<PAGE>
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 June 30, 1999
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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
- -----------------------------------------------------------------------------
(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 June 30,
1999:
6,536,034
<PAGE>
inTEST CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998 1
Consolidated Statements of Earnings (unaudited) for the
three months and six months ended June 30, 1999 and 1998 2
Consolidated Statements of Comprehensive Earnings
(unaudited) for the three months and six months
ended June 30, 1999 and 1998 3
Consolidated Statement of Stockholders' Equity (unaudited)
for the six months ended June 30, 1999 4
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 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
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 24-25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, Dec. 31,
1999 1998
--------- --------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,728 $ 8,468
Trade accounts and notes receivable, net of allowance for
doubtful accounts of $168 and $168, respectively 5,340 3,275
Inventories 2,663 2,521
Deferred tax asset 245 245
Refundable domestic and foreign income taxes - 658
Other current assets 226 137
------- -------
Total current assets 17,202 15,304
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Machinery and equipment:
Machinery and equipment 1,865 1,690
Leasehold improvements 274 223
------- -------
2,139 1,913
Less: accumulated depreciation (1,209) (1,078)
------- -------
Net machinery and equipment 930 835
------- -------
Other assets 169 195
Goodwill 6,645 6,884
------- -------
Total assets $24,946 $23,218
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,283 $ 969
Accrued expenses 1,267 1,023
Domestic and foreign income taxes payable 591 -
------- -------
Total current liabilities 3,141 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 5,235 4,570
Accumulated other comprehensive expense (142) (56)
------- -------
Total stockholders' equity 21,805 21,226
------- -------
Total liabilities and stockholders' equity $24,946 $23,218
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 1 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C>
Net revenues $ 6,485 $ 5,163 $11,296 $10,789
Cost of revenues 2,979 2,134 5,258 4,334
------- ------- ------- -------
Gross margin 3,506 3,029 6,038 6,455
------- ------- ------- -------
Operating expenses:
Selling expense 1,036 678 1,821 1,419
Research and development expense 712 434 1,365 855
General and administrative expense 1,018 582 1,881 1,176
------- ------- ------- -------
Total operating expenses 2,766 1,694 5,067 3,450
------- ------- ------- -------
Operating income 740 1,335 971 3,005
------- ------- ------- -------
Other income (expense):
Interest income 81 138 151 266
Interest expense - (1) - (2)
Other 29 (14) 25 11
------- ------- ------- -------
Total other income 110 123 176 275
------- ------- ------- -------
Earnings before income taxes 850 1,458 1,147 3,280
Income tax expense 357 550 482 1,218
------- ------- ------- -------
Net earnings $ 493 $ 908 $ 665 $ 2,062
======= ======= ======= =======
Net earnings per common share-basic $0.07 $0.15 $0.10 $0.35
Weighted average common shares
outstanding-basic 6,536,034 5,911,034 6,536,034 5,911,034
Net earnings per common share-diluted $0.07 $0.15 $0.10 $0.35
Weighted average common and common
share equivalents outstanding-diluted 6,591,785 5,918,809 6,597,022 5,921,862
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
------- ------- ------ ------
<S> <C> <C> <C> <C>
Net earnings $ 493 $ 908 $ 665 $2,062
Foreign currency translation adjustments (11) (19) (86) (61)
------ ------ ------ ------
Comprehensive earnings $ 482 $ 889 $ 579 $2,001
====== ====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 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 - - - 665 - 665
Other comprehensive expense - - - - (86) (86)
--------- ---- ------- ------- ----- -------
Balance, June 30, 1999 6,536,034 $ 65 $16,647 $ 5,235 $(142) $21,805
========= ==== ======= ======= ===== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 665 $ 2,062
Adjustments to reconcile net earnings to net cash:
Depreciation and amortization 391 133
Foreign exchange (gain)loss 4 (3)
Changes in assets and liabilities:
Trade accounts and notes receivable, net (2,087) 699
Inventories (149) (6)
Refundable domestic and foreign income taxes 663 -
Other current assets (90) (192)
Accounts payable 321 (63)
Domestic and foreign income taxes payable 591 (1,016)
Accrued expenses 257 (310)
------- -------
Net cash provided by operating activities 566 1,304
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of machinery and equipment (251) (85)
Other long-term assets 15 (11)
------- -------
Net cash used in investing activities (236) (96)
------- -------
Effects of exchange rates on cash (70) (28)
------- -------
Net cash provided by all activities 260 1,180
Cash and cash equivalents at beginning of period 8,468 12,035
------- -------
Cash at end of period $ 8,728 $13,215
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 5 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 1999 and for the three months and
six months ended June 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. 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.
