UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549_____________
FORM 10-Q
FORM 10-Q_____________
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172021 or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission File Number 1-36117
inTEST Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware | 22-2370659 |
804 East Gate Drive, Suite 200
Mt. Laurel, New Jersey 08054
(Address of principal executive offices, including zip code)
(856) 505-8800
(Registrant's Telephone Number, including Area Code)_________________
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of Each Class | Trading Symbol INTT | Name of Each Exchange on Which Registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.YES
Yes ☒ NONo ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (SS (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).YES
Yes ☒ NO No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or aan emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YES
Yes ☐ NO No ☒
Number of shares of Common Stock, $.01$0.01 par value, outstanding as of the close of business on OctoberJuly 31, 2017:
10,413,0582021: 10,782,782
inTEST CORPORATION
INDEX
Page | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | Financial Statements | |
Consolidated Balance Sheets as of | 1 | |
Unaudited Consolidated Statements of Operations for the three months and | 2 | |
Unaudited Consolidated Statements of Comprehensive Earnings (Loss) for the three months and | 3 | |
Unaudited Consolidated | 4 | |
Unaudited Consolidated Statements of Cash Flows for the | 5 | |
Notes to Consolidated Financial Statements |
| |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. | Controls and Procedures |
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PART II. | OTHER INFORMATION | 30 |
Item 1. | Legal Proceedings |
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Item 1A. | Risk Factors |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. | Defaults Upon Senior Securities |
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Item 4. | Mine Safety Disclosures |
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Item 5. | Other Information |
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Item 6. | Exhibits |
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|
|
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
inTEST CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, | December 31, | |||||||||||||||
September 30, | December 31, | 2021 | 2020 | |||||||||||||
2017 | 2016 | (Unaudited) | ||||||||||||||
ASSETS | (Unaudited) | |||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 11,499 | $ | 28,611 | $ | 14,625 | $ | 10,277 | ||||||||
Trade accounts receivable, net of allowance for doubtful accounts of $146 and $146, respectively | 10,225 | 5,377 | ||||||||||||||
Trade accounts receivable, net of allowance for doubtful accounts of $212 | 12,832 | 8,435 | ||||||||||||||
Inventories | 6,033 | 3,676 | 8,702 | 7,476 | ||||||||||||
Prepaid expenses and other current assets | 714 | 342 | 528 | 776 | ||||||||||||
Total current assets | 28,471 | 38,006 | 36,687 | 26,964 | ||||||||||||
Property and equipment: | ||||||||||||||||
Machinery and equipment | 4,993 | 4,383 | 5,409 | 5,356 | ||||||||||||
Leasehold improvements | 730 | 603 | 2,909 | 2,636 | ||||||||||||
Gross property and equipment | 5,723 | 4,986 | 8,318 | 7,992 | ||||||||||||
Less: accumulated depreciation | (4,179 | ) | (4,042 | ) | (5,856 | ) | (5,642 | ) | ||||||||
Net property and equipment | 1,544 | 944 | 2,462 | 2,350 | ||||||||||||
Deferred tax assets | - | 1,110 | ||||||||||||||
Right-of-use assets, net | 5,852 | 6,387 | ||||||||||||||
Goodwill | 13,738 | 1,706 | 13,738 | 13,738 | ||||||||||||
Intangible assets, net | 16,259 | 875 | 11,812 | 12,421 | ||||||||||||
Restricted certificates of deposit | 175 | 175 | 100 | 140 | ||||||||||||
Other assets | 27 | 28 | 36 | 30 | ||||||||||||
Total assets | $ | 60,214 | $ | 42,844 | $ | 70,687 | $ | 62,030 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 2,363 | $ | 1,368 | $ | 3,524 | $ | 2,424 | ||||||||
Accrued wages and benefits | 2,218 | 1,588 | 2,605 | 1,944 | ||||||||||||
Accrued rent | 530 | 572 | ||||||||||||||
Accrued professional fees | 682 | 419 | 704 | 776 | ||||||||||||
Customer deposits and deferred revenue | 892 | 396 | ||||||||||||||
Accrued sales commissions | 476 | 287 | 871 | 472 | ||||||||||||
Customer deposits and deferred revenue | 1,111 | 74 | ||||||||||||||
Current portion of operating lease liabilities | 1,147 | 1,215 | ||||||||||||||
Domestic and foreign income taxes payable | 1,087 | 575 | 1,107 | 825 | ||||||||||||
