
Accumulated other comprehensive expense (168) (126)
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Total stockholders' equity 21,476 16,557
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Total liabilities and stockholders' equity $23,415 $19,945
======= =======
See accompanying Notes to Consolidated Financial Statements.
- 1 -
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Three Months Ended Nine Months Ended
-------------------- --------------------
9/30/98 9/30/97 9/30/98 9/30/97
-------- -------- -------- --------
Revenues $ 4,449 $ 6,212 $15,238 $14,719
Cost of revenues 2,118 2,319 6,453 5,756
------- ------- ------- -------
Gross profit 2,331 3,893 8,785 8,963
------- ------- ------- -------
Operating expenses:
Selling expense 862 706 2,281 1,799
Research and development expense 483 455 1,338 1,230
General and administrative expense 726 666 1,902 1,567
------- ------- ------- -------
Total operating expenses 2,071 1,827 5,521 4,596
------- ------- ------- -------
Operating income 260 2,066 3,264 4,367
------- ------- ------- -------
Other income (expense):
Interest income 111 138 377 204
Interest expense (1) (6) (3) (14)
Other (10) (8) 2 (6)
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Total other income (expense) 100 124 376 184
------- ------- ------- -------
Earnings before income taxes and
minority interest 360 2,190 3,640 4,551
------- ------- ------- -------
Provision for income taxes:
Domestic 30 673 931 827
Foreign 103 251 420 546
------- ------- ------- -------
Income tax expense 133 924 1,351 1,373
------- ------- ------- -------
Earnings before minority interest 227 1,266 2,289 3,178
Minority interest - - - (25)
------- ------- ------- -------
Net earnings $ 227 $ 1,266 $ 2,289 $ 3,153
======= ======= ======= =======
Net earnings per common share - basic $ 0.04 $ 0.21 $ 0.38 $ 0.69
Weighted average common shares
outstanding - basic 6,311,849 5,911,034 6,046,107 4,598,379
Net earnings per common share - diluted $ 0.04 $ 0.21 $ 0.38 $ 0.68
Weighted average common and common
equivalent shares outstanding - diluted 6,317,578 5,966,143 6,055,217 4,617,444
See accompanying Notes to Consolidated Financial Statements.
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inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(In thousands, except share data)
(Unaudited except Balance, December 31, 1997)
Accumulated
Common Stock Additional Other Total
----------------- Paid-In Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Expense Equity
--------- ------ ---------- -------- ------------- -------------
Balance, December 31, 1997 5,911,034 $ 59 $13,981 $ 2,643 $ (126) $16,557
Net earnings - - - 2,289 - 2,289
Issuance of common stock in
connection with the
Acquisition 625,000 6 2,666 - - 2,672
Accumulated other
comprehensive expense - - - - (42) (42)
--------- ---- ------- ------- ------ -------
Balance, September 30, 1998 6,536,034 $ 65 $16,647 $ 4,932 $ (168) $21,476
========= ==== ======= ======= ====== =======
See accompanying Notes to Consolidated Financial Statements.
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inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
Nine Months Ended
September 30,
--------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 2,289 $ 3,153
Adjustments to reconcile net earnings to net cash:
Depreciation and amortization 303 157
Foreign exchange (gain) loss 6 10
Minority interest - 25
Allowance for bad debts - 50
Changes in assets and liabilities, net of effects of Acquisition:
Accounts and notes receivable 1,507 (2,650)
Inventories (134) (10)
Prepaid income taxes (352) -
Other current assets (94) (250)
Accounts payable (70) 567
Dividends payable - (973)
Domestic and foreign income taxes payable (1,482) 553
Accrued expenses (415) 166
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Total adjustments (731) (2,355)
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Net cash provided by operating activities 1,558 798
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CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of property and equipment (165) (50)
Acquisition of business, net of cash acquired (4,629) -
Other long-term asset (21) (49)
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Net cash provided by (used in) investing activities (4,815) (99)
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CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Dividends paid - (5,551)
Principal debt repayments (215) (189)
Net proceeds from public offering - 11,635
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Net cash provided by (used in) financing activities (215) 5,895
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Effects of exchange rates on cash (12) (39)
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Net cash provided by (used in) all activities $(3,484) $ 6,555
======= =======
Cash at beginning of period $12,035 $ 3,692
Cash at end of period $ 8,551 $10,247
Supplemental Schedule of Non-Cash Investing Activities:
Details of Acquisition:
Fair value of assets acquired net of cash acquired $ 1,669
Liabilities assumed (215)
Common stock issued (2,672)
Goodwill resulting from Acquisition 5,847
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Net cash paid for Acquisition $ 4,629
=======
See accompanying Notes to Consolidated Financial Statements.