(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 -
<PAGE>
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 six months ended June 30, 1998 includes
certain adjustments to reflect results as if the acquisition of
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 -
<PAGE>
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 six months ended June 30, 1998 as if the
Acquisition had occurred on January 1, 1998:
- 8 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
------------------ ----------------
<S> <C> <C>
Pro forma net revenues $ 7,109 $14,681
Pro forma net earnings 897 2,028
Pro forma net earnings per
common share-diluted $ 0.14 $ 0.31
</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 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(4) SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues from unaffiliated customers:
North America $4,678 $3,132 $ 8,263 $ 7,171
Asia-Pacific 1,425 1,580 2,383 2,830
Europe 382 451 650 788
------ ------ ------- -------
$6,485 $5,163 $11,296 $10,789
====== ====== ======= =======
Affiliate sales or transfers from:
North America $ 342 $ 195 $ 632 $ 563
Asia-Pacific - - - -
Europe 342 191 434 267
------ ------ ------- -------
$ 684 $ 386 $ 1,066 $ 830
====== ====== ======= =======
Operating income:
North America $ 446 $ 849 $ 621 $ 2,355
Asia-Pacific 127 285 204 374
Europe 167 201 146 276
------ ------ ------- -------
$ 740 $1,335 $ 971 $ 3,005
====== ====== ======= =======
Earnings before income taxes:
North America $ 519 $ 969 $ 746 $ 2,593
Asia-Pacific 160 279 245 396
Europe 171 210 156 291
------ ------ ------- -------
$ 850 $1,458 $ 1,147 $ 3,280
====== ====== ======= =======
Net earnings:
North America $ 270 $ 590 $ 430 $ 1,690
Asia-Pacific 76 150 83 130
Europe 147 168 152 242
------ ------ ------- -------
$ 493 $ 908 $ 665 $ 2,062
====== ====== ======= =======
</TABLE>
-10-
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(5) LEGAL PROCEEDINGS
As reported in the Company's 10-K for the year ended December 31, 1998,
the Company and its subsidiary inTEST IP Corp. (which holds title to all
Company intellectual property) filed suit in the Federal District Court
in Washington, D.C. against Reid-Ashman Manufacturing, Inc. and its
President and CEO, Mr. Steven J. Reid (the "Defendants") for
Infringement of a United States patent held by the Company (the "815
Patent") on November 18, 1998.
On April 16, 1999, the Company and the Defendants agreed to dismiss the
complaint in the Federal District Court in Washington, D.C. and re-file
the suit in Federal District Court in Delaware. In addition, the parties
agreed to remove Mr. Steven J. Reid, President and CEO of Reid-Ashman
Manufacturing, Inc., as a defendant in the action. The parties also
stipulated that the statutory period of recovery for damages for any
infringement, which is limited to six years from the filing of the suit,
shall be tolled as of November 18, 1998, the date the original suit was
filed in the Federal District in Washington, D.C.
- 11 -
<PAGE>
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 last three 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.
During the first six months of 1999, the Company has seen a significant
increase in the level of orders for its products ("bookings") as compared to
the last six months of 1998. Orders booked during the six months ended June
30, 1999 were $17.9 million compared to $8.2 million during the last six
months of 1998, an increase of $9.7 million or 118%. As a result of the
increase in booking activity, the Company's backlog increased from $3.4
million at December 31, 1998 to $9.2 million at June 30, 1999 and its net
revenues increased from $8.3 million for the last six months of 1998 to $11.3
million for the first six months of 1999. The increase in the Company's
bookings 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
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<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
spending during 1998. While bookings and backlog are calculated on the basic
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 June 30, 1999 Compared to Three Months Ended June 30,1998:
Net Revenues. Net revenues were $6.5 million for the quarter ended June
30, 1999 compared to $5.2 million for the same period in 1998, an increase of
$1.3 million or 26%. While net revenues increased over the comparable prior
quarter, net revenues exclusive of the net revenues of inTEST Sunnyvale
(formerly, TestDesign Corporation), which was acquired on August 3, 1998 (the
"Acquisition"), declined by approximately $170,000 from the prior year. The
decrease in net revenues (exclusive of those of inTEST Sunnyvale) over the
comparable prior period reflects the aforementioned cyclical trends of the ATE
industry and, particularly, the higher demand for ATE and related products in
the three months ended June 30, 1998 as demand for ATE was decreasing, as
compared with the lower, albeit increasing, demand for ATE and related
products in the three months ended June 30, 1999.