Current portion of contingent consideration liability | - | - | ||||||||||||||
Other current liabilities | 400 | 173 | 867 | 804 | ||||||||||||
Total current liabilities | 8,867 | 5,056 | 11,717 | 8,856 | ||||||||||||
Operating lease liabilities, net of current portion | 5,471 | 6,050 | ||||||||||||||
Deferred tax liabilities | 4,010 | - | 1,841 | 1,922 | ||||||||||||
Contingent consideration liability, net of current portion | 3,574 | - | ||||||||||||||
Other liabilities | 437 | 450 | ||||||||||||||
Total liabilities | 16,451 | 5,056 | 19,466 | 17,278 | ||||||||||||
Commitments and Contingencies | ||||||||||||||||
Stockholders' equity: | ||||||||||||||||
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued or outstanding | - | - | 0 | 0 | ||||||||||||
Common stock, $0.01 par value; 20,000,000 shares authorized; 10,444,135 and 10,394,018 shares issued, respectively | 104 | 104 | ||||||||||||||
Addtional paid-in capital | 25,808 | 25,578 | ||||||||||||||
Common stock, $0.01 par value; 20,000,000 shares authorized; 10,815,859 and 10,562,200 shares issued, respectively | 108 | 106 | ||||||||||||||
Additional paid-in capital | 28,574 | 26,851 | ||||||||||||||
Retained earnings | 17,212 | 11,671 | 21,931 | 17,110 | ||||||||||||
Accumulated other comprehensive earnings | 843 | 639 | 812 | 889 | ||||||||||||
Treasury stock, at cost; 33,077 and 33,077 shares, respectively | (204 | ) | (204 | ) | ||||||||||||
Treasury stock, at cost; 33,077 shares | (204 | ) | (204 | ) | ||||||||||||
Total stockholders' equity | 43,763 | 37,788 | 51,221 | 44,752 | ||||||||||||
Total liabilities and stockholders' equity | $ | 60,214 | $ | 42,844 | $ | 70,687 | $ | 62,030 |
See accompanying Notes to Consolidated Financial Statements.
inTEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Net revenues | $ | 17,352 | $ | 10,823 | $ | 47,420 | $ | 29,955 | $ | 21,820 | $ | 13,275 | $ | 41,376 | $ | 24,505 | ||||||||||||||||
Cost of revenues | 8,556 | 5,246 | 22,475 | 14,982 | 10,858 | 7,208 | 20,893 | 13,571 | ||||||||||||||||||||||||
Gross margin | 8,796 | 5,577 | 24,945 | 14,973 | 10,962 | 6,067 | 20,483 | 10,934 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Selling expense | 2,322 | 1,394 | 5,861 | 4,200 | 2,605 | 1,761 | 5,008 | 3,813 | ||||||||||||||||||||||||
Engineering and product development expense | 1,139 | 905 | 3,056 | 2,878 | 1,356 | 1,217 | 2,678 | 2,509 | ||||||||||||||||||||||||
General and administrative expense | 3,143 | 1,574 | 8,423 | 5,364 | 3,769 | 2,850 | 6,930 | 5,726 | ||||||||||||||||||||||||
Adjustment to contingent consideration liability | (549 | ) | 0 | (549 | ) | 0 | ||||||||||||||||||||||||||
Restructuring and other charges | 197 | 38 | 252 | 46 | ||||||||||||||||||||||||||||
Total operating expenses | 6,055 | 3,873 | 16,791 | 12,442 | 7,927 | 5,866 | 14,868 | 12,094 | ||||||||||||||||||||||||
Operating income | 2,741 | 1,704 | 8,154 | 2,531 | ||||||||||||||||||||||||||||
Other income | 100 | 17 | 195 | 63 | ||||||||||||||||||||||||||||
Earnings before income tax expense | 2,841 | 1,721 | 8,349 | 2,594 | ||||||||||||||||||||||||||||
Income tax expense | 823 | 631 | 2,808 | 937 | ||||||||||||||||||||||||||||
Net earnings | $ | 2,018 | $ | 1,090 | $ | 5,541 | $ | 1,657 | ||||||||||||||||||||||||
Net earnings per common share - basic | $ | 0.20 | $ | 0.11 | $ | 0.54 | $ | 0.16 | ||||||||||||||||||||||||
Operating income (loss) | 3,035 | 201 | 5,615 | (1,160 | ) | |||||||||||||||||||||||||||
Other income (loss) | 21 | (18 | ) | 19 | (50 | ) | ||||||||||||||||||||||||||
Earnings (loss) before income tax expense (benefit) | 3,056 | 183 | 5,634 | (1,210 | ) | |||||||||||||||||||||||||||
Income tax expense (benefit) | 447 | 13 | 813 | (237 | ) | |||||||||||||||||||||||||||
Net earnings (loss) | $ | 2,609 | $ | 170 | $ | 4,821 | $ | (973 | ) | |||||||||||||||||||||||
Net earnings (loss) per common share - basic | $ | 0.25 | $ | 0.02 | $ | 0.46 | $ | (0.10 | ) | |||||||||||||||||||||||
Weighted average common shares outstanding - basic | 10,288,325 | 10,295,447 | 10,276,682 | 10,327,095 | 10,442,916 | 10,252,490 | 10,386,183 | 10,236,672 | ||||||||||||||||||||||||
Net earnings per common share - diluted | $ | 0.19 | $ | 0.11 | $ | 0.54 | $ | 0.16 | ||||||||||||||||||||||||
Net earnings (loss) per common share - diluted | $ | 0.24 | $ | 0.02 | $ | 0.45 | $ | (0.10 | ) | |||||||||||||||||||||||
Weighted average common shares and common share equivalents outstanding - diluted | 10,351,009 | 10,318,715 | 10,327,080 | 10,344,747 | 10,764,936 | 10,258,917 | 10,645,381 | 10,236,672 |
See accompanying Notes to Consolidated Financial Statements.