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inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and for the three months
and nine months ended September 30, 1998 and 1997 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 wafer test 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. and the U.K. Marketing
and support activities are conducted worldwide from the Company's
facilities in the U.S., U.K., Japan and Singapore.
On June 20, 1997, the Company completed an initial public offering of
2.275 million common shares through which the Company issued 1.82 million
new shares of common stock (the "Offering"). Simultaneous with the
closing of the Offering, the Company acquired the 21% minority interests
in each of its three foreign subsidiaries in exchange for an aggregate of
300,443 shares of the Company's common stock (the "Exchange"). Prior to
the Offering the Company owned 79% of each of the three foreign
subsidiaries.
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
wafer test interfaces used by the semiconductor industry. The purchase
price was paid by delivery to Douglas W. Smith, the sole shareholder of
TestDesign (the "Seller"), of $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 transactions costs of
approximately $425,000 in completing the Acquisition. The following is
an allocation of purchase price:
- 5 -
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(1) NATURE OF OPERATIONS (Continued)
Cash payment $4,400
625,000 common shares at $4.28 2,672
Transaction costs 425
------
7,497
Estimated fair value of
identifiable assets acquired net
of liabilities assumed 1,650
------
Goodwill to be amortized over
15 years $5,847
======
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 1997.
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.
Net Earnings Per Common Share
-----------------------------
Net earnings per common share is computed in accordance with the
Statement of Financial Accounting Standard No. 128, Earnings per Share.
Basic earnings per share is computed by dividing net income by the
- 6 -
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Earnings Per Common Share (Continued)
-----------------------------
weighted average number of common shares outstanding during each period.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding during each period. Common share equivalents include stock
options using the treasury stock method.
As discussed in Note 3, pro forma earnings per share information for the
three months and nine months ended September 30, 1998 includes certain
adjustments to reflect results as if (i) the Company had been taxed as a
C corporation for the entire nine month period ended September 30, 1997;
(ii) as if the acquisition of the minority interests in the Company's
three foreign subsidiaries had occurred January 1, 1997; and (iii) as if
the Acquisition of TestDesign had occurred on January 1, 1997.
Income Taxes
------------
Just prior to the closing of the Offering, the Company terminated its
status as an S corporation for Federal tax purposes and in the State of
New Jersey. As an S corporation, any Federal and certain New Jersey
state income tax liabilities were those of the former S corporation
stockholders, not of the Company. All tax liabilities on income earned
subsequent to the revocation of the S corporation election are
liabilities of the Company. The Company is taxed in foreign countries
and for activity in certain states. The Company accounts for income
taxes in accordance with the Statement of Financial Accounting Standard
No. 109, Accounting for Income Taxes.
Foreign Currency
----------------
The accounts of the foreign subsidiaries are translated in accordance
with the Statement of Financial Accounting Standard No. 52, Foreign
Currency Translation, which requires that assets and liabilities of
international operations be translated using the exchange rate in effect
at the balance sheet date. The results of operations are translated
using an average exchange rate for the period. The effects of rate
fluctuations in translating assets and liabilities of international
operations into U.S. dollars are accumulated and reflected as accumulated
other comprehensive expense in the consolidated statements of
stockholders' equity. Transaction gains or losses are included in net
earnings.
- 7 -
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements
-----------------------------
In June 1997, the FASB issued SFAS 131, Disclosures About Segments of an
Enterprise and Related Information. This Statement established standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosure about products and services, geographic
areas and major customers. The Company plans to adopt this Statement for
the year ended December 31, 1998, as required. The adoption of this
Statement will not affect results from operations, financial condition or
long-term liquidity.
In March 1998, the AICPA issued Statement of Position 98-1, Accounting
for the Cost of Computer Software Developed or Obtained for Internal
Use. This Statement requires that certain costs related to the
development or purchase of internal software be capitalized and amortized
over the estimated useful life of the software. This Statement also
requires that costs related to the preliminary project stage and the post
implementation/operation stage of an internal use computer software
development project be expensed as incurred. The Company plans to adopt
this Statement for the year ended December 31, 1999, 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.