Gross Margin. Gross margin declined to 54% for the quarter ended
June 30, 1999 compared to 59% 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 $1.0 million for the quarter ended
June 30, 1999 compared to $678,000 for the same period in 1998, an
increase of $358,000 or 53%. The increase was attributable to several factors
including the additional salary expense of inTEST Sunnyvale sales 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
$712,000 for the quarter ended June 30, 1999 compared to $434,000 for the
same period in 1998, an increase of $278,000 or 64%. 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.
- 13 -
<PAGE>
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 $1.0 million for the quarter ended June 30, 1999 compared to $582,000 for
the same period in 1998, an increase of $436,000 or 75%. The increase was
primarily attributable to the additional salary and other administrative
costs of inTEST Sunnyvale, legal costs related to the Company's patent
infringement suit and the amortization of goodwill resulting from the
Acquisition. In addition, there were increases in administrative salary
expense due to both staffing increases and salary increases for existing
staff, as well as increases in directors' fees.
Income Tax Expense. Income tax expense decreased to $357,000 for the
quarter ended June 30, 1999 from $550,000 for the comparable period in
1998, a decrease of $193,000. The Company's effective tax rate was 42% for
the second quarter of 1999 compared to 38% 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.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net Revenues. Net revenues were $11.3 million for the six months ended
June 30, 1999 compared to $10.8 million for the same period in 1998, an
increase of $507,000 or 5%. While net revenues increased over the comparable
prior period, when net revenues from inTEST Sunnyvale are eliminated, net
revenues actually declined by $1.8 million from the comparable prior period
due to the aforementioned cyclical trends of the ATE industry.
Gross Margin. Gross margin declined to 53% for the six months ended June
30, 1999 compared to 60% 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 $1.8 million for the six months
ended June 30, 1999 compared to $1.4 million for the same period in 1998, an
increase of $402,000 or 28%. The increase was attributable to several factors
including the additional salary expense of inTEST Sunnyvale sales 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
$1.4 million for the six months ended June 30, 1999 compared to $855,000 for
the same period in 1998, an increase of $510,000 or 60%. 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 which was offset in part by reductions in spending on research
and development materials in 1999 as compared to 1998.
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<PAGE>
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 $1.9 million for the six months ended June 30, 1999 compared to $1.2
million for the same period in 1998, an increase of $705,000 or 60%. The
increase was primarily attributable to additional salary and other
administrative costs of inTEST Sunnyvale, legal costs related to the Company's
patent infringement suit 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, as
well as higher levels of spending on data processing and increases in
director's fees.
Income Tax Expense. Income tax expense decreased to $482,000 for the six
months ended June 30, 1999 from $1.2 million for the comparable period in
1998, a decrease of $736,000. The Company's effective tax rate was 42% for
the first half 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 six months ended June 30,
1999 was $566,000. Accounts receivable increased $2.1 million from December
31, 1998 to June 30, 1999 due to the increase in sales activity during the
first six months of 1999. Inventories increased $149,000 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 $90,000, primarily as
a result of increases in prepaid expenses. Accounts payable increased
$321,000 due to the higher production levels during the first six months of
1999. Accrued expenses increased $257,000 primarily as a result the increased
sales activity and staffing additions and their related expense accruals.
Domestic and foreign income taxes payable increased $591,000 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 six months of 1999.
Purchases of machinery and equipment were $251,000 for the six months ended
June 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 third quarter
- 15-
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
of 1999 to complete the renovations and to purchase a coordinate measuring
machine for this facility. In addition, the Company intends to increase its
domestic fabrication capacity during the third quarter of 1999 through the
addition of a 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. The Company plans to commence 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 has
substantially completed the system modifications at inTEST Sunnyvale and
anticipates that all of its systems will be Year 2000 compliant by September
1, 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.
- 16 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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
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 intends to replace any critical
raw materials and fabrication suppliers which cannot demonstrate Year 2000
compliance before the end of the third 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.
- 17 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
International Operations
- ------------------------
Revenues generated by the Company's foreign subsidiaries were 27% and
34% of consolidated revenues for the six months ended June 30, 1999 and
1998, 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.
Revenues denominated in foreign currencies were 15% and 24% of
consolidated revenues for the six months ended June 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 21% and 26% for the six months
ended June 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
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.
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
- 18 -
<PAGE>
inTEST CORPORATION AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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, tester interfaces and related ATE interface products.