inTEST CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(In thousands)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net earnings | $ | 2,018 | $ | 1,090 | $ | 5,541 | $ | 1,657 | ||||||||
Foreign currency translation adjustments | 21 | (6 | ) | 204 | 35 | |||||||||||
Comprehensive earnings | $ | 2,039 | $ | 1,084 | $ | 5,745 | $ | 1,692 |
Three Months Ended | Six Months Ended | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Net earnings (loss) | $ | 2,609 | $ | 170 | $ | 4,821 | $ | (973 | ) | |||||||
Foreign currency translation adjustments | 24 | 35 | (77 | ) | (3 | ) | ||||||||||
Comprehensive earnings (loss) | $ | 2,633 | $ | 205 | $ | 4,744 | $ | (976 | ) |
See accompanying Notes to Consolidated Financial Statements.
inTEST CORPORATION
CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
�� | Accumulated | |||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Common Stock | paid-in | Retained | Comprehensive | Treasury | Stockholders' | |||||||||||||||||||||||
Shares | Amount | capital | Earnings | Earnings | Stock | Equity | ||||||||||||||||||||||
Balance, January 1, 2017 | 10,394,018 | $ | 104 | $ | 25,578 | $ | 11,671 | $ | 639 | $ | (204 | ) | $ | 37,788 | ||||||||||||||
Net earnings | - | - | - | 5,541 | - | - | 5,541 | |||||||||||||||||||||
Other comprehensive income | - | - | - | - | 204 | - | 204 | |||||||||||||||||||||
Amortization of deferred compensation related to stock-based awards | - | - | 292 | - | - | - | 292 | |||||||||||||||||||||
Issuance of unvested shares of restricted stock | 64,000 | - | - | - | - | - | - | |||||||||||||||||||||
Repurchase and retirement of common stock | (13,883 | ) | - | (62 | ) | (62 | ) | |||||||||||||||||||||
Balance, September 30, 2017 | 10,444,135 | $ | 104 | $ | 25,808 | $ | 17,212 | $ | 843 | $ | (204 | ) | $ | 43,763 |
Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | Treasury | Stockholders' | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Earnings | Stock | Equity | ||||||||||||||||||||||
Balance, January 1, 2021 | 10,562,200 | $ | 106 | $ | 26,851 | $ | 17,110 | $ | 889 | $ | (204 | ) | $ | 44,752 | ||||||||||||||
Net earnings | - | 0 | 0 | 2,212 | 0 | 0 | 2,212 | |||||||||||||||||||||
Other comprehensive loss | - | 0 | 0 | 0 | (101 | ) | 0 | (101 | ) | |||||||||||||||||||
Amortization of deferred compensation related to stock-based awards | - | 0 | 269 | 0 | 0 | 0 | 269 | |||||||||||||||||||||
Issuance of unvested shares of restricted stock | 81,468 | 1 | (1 | ) | 0 | 0 | 0 | 0 | ||||||||||||||||||||
Stock options exercised | 99,740 | 1 | 716 | 0 | 0 | 0 | 717 | |||||||||||||||||||||
Balance, March 31, 2021 | 10,743,408 | 108 | 27,835 | 19,322 | 788 | (204 | ) | 47,849 | ||||||||||||||||||||
Net earnings | - | 0 | 0 | 2,609 | 0 | 0 | 2,609 | |||||||||||||||||||||
Other comprehensive earnings | - | 0 | 0 | 0 | 24 | 0 | 24 | |||||||||||||||||||||
Amortization of deferred compensation related to stock-based awards | - | 0 | 454 | 0 | 0 | 0 | 454 | |||||||||||||||||||||
Issuance of unvested shares of restricted stock | 44,741 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Forfeiture of unvested shares of restricted stock | (18,125 | ) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
Stock options exercised | 45,835 | 0 | 285 | 0 | 0 | 0 | 285 | |||||||||||||||||||||
Balance, June 30, 2021 | 10,815,859 | $ | 108 | $ | 28,574 | $ | 21,931 | $ | 812 | $ | (204 | ) | $ | 51,221 |
Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | Treasury | Stockholders' | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Earnings | Stock | Equity | ||||||||||||||||||||||
Balance, January 1, 2020 | 10,413,982 | $ | 104 | $ | 26,256 | $ | 18,005 | $ | 673 | $ | (204 | ) | $ | 44,834 | ||||||||||||||
Net loss | - | 0 | 0 | (1,143 | ) | 0 | 0 | (1,143 | ) | |||||||||||||||||||
Other comprehensive loss | - | 0 | 0 | 0 | (38 | ) | 0 | (38 | ) | |||||||||||||||||||
Amortization of deferred compensation related to stock-based awards | - | 0 | 187 | 0 | 0 | 0 | 187 | |||||||||||||||||||||
Issuance of unvested shares of restricted stock | 58,160 | 1 | (1 | ) | 0 | 0 | 0 | 0 | ||||||||||||||||||||
Forfeiture of unvested shares of restricted stock | (8,315 | ) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
Repurchase and retirement of common stock | (13,767 | ) | 0 | (74 | ) | 0 | 0 | 0 | (74 | ) | ||||||||||||||||||