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION
The Company terminated its status as an S corporation just prior to the
closing of the Offering, described in Note 1, and is subject to Federal
and additional state income taxes for periods after such termination.
Accordingly, for informational purposes, the following pro forma
information for the three and nine months ended September 30, 1998 and
1997, respectively, is presented to show pro forma earnings on an after-
tax basis, assuming the Company had been taxed as a C corporation since
January 1, 1997. The difference between the Federal statutory income tax
rate and the pro forma income tax rate are as follows:
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inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION (Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Federal statutory tax rate 34% 34% 34% 34%
State income taxes, net of Federal
benefit (4) 3 2 3
Foreign income taxes 29 11 12 7
Non-deductible goodwill amortization 8 - 1 1
Tax exempt interest income (5) - (2) -
Undistributed earnings of foreign
subsidiaries permanently reinvested (25) (6) (10) -
Other - - - (1)
-- -- -- --
Pro forma income tax rate 37% 42% 37% 44%
Set forth below are pro forma results of the Company's operations for
the three months and nine months ended September 30, 1998 and 1997.
These pro forma results reflect adjustments for:
(i) the aforementioned change in method of computing taxes.
(ii) the amortization of goodwill resulting from the acquisition of
minority interests in the Company's three foreign subsidiaries, net
of the elimination of the minority interest charge reflected in the
historical financial statements, as if the Exchange had occurred on
January 1, 1997. The goodwill resulting from the Exchange, which
totaled $1.3 million, is being amortized over 15 years.
(iii) the results of TestDesign for these periods as if the Acquisition
had occurred on January 1, 1997, net of the amortization of
goodwill resulting from the Acquisition. The goodwill resulting
from the Acquisition, which totaled $5.8 million, is being
amortized over 15 years.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Pro forma revenues $ 4,816 $ 8,316 $19,498 $21,559
Pro forma earnings before income taxes 294 2,188 3,505 4,546
Pro forma income taxes 133 924 1,351 1,981
Pro forma net earnings 161 1,264 2,154 2,565
Pro forma net earnings per common
share-basic $ 0.02 $ 0.19 $ 0.33 $ 0.47
Pro forma weighted average common shares
outstanding - basic 6,536,034 6,536,034 6,536,034 5,409,367
Pro forma net earnings per common share
- diluted $ 0.02 $ 0.19 $ 0.33 $ 0.47
Pro forma weighted average common and
common stock equivalent shares
outstanding - diluted 6,541,763 6,591,413 6,545,144 5,428,433
- 9 -
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION (Continued)
Pro forma net earnings per common share - basic was calculated by
dividing pro forma net earnings by the pro forma weighted average number
of shares of common stock outstanding during the period calculated as if
the Exchange and the Acquisition had occurred on January 1, 1997.
Pro forma net earnings per common share - diluted was calculated by
dividing pro forma net earnings by the pro forma weighted average number
of shares of common and common stock equivalent shares outstanding
during the period calculated as if the Exchange and the Acquisition had
occurred on January 1, 1997.
(4) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS 130, Reporting Comprehensive
Income. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income is
computed as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
Net income $ 227 $ 1,266 $ 2,289 $ 3,153
Other comprehensive expense,
net of tax:
Foreign currency translation
adjustment 19 (65) (42) (75)
------- ------- ------- -------
$ 246 $ 1,201 $ 2,247 $ 3,078
======= ======= ======= =======
-10-
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
- --------
The Company designs, manufacturers and markets docking hardware, test
head manipulators and wafer test 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, interface boards
and probing assemblies. 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.
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. The
Company believes that purchases of the Company's docking hardware,
manipulators and wafer test interfaces are typically made from its customers'
capital expenditure budgets, while related ATE interface products, which must
be replaced periodically, are typically made from its customers' operating
budgets.
During the last three years, the demand for ATE by the semiconductor
industry exhibited a high degree of cyclicality. When semiconductor
manufacturing activity generally slowed during much of 1996, many
semiconductor manufacturers reduced their capital expenditure budgets and,
correspondingly, postponed or canceled orders for ATE and related equipment.