- 19 -
<PAGE>
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
change 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 June 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 -
<PAGE>
inTEST CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the Company's 10-K for the year ended December
31, 1998, the Company and its subsidiary inTEST IP Corp. (which
holds title to all Company intellectual property) filed suit in the
Federal District Court in Washington, D.C. against Reid-Ashman
Manufacturing, Inc. and its President and CEO, Mr. Steven J. Reid
(the "Defendants") for infringement of a United States patent held
by the Company (the "815 Patent") on November 18, 1998.
As reported in the Company's 10-Q for the quarter ended
March 31, 1999, on April 16, 1999, the Company and the Defendants
agreed to dismiss the complaint in the Federal District Court in
Washington, D.C. and re-file the suit in Federal District Court in
Delaware. In addition, the parties agreed to remove Mr. Steven J.
Reid, President and CEO of Reid-Ashman Manufacturing, Inc., as a
defendant in the action. The parties also stipulated that the
statutory period of recovery for damages for any infringement, which
is limited to six years from the filing of the suit, shall be tolled
as of November 18, 1998, the date the original suit was filed in the
Federal District in Washington, D.C.
- 21 -
<PAGE>
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 -
<PAGE>
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 547,857
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 4,693,397
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 -
<PAGE>
inTEST CORPORATION
PART II. OTHER INFORMATION (Continued)
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of Stockholders of the Company was held on
May 20, 1999 (the "Meeting"). Notice of the Meeting was mailed
to stockholders or record on or about April 20, 1999, together
with proxy solicitation materials prepared in accordance with
Section 14(a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder.
The matters submitted to a vote of stockholders at the meeting
were the following:
1. The election of the members of the Board of Directors to
serve until the next annual meeting of stockholders and
until their successors are duly elected and qualified;
2. The ratification of the appointment by the Board of Directors
of KPMG LLP as the independent public accountants for the
Company for the year ending December 31, 1999.
There was no solicitation in opposition to the nominees of the
Board of Directors for election to the Board of Directors and all
such nominees were elected. The number of votes cast for or
withheld as well as the number of abstentions and broker non-
votes for each nominees for election to the Board of Directors
were as follows:
<TABLE>
<CAPTION>
Abstentions and
Nominee For Withheld Broker Non-Votes
--------------------- --------- -------- ----------------
<S> <C> <C> <C>
Alyn R. Holt 5,274,810 651,950 0
Robert E. Matthiessen 5,274,810 651,950 0
Douglas W. Smith 5,274,810 651,950 0
Daniel J. Graham 5,274,810 651,950 0
Richard O. Endres 5,274,810 651,950 0
Stuart F. Daniels 5,274,810 651,950 0
Gregory W. Slayton 5,251,031 675,729 0
</TABLE>
The proposal to ratify the appointment of KPMG LLP as the
Company's Independent public accountants for the year ending
December 31, 1999 was ratified. The number of votes cast for or
against as well as the number of abstentions and broker non-votes
for the ratification were as follows:
- 24 -
<PAGE>
inTEST CORPORATION
PART II. OTHER INFORMATION (Continued)
Item 4. Submission of Matters to a Vote of Securities Holders (Continued)
<TABLE>
<CAPTION>
For Against Abstentions Broker Non-Votes
----------- ------- ----------- ----------------
<C> <C> <C> <C>
5,926,110 450 200 0
</TABLE>
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.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
- 25 -
<PAGE>
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: August 13, 1999 /s/ Robert E. Matthiessen
----------------- ------------------------------------
Robert E. Matthiessen
President and Chief Executive Officer
Date: August 13, 1999 /s/ Hugh T. Regan, Jr.
----------------- ------------------------------------
Hugh T. Regan, Jr.
Treasurer and Chief Financial Officer
<PAGE>
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.
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001036262
<NAME> INTEST CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,728
<SECURITIES> 0
<RECEIVABLES> 5,340
<ALLOWANCES> 168
<INVENTORY> 2,663
<CURRENT-ASSETS> 17,202
<PP&E> 2,139
<DEPRECIATION> 1,209
<TOTAL-ASSETS> 24,946
<CURRENT-LIABILITIES> 3,141
<BONDS> 0
0
0
<COMMON> 65
<OTHER-SE> 21,740
<TOTAL-LIABILITY-AND-EQUITY> 24,946
<SALES> 11,296
<TOTAL-REVENUES> 11,296
<CGS> 5,258
<TOTAL-COSTS> 5,067
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,147
<INCOME-TAX> 482
<INCOME-CONTINUING> 665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 665
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