Balance, March 31, 2020 | 10,450,060 | 105 | 26,368 | 16,862 | 635 | (204 | ) | 43,766 | ||||||||||||||||||||
Net earnings | - | 0 | 0 | 170 | 0 | 0 | 170 | |||||||||||||||||||||
Other comprehensive earnings | - | 0 | 0 | 0 | 35 | 0 | 35 | |||||||||||||||||||||
Amortization of deferred compensation related to stock-based awards | - | 0 | 208 | 0 | 0 | 0 | 208 | |||||||||||||||||||||
Issuance of unvested shares of restricted stock | 15,840 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Forfeiture of unvested shares of restricted stock | (6,750 | ) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
Balance, June 30, 2020 | 10,459,150 | $ | 105 | $ | 26,576 | $ | 17,032 | $ | 670 | $ | (204 | ) | $ | 44,179 |
See accompanying Notes to Consolidated Financial Statements.
inTEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, | Six Months Ended | |||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Net earnings | $ | 5,541 | $ | 1,657 | ||||||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||||||
Net earnings (loss) | $ | 4,821 | $ | (973 | ) | |||||||||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 1,317 | 451 | 1,461 | 1,584 | ||||||||||||
Adjustment to contingent consideration liability | (549 | ) | - | |||||||||||||
Provision for excess and obsolete inventory | 161 | 184 | 93 | 305 | ||||||||||||
Foreign exchange gain | (130 | ) | (7 | ) | ||||||||||||
Foreign exchange loss | 4 | 37 | ||||||||||||||
Amortization of deferred compensation related to stock-based awards | 292 | 222 | 723 | 395 | ||||||||||||
(Gain) loss on sale of property and equipment | (4 | ) | 3 | |||||||||||||
Loss on disposal of property and equipment | 27 | 0 | ||||||||||||||
Proceeds from sale of demonstration equipment, net of gain | 53 | 128 | (14 | ) | 0 | |||||||||||
Deferred income tax expense (benefit) | (225 | ) | 141 | |||||||||||||
Deferred income tax benefit | (81 | ) | (209 | ) | ||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Trade accounts receivable | (1,060 | ) | (2,252 | ) | (4,419 | ) | (205 | ) | ||||||||
Inventories | (581 | ) | (57 | ) | (1,326 | ) | (1,054 | ) | ||||||||
Prepaid expenses and other current assets | (164 | ) | 183 | 246 | 359 | |||||||||||
Restricted certificates of deposit | - | 125 | 40 | 0 | ||||||||||||
Other assets | 1 | - | (6 | ) | (4 | ) | ||||||||||
Accounts payable | (426 | ) | 343 | 1,105 | 635 | |||||||||||
Accrued wages and benefits | (18 | ) | 47 | 663 | (133 | ) | ||||||||||
Accrued rent | (42 | ) | (100 | ) | ||||||||||||
Accrued professional fees | 177 | 64 | ||||||||||||||
Customer deposits and deferred revenue | 499 | 217 | ||||||||||||||
Accrued sales commissions | 83 | 74 | 399 | 41 | ||||||||||||
Customer deposits and deferred revenue | 302 | (74 | ) | |||||||||||||
Operating lease liabilities | (641 | ) | (652 | ) | ||||||||||||
Domestic and foreign income taxes payable | 472 | 523 | 284 | (100 | ) | |||||||||||
Other current liabilities | (12 | ) | 86 | (9 | ) | (157 | ) | |||||||||
Other liabilities | (7 | ) | (5 | ) | ||||||||||||
Net cash provided by operating activities | 5,188 | 1,741 | 3,862 | 81 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||||
Acquisition of business, net of cash acqured | (21,962 | ) | - | |||||||||||||
Purchase of property and equipment | (435 | ) | (282 | ) | (463 | ) | (190 | ) | ||||||||
Proceeds from sale of property and equipment | 35 | - | ||||||||||||||
Net cash used in investing activities | (22,362 | ) | (282 | ) | (463 | ) | (190 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||||
Proceeds from stock options exercised | 1,002 | 0 | ||||||||||||||
Repurchases of common stock | (62 | ) | (841 | ) | 0 | (74 | ) | |||||||||
Net cash used in financing activities | (62 | ) | (841 | ) | ||||||||||||
Proceeds from Paycheck Protection Program loans | 0 | 2,829 | ||||||||||||||
Repayments of Paycheck Protection Program loans | 0 | (2,829 | ) | |||||||||||||
Proceeds from revolving credit facility | 0 | 2,800 | ||||||||||||||
Repayments of revolving credit facility | 0 | (2,800 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 1,002 | (74 | ) | |||||||||||||
Effects of exchange rates on cash | 124 | 17 | (53 | ) | (5 | ) | ||||||||||
Net cash provided by (used in) all activities | (17,112 | ) | 635 | 4,348 | (188 | ) | ||||||||||