As a result, orders for and sales of the Company's products experienced
sequential quarterly declines throughout most of 1996. The beginning of 1997
marked a turnaround in the semiconductor industry which was evidenced by a
renewal in demand for ATE and related equipment. This resulted in sequential
quarterly increases in orders for and sales of the Company's products
throughout most of 1997. During the first nine months of 1998, orders for and
sales of the Company's products have declined on a sequential quarterly basis.
This decline can be attributed to a number of factors including the worldwide
decline in demand for integrated circuits and the economic downturns in many
world economies, especially those in Southeast Asia and Japan. As a result of
the reduced demand for products manufactured by semiconductor manufacturers,
their need for new or additional equipment for the manufacture and testing of
semiconductors has been substantially reduced. The Company believes that
demand for and sales of its products may continue to decline during the next
several quarters. This reduced demand is reflected in the Company's backlog,
which was $6.2 million at December 31, 1997 and $3.7 million at September 30,
1998.
- 11 -
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
On June 20, 1997 the Company completed an initial public offering of
2.275 million common shares through which the Company issued 1.82 million new
shares of common stock (the "Offering"). Prior to the Offering the Company
was an S corporation, and the net earnings of the Company were taxed as income
to the Company's stockholders for Federal and certain New Jersey state income
tax purposes. The Company terminated its status as an S corporation prior to
the closing of the Offering and is subject to Federal and additional state
income taxes for periods after such termination.
On August 3, 1998, the Company acquired all of the outstanding capital
stock of TestDesign Corporation ("TestDesign"), a privately held California
corporation (the "Acquisition"). TestDesign is engaged in the design and
manufacture of wafer test interfaces used by the semiconductor industry. The
purchase price was paid by delivery to Douglas W. Smith, the sole shareholder
of TestDesign, of $4.4 million in cash and 625,000 shares of the Company's
common stock (subject to certain adjustments).
Results of Operations
- ---------------------
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997:
Revenues. Revenues were $4.4 million for the quarter ended September 30,
1998 compared to $6.2 million for the same period in 1997, a decrease of $1.8
million or 28%. The decrease in revenue over the comparable prior period
reflects the aforementioned downward cyclical trend which has occurred in the
ATE industry during 1998 offset, in part, by the additional revenues of
TestDesign.
Gross Margin. Gross margin declined to 52% for the quarter ended
September 30, 1998 compared to 63% for the comparable period in 1997. The
reduction in gross margin was primarily the result of the additional fixed
costs of manufacturing of TestDesign which were impacted unfavorably by the
substantially reduced revenue levels during the quarter. In addition,
material costs as a percentage of sales increased over the comparable prior
period due to an increase in the level of sales of certain products with a
greater component material cost in 1998 compared to 1997.
Selling Expense. Selling expense was $862,000 for the quarter ended
September 30, 1998 compared to $706,000 for the same period in 1997, an
increase of $156,000 or 22%. The increase was attributable to several factors
including the additional salary and commission expenses of TestDesign and
increased travel expenses incurred in connection with the Company's sales
activities.
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inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Research and Development Expense. Research and development expense was
$483,000 for the quarter ended September 30, 1998 compared to $455,000 for the
same period in 1997, an increase of $28,000 or 6%. The increase was
attributable to the additional salary expense of TestDesign coupled with a
growth in the number of engineering and technical staff offset in part by
reductions in spending on research and development materials and travel
expenses in 1998 as compared to 1997.
General and Administrative Expense. General and administrative expense
was $726,000 for the quarter ended September 30, 1998 compared to $666,000 for
the same period in 1997, an increase of $60,000 or 9%. The increase was
primarily attributable to the additional salary and other administrative costs
of TestDesign. Also contributing to the increase in 1998 was the amortization
of goodwill resulting from the Acquisition. These increases were offset by a
reduction in bad debt expense, which was zero in 1998 compared to $50,000 in
1997.
Income Tax Expense. Income tax expense decreased to $133,000 for the
quarter ended September 30, 1998 from $924,000 for the comparable period in
1997, an decrease of $791,000. The Company's effective tax rate was 37% for
the third quarter of 1998 compared to 42% for the same period in 1997. The
reduction in the effective tax rate is the result of several factors including
the implementation of tax favorable corporate structures and a lower
percentage of earnings attributable to the Company's Japanese subsidiary in
1998 as compared to 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997:
Revenues. Revenues were $15.2 million for the nine months ended
September 30, 1998 compared to $14.7 million for the same period in 1997, an
increase of $519,000 or 4%. The increase in revenue reflects the additional
sales of TestDesign offset, in part, by the lower demand for ATE and related
products in the nine months ended September 30, 1998 as compared to the nine
months ended September 30, 1997.