Cash and cash equivalents at beginning of period | 28,611 | 25,710 | 10,277 | 7,612 | ||||||||||||
Cash and cash equivalents at end of period | $ | 11,499 | $ | 26,345 | $ | 14,625 | $ | 7,424 | ||||||||
Cash payments for: | ||||||||||||||||
Domestic and foreign income taxes | $ | 2,555 | $ | 25 | $ | 610 | $ | 73 | ||||||||
Details of acquisition: | ||||||||||||||||
Fair value of assets acquired, net of cash | $ | 22,652 | ||||||||||||||
Liabilities assumed | (8,599 | ) | ||||||||||||||
Goodwill resulting from acquisition | 12,032 | |||||||||||||||
Contingent consideration | (4,123 | ) | ||||||||||||||
Net cash paid for acquisition | $ | 21,962 |
See accompanying Notes to Consolidated Financial Statements.
inTEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share data)
| NATURE OF OPERATIONS |
We are an independent designer, manufacturera global supplier of innovative test and marketer of thermal management productsprocess solutions for use in manufacturing and semiconductor automatic test equipment (“ATE”) interface solutions. Our products are used by semiconductor manufacturers to perform development, qualifying and final testing of integrated circuits (“ICs”) and wafers, and for other electronic test across a wide range of industries including the automotive, defense/aerospace, energy, industrial and telecommunications markets. We also offer induction heating products for joining and forming metals in a variety of industrial markets including automotive, defense/aerospace, machinery, wire & fasteners,industrial, medical, semiconductor food & beverage, and packaging.telecommunications. We manage our business as 2 operating segments which are also our reportable segments and reporting units: Thermal Products ("Thermal") and Electromechanical Solutions ("EMS"). Our Thermal segment designs, manufactures and sells our thermal test and thermal process products while our EMS segment designs, manufactures and sells our semiconductor test products. We manufacture our products in the U.S. Marketing and support activities are conducted worldwide from our facilities in the U.S., Germany, Singapore, the Netherlands and the U.K. The consolidated entity is comprised of inTEST Corporation and our wholly-owned subsidiaries.During 2016, we reorganized
Our EMS segment sells its products to semiconductor manufacturers and third-party test and assembly houses (end user sales) and to automated test equipment (“ATE”) manufacturers (original equipment manufacturer (“OEM”) sales), who ultimately resell our business from three product segments,equipment with theirs to both semiconductor manufacturers and third-party test and assembly houses. These sales all fall within the ATE sector of the broader semiconductor market. Our Thermal Products, Mechanical Products and Electrical Products, into two product segments, Thermal Products ("Thermal") and Electromechanical Semiconductor Products ("EMS"). Certain operational changes undertakensegment sells its products to many of these same types of customers; however, it also sells to customers in the first quarterwafer processing sector within the broader semiconductor market and to customers in a variety of 2016 in connection with this reorganization are discussed further in Note 3other markets outside the semiconductor market, including the automotive, defense/aerospace, industrial (including consumer products packaging, fiber optics and other sectors within the broader industrial market), medical and telecommunications markets.
Both of our operating segments have multiple products that we design, manufacture and market to our customers. Due to a number of factors, our products have varying levels of gross margin. The mix of products we sell in any period is ultimately determined by our customers' needs. Therefore, the mix of products sold in any given period can change significantly from the prior period. As a result, our consolidated financial statements includedgross margin can be significantly impacted in our Annual Report on Form 10-K forany given period by a change in the year ended December 31, 2016 filed with the Securities and Exchange Commission on March 27, 2017 (the "2016 Form 10-K"). Accordingly, effective January 1, 2017, we have two reportable segments, which are also our reporting units. Prior period information has been reclassified to be comparablemix of products sold in that period.
We refer to the presentation for 2017.On May 24, 2017, we completedbroader semiconductor market, including the acquisition of Ambrell Corporation ("Ambrell").more specialized ATE and wafer processing sectors within that market, as the “Semi Market.” All other markets are designated as “Multimarket.” The acquisition was completed by acquiring all ofSemi Market, which is the outstanding capital stock of Ambrell. Ambrell is a manufacturer of precision induction heating systems which are used to conduct fast, efficient, repeatable non-contact heating of metals or other electrically conductive materials, in order to transform raw materials into finished parts. The Ambrell acquisition complements our current thermal technologies and broadens our diverse customer base, allowing expansion within many non-ATE related markets, such as consumer product packaging, fiber-optics, automotive and other markets. Ambrell's operations are included in our Thermal segment. Ambrell manufactures its products in the U.S. and conducts marketing and support activities from its facilities in the U.S., the Netherlands and the U.K. This acquisition is discussed further in Note 3.The ATEprincipal market in which we operate, is characterized by rapid technological change, competitive pricing pressures and cyclical as well as seasonal market patterns. This market is subject to significant economic downturns at various times.
Our financial results are affected by a wide variety of factors, including, but not limited to, general economic conditions worldwide and in the markets in which we operate, economic conditions specific to the ATE marketSemi Market and the other markets we serve, our ability to safeguard patented technology and intellectual property in a rapidly evolving market, downward pricing pressures from customers, and our reliance on a relatively few number of customers for a significant portion of our sales. In addition, we are exposed to the risk of obsolescence of our inventory depending on the mix of future business and technological changes within the markets that we serve. We also continue to implement an acquisitionPart of our strategy for growth includes potential acquisitions that may cause us to incur substantial expense in reviewingthe review and evaluatingevaluation of potential transactions. We may or may not be successful in locating suitable businesses to acquire.acquire or in closing acquisitions of businesses we pursue. In addition, we may not be able to successfully integrate any business we do acquire with our existing business and we may not be able to operate the acquired business profitably. As a result of these or other factors, we may experience significant period-to-period fluctuations in our future operating results.
COVID-19 Pandemic
During the second quarter of 2021, as more Americans became vaccinated and the spread of COVID-19 appeared to be lessening, governmental mandates and restrictions in the regions in the U.S. where we operate our business were reduced or eliminated. As a result, we began the process of reopening our offices in these regions. As of the date of this Report, due to the increasing spread of COVID-19 variants in the U.S., several regulatory authorities have either reinstated certain COVID-19 mandates or restrictions or have indicated they are considering taking such actions. We are following the guidance of the Centers for Disease Control and Prevention (“CDC”). Accordingly, as of the date of this Report, our U.S. offices remain open, but we are requiring all employees to wear masks and maintain appropriate social distancing. As of the date of this Report, our offices in Europe have also reopened to varying degrees, while our employees in Asia remain under more significant restrictions. Our employees outside of the U.S. continue to follow the guidance of their local regulatory authorities, which in most cases includes wearing masks, observing social distancing, limiting travel and quarantining after travel, as required.
While the negative impact of COVID-19 on our business was reduced significantly in the second half of 2020 and the first half of 2021, the spread of the virus or variants of the virus could continue to worsen and one or more of our significant customers or suppliers could be impacted, or significant additional governmental regulations and restrictions could be imposed, thus negatively impacting our business in the future. We continue to monitor the situation closely in the regions in which we operate in the U.S. and abroad and will adjust our operations as necessary to protect the health and well-being of our employees. To the extent that further governmental mandates or restrictions are implemented in the future, we currently expect to be able to continue to operate our business in a manner similar to how we have operated over the past year. As a result of our current level of working capital as well as the availability under our revolving credit facility, which is discussed in Note 9, we currently expect to have sufficient liquidity to operate our business throughout 2021.
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Use of Estimates
The accompanying consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"(“GAAP”) requires us 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. Certain of our accounts, including inventories, long-lived assets, goodwill, identifiable intangibles, contingent consideration liabilities and deferred tax assets and liabilities, including related valuation allowances, and performance-based stock compensation are particularly impacted by estimates.
In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (consisting only of normal 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 consolidated financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in our 2016 Form 10-K.
10-K for the year ended December 31, 2020 (“2020 Form 10-K”) filed on March 23, 2021 with the Securities and Exchange Commission.
inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except share and per share data)
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Reclassification
Certain prior period amounts have been reclassified to be comparable with the current period's presentation.
Subsequent Events
We have made an assessment of our operations and determined that there were no material subsequent events requiring adjustment to, or disclosure in, our consolidated financial statements for the six months ended June 30, 2021 other than those described in Note 15.