Gross Margin. Gross margin declined to 58% for the nine months ended
September 30, 1998 compared to 61% for the comparable prior period in 1997.
The reduction in gross margin was primarily the result of an increase in
material costs as a percentage of sales due to an increase in the level of
sales of certain products with a greater component material cost in 1998
compared to 1997. To a lesser extent, the gross margin during 1998 was also
reduced by the additional fixed manufacturing costs of TestDesign which were
unfavorably impacted by the reduced revenue levels in the most recent quarter.
- 13 -
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Selling Expense. Selling expense was $2.3 million for the nine months
ended September 30, 1998 compared to $1.8 million for the same period in 1997,
an increase of $482,000 or 27%. The majority of the increase was attributable
to a significant increase in commission expense resulting from a higher level
of commissioned sales to semiconductor manufacturers in 1998 over the
comparable prior period. The increase in selling expense also reflects an
increase in warranty and travel expenses over the same period in 1997. Also
contributing to the increase in selling expenses were the additional salaries,
commission and travel expenses of TestDesign.
Research and Development Expense. Research and development expense was
$1.3 million for the nine months ended September 30, 1998 compared to $1.2
million for the same period in 1997, an increase of $108,000 or 9%. The
increase was primarily the result of the additional salary expense of
TestDesign. In addition, the increase was attributable to a growth in the
number of engineering and technical staff prior to the Acquisition, and to a
lesser extent, to increased levels of spending on research and development
materials in 1998 as compared to 1997.
General and Administrative Expense. General and administrative expense
was $1.9 million for the nine months ended September 30, 1998 compared to $1.6
million for the same period in 1997, an increase of $335,000 or 21%. The
increase was primarily attributable to the additional costs associated with
professional fees, shareholder and investor relations and increased
expenditures for outside directors' fees incurred as a public company. Other
factors contributing to the increase in 1998 were the amortization of goodwill
resulting from both the Acquisition and the acquisition of the minority
interests in the Company's three foreign subsidiaries in connection with the
Offering, salary increases of administrative staff and higher levels of travel
expenses.
Income Tax Expense. Income tax expense remained relatively constant at
$1.4 million for both the nine months ended September 30, 1998 and 1997. The
Company's effective tax rate was 37% for the first nine months of 1998
compared to 30% for the same period in 1997. The significant increase in the
effective tax rate was caused by the accrual of Federal income tax on 100% of
the Company's 1998 earnings due to the change of tax status from S corporation
to C corporation in June 1997 in connection with the Offering.
- 14 -
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources
- -------------------------------
The Company realized net cash proceeds of $11.7 million (after payment of
direct expenses of the Offering) from the sale of 1.82 million newly issued
shares in the Offering in June 1997. The proceeds from the Offering are
expected to be used for working capital, general corporate purposes and
possible acquisitions of businesses, technologies or products complementary to
the Company's business. On August 3, 1998, the Company acquired all of the
outstanding capital stock of TestDesign Corporation ("TestDesign"), a
privately held California corporation (the "Acquisition"). The purchase price
was $4.4 million in cash and 625,000 shares of the Company's common stock
(subject to certain adjustments). In addition, the Company incurred
transactions costs of approximately $425,000 in connection with the
Acquisition. The Company funded the cash portion of the purchase price from
its cash on hand. At September 30, 1998, the Company's cash and cash
equivalents included $5,038,597 of temporary investments attributable to such
Offering.
Net cash provided from operations for the nine months ended September 30,
1998 was $1.6 million. Accounts receivable decreased $1.5 million from
December 31, 1997 to September 30, 1998 due to the sequential quarterly
reductions in sales levels during 1998. Inventories increased $134,000
primarily as a result of postponements of shipments by certain customers.
Prepaid income taxes increased $352,000 as a result of lower levels of
earnings than were originally forecasted at the time estimated Federal and
state income tax payments were made. Other current assets increased $94,000,
primarily as a result of increases in prepaid expenses. Accounts payable
decreased $70,000 due to the lower production levels. Accrued expenses
decreased $415,000 primarily as a result of the timing of payments of
previously accrued expenses. Domestic and foreign income taxes payable
decreased $1.5 million as a result of the payment of previously accrued of
Federal, state and foreign income tax on earnings.