Business Combinations
Acquired businesses are accounted for using the purchase method of accounting, which requires that the purchase price be allocated to the net assets acquired at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Fair values of intangible assets are estimated by valuation models prepared by our management and third party-party advisors. The assets purchased and liabilities assumed have been reflected in our consolidated balance sheets, and the results are included in the consolidated statements of operations and consolidated statements of cash flows from the date of acquisition. Any change in the fair value of acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, will be recognized within general and administrative expensein the consolidated statement of operations in the period of the estimated fair value change. Acquisition-related transaction costs, including legal and accounting fees and other external costs directly related to the acquisition, are recognized separately from the acquisition and expensed as incurred in general and administrative expense in the consolidated statements of operations.
Fair Value MeasurementsThe fair values of our financial instruments reflect the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).The carrying amounts of our financial instruments of cashRestructuring and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities.We carry our contingent consideration liability at fair value. Other Charges
In accordance with the three-tierguidance in Accounting Standards Codification (“ASC”) Topic 420 (Exit or Disposal Cost Obligations), we recognize a liability for restructuring costs at fair value hierarchy, weonly when the liability is incurred. Workforce-related charges are accrued when it is determined that a liability has been incurred, which is generally after individuals have been notified of their termination dates and expected severance benefits. Depending on the fair valuetiming of the termination dates, these charges may be recognized upon notification or ratably over the remaining required service period of the employees. Plans to consolidate excess facilities may result in lease termination fees and impairment charges related to our right-of-use (“ROU”) assets that are associated with the leases for these facilities. Other long-lived assets that may be impaired as a result of restructuring consist of property and equipment, goodwill and intangible assets. Asset impairment charges included in restructuring and other charges are based on an estimate of the amounts and timing of future cash flows related to the expected future remaining use and ultimate sale or disposal of the asset, and, in the case of our contingent consideration liability using an option-based income approach with a Monte Carlo simulation model. The income approach uses Level 3, or unobservable inputs, as defined under the accounting guidance for fair value measurements. See Notes 3 and 4 for more information regarding our contingent consideration liability.InventoriesInventories are valued at cost on a first-in, first-out basis, not in excess of market value. Cash flows from the sale of inventories are recorded in operating cash flows. On a quarterly basis, we review our inventories and record excess and obsolete inventory charges based upon our established objective excess and obsolete inventory criteria. These criteria identify material that has not been used in a work order during the prior twelve months and the quantity of material on hand that is greater than the average annual usage of that material over the prior three years. In certain cases, additional excess and obsolete inventory charges are recorded based upon current market conditions, anticipated product life cycles, new product introductions andROU assets, would include expected future use ofsublease rental income, if applicable. These estimates are derived using the inventory. The excessguidance in ASC Topic 842 (Leases), ASC Topic 360 (Property, Plant and obsolete inventory charges we record establish a new cost basis for the related inventories. We incurred excessEquipment) and obsolete inventory charges of $161ASC Topic 350 (Intangibles - Goodwill and $184 for the nine months ended September 30, 2017 and 2016, respectively.Other).
Goodwill, Intangible and Long-Lived Assets
We account for goodwill and intangible assets in accordance with Accounting Standards Codification ("ASC") ASC Topic 350 (Intangibles - Goodwill and Other). Finite-lived intangible assets are amortized over their estimated useful economic life and are carried at cost less accumulated amortization. Goodwill is assessed for impairment annually in the fourth quarter on a reporting unit basis, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. Goodwill is considered to be impaired if the fair value of a reporting unit is less than its carrying amount. As a part of the goodwill impairment assessment, we have the option to perform a qualitative assessment to determine whether it is more-likely-than-notmore-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If, as a result of our qualitative assessment, we determine thisthat it is more-likely-than-not that the case,fair value of the reporting unit is greater than its carrying amount, a quantitative goodwill impairment test is not required. However, if, as a result of our qualitative assessment, we determine it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, or, if we choose not to perform a qualitative assessment, we are required to perform a two-stepquantitative goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized.
The two-step test is discussed below. If we determine that it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying amounts, the two-stepquantitative goodwill impairment test is not required.
inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except share and per share data)
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If we determine it is more-likely-than-not thatcompares the fair value of a reporting unit is less thanwith its carrying amount, as a result of our qualitative assessment, we will perform a quantitative two-step goodwill impairment test. In the Step I test,including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is computed and compared with its book value.considered not impaired. If the book valuecarrying amount of a reporting unit exceeds its fair value, a Step II test is performed in which the implied fair value of goodwill is compared with the carrying amount of goodwill. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recordedwill be recognized in an amount equal to that excess.excess, limited to the total amount of goodwill allocated to that reporting unit. The two-step goodwill impairment assessment is based upon a combination of the income approach, which estimates the fair value of our reporting units based upon a discounted cash flow approach, and the market approach which estimates the fair value of our reporting units based upon comparable market multiples.approach. This fair value is then reconciled to our market capitalization at year end with an appropriate control premium. The determination of the fair value of our reporting units requires management to make significant estimates and assumptions, including the selection of appropriate peer group companies, control premiums, discount rate,rates, terminal growth rates, forecasts of revenue and expense growth rates, income tax rates, changes in working capital, depreciation, amortization and capital expenditures. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting unit or the amount of the goodwill impairment charge.