Purchases of property and equipment and other assets were $165,000 for
the nine months ended September 30, 1998. The Company plans to spend
approximately $500,000 between the fourth quarter of 1998 and the second
quarter of 1999 to renovate and expand its UK manufacturing facility and to
purchase a coordinate measuring machine for this facility.
Simultaneous with the Offering, the Company acquired the 21% minority
interests in each of its three foreign subsidiaries in exchange for an
aggregate of 300,443 shares of the Company's common stock. This acquisition,
which was accounted for using the purchase method, created goodwill of
- 15 -
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
approximately $1.3 million, which is being amortized over a period of 15
years. The acquisition of TestDesign, which was accounted for using the
purchase method, resulted in goodwill of $5.8 million, which is being
amortized over a period of 15 years.
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. Although the
Company, as an S corporation, historically paid cash dividends to its
stockholders, 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 TestDesign, 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
TestDesign which are not yet Year 2000 compliant and has begun converting them
to systems which are Year 2000 compliant. The Company intends to have all of
its systems Year 2000 compliant by mid-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 insure
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
- 16 -
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
which may or may not be Year 2000 compliant. In addition, the Company relies
on utility and telecommunications suppliers to operate its businesses
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 is waiting for responses from most of these
suppliers. 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 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 that may result if the Company is unable to achieve Year
2000 readiness of its critical operations. 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 shut-down of some or all of
the Company's operations, which would have a material adverse effect on the
Company.
- 17 -
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 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, wafer test
interfaces and related ATE interface products.
International Operations
- ------------------------
Revenues generated by the Company's foreign subsidiaries were 35% and 36%
of consolidated revenues for the nine months ended September 30, 1998 and
1997, respectively. The Company anticipates that revenues generated by the
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.
- 18 -
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Revenues denominated in foreign currencies were 26% and 30% of
consolidated revenues for the nine months ended September 30, 1998 and 1997,
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 26% and 29% for the nine months ended
September 30, 1998 and 1997, respectively. Countries in the Asia Pacific
region, including Japan, have recently experienced economic instability
resulting in weaknesses in their currency, banking and equity markets.
Although the current 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
- 19 -
inTEST CORPORATION
Part II. Other Information
Item 1. Legal Proceedings
None
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:
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
==========
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 through September 30, 1998,
the net proceeds have been used for the following purposes:
- 20 -
inTEST CORPORATION
Part II. Other Information (Continued)
Item 2. Changes in Securities and Use of Proceeds (Continued)
Construction of plant, building and facilities $ -
Purchase and installation of machinery
and equipment 202,657
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 5,038,597
Other purposes (for which at least $100,000
has been used), including:
Payment of final S corporation distribution 600,765
-----------
$11,654,842
===========
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
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
- 21 -
inTEST CORPORATION
PART II. Other Information (Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3(i) 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(ii) 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.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on August 5, 1998
(the "Initial Report") reporting the acquisition of
TestDesign Corporation by the Company. A report on Form
8-K/A was filed on October 2, 1998 to amend the Initial
Report to include the following financial statements:
(a) Financial Statements of TestDesign:
Balance Sheets as of May 31, 1998 and June 30, 1997
Statements of Earnings for the eleven months ended
May 31, 1998 and the year ended June 30, 1997
Statements of Shareholder's Equity for the eleven
months ended May 31, 1998 and the year ended June 30,
1997
Statements of Cash Flows for the eleven months ended
May 31, 1998 and the year ended June 30, 1997
(b) Pro Forma Financial Information to reflect the
acquisition of TestDesign Corporation by the Company:
Pro Forma Consolidated Balance Sheet as of June 30, 1998
Pro Forma Consolidated Statements of Earnings for the
six months ended June 30, 1998 and the year ended
December 31, 1997
- 22 -
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 16, 1998 /s/ Robert E. Matthiessen
--------------------- -------------------------------------
Robert E. Matthiessen
President and Chief Executive Officer
Date: November 16, 1998 /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
27 Financial Data Schedule
5
0001036262
INTEST CORPORATION
1,000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
8,551
0
3,293
197
2,631
15,456
2,549
1,745
23,415
1,939
0
0
0
65
21,411
23,415
15,238
15,238
6,453
5,521
0
0
3
3,640
1,351
2,289
0
0
0
2,289
.38
.38