Indefinite-lived intangible assets are assessed for impairment annually in the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. As a part of the impairment assessment, we have the option to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, as a result of our qualitative assessment, we determine that it is more-likely-than-notmore-likely-than-not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, required; otherwise, no further testing is required. The quantitative impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Long-lived assets, which consist of finite-lived intangible assets, and property and equipment and ROU assets, are assessed for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the estimated undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down to its estimated fair value. The cash flow estimates used to determine the impairment, if any, contain management's best estimates using appropriate assumptions and projections at that time.
Revenue Recognition
We recognize revenue in accordance with the guidance in ASC Topic 606 (Revenue from Contracts with Customers). We recognize revenue for the sale of products or services when our performance obligations under the terms of a contract with a customer are satisfied and control of the product or service has been transferred to the customer. Generally, this occurs when we ship a product or perform a service. In certain cases, recognition of revenue is deferred until the product is received by the customer or at some other point in the future when we have determined that we have satisfied our performance obligations under the contract. Our contracts with customers may include a combination of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. In addition to the sale of products and services, we also lease certain of our equipment to customers under short-term lease agreements. We recognize revenue from equipment leases on a straight-line basis over the lease term.
Revenue is recorded in an amount that reflects the consideration we expect to receive in exchange for those products or services. We do not have any material variable consideration arrangements, or any material payment terms with our customers other than standard payment terms which generally range from net 30 to net 90 days. We generally do not provide a right of return to our customers. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Products and Services
We are a global supplier of innovative test and process solutions for use in manufacturing and testing across a wide range of markets including automotive, defense/aerospace, industrial, medical, semiconductor and telecommunications. We sell thermal management products including ThermoStreams, ThermoChambers and process chillers, which we sell under our Temptronic, Sigma and Thermonics product lines, and Ambrell Corporation’s (“Ambrell”) precision induction heating systems, including EKOHEAT and EASYHEAT products. We sell semiconductor ATE interface solutions which include manipulators, docking hardware and electrical interface products. We provide post-warranty service for the equipment we sell. We sell semiconductor ATE interface solutions and certain thermal management products to the Semi Market. We also sell our thermal management products to various other markets including the automotive, defense/aerospace, industrial, medical and telecommunications markets.
We lease certain of our equipment under short-term leasing agreements with original lease terms of six months or less. Our lease agreements do not contain purchase options.
Types of Contracts with Customers
Our contracts with customers are generally structured as individual purchase orders which specify the exact products or services being sold or equipment being leased along with the selling price, service fee or monthly lease amount for each individual item on the purchase order. Payment terms and any other customer-specific acceptance criteria are also specified on the purchase order. We generally do not have any customer-specific acceptance criteria, other than that the product performs within the agreed upon specifications. We test substantially all products manufactured as part of our quality assurance process to determine that they comply with specifications prior to shipment to a customer.
Contract Balances
We record accounts receivable at the time of invoicing. Accounts receivable, net of the allowance for doubtful accounts, is included in current assets on our balance sheet. To the extent that we do not recognize revenue at the same time as we invoice, we record a liability for deferred revenue. In certain instances, we also receive customer deposits in advance of invoicing and recording of accounts receivable. Deferred revenue and customer deposits are included in current liabilities on our consolidated balance sheets.
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, if any, historical experience, and other currently available evidence.
Costs to Obtain a Contract with a Customer
The only costs we incur associated with obtaining contracts with customers are sales commissions that we pay to our internal sales personnel or third-party sales representatives. These costs are calculated based on set percentages of the selling price of each product or service sold. Commissions are considered earned by our internal sales personnel at the time we recognize revenue for a particular transaction. Commissions are considered earned by third-party sales representatives at the time that revenue is recognized for a particular transaction. We record commission expense in our consolidated statements of operations at the time the commission is earned. Commissions earned but not yet paid are included in current liabilities on our balance sheets.
Product Warranties
In connection with the sale of our products, we generally provide standard one- or two-year product warranties which are detailed in our terms and conditions and communicated to our customers. Our standard warranties are not offered for sale separately from our products; therefore, there is not a separate performance obligation related to our standard warranties. We record estimated warranty expense for our standard warranties at the time of sale based upon historical claims experience. We offer customers an option to separately purchase an extended warranty on certain products. In the case of extended warranties, we recognize revenue in the amount of the sale price for the extended warranty on a straight-line basis over the extended warranty period. We record costs incurred to provide service under an extended warranty at the time the service is provided. Warranty expense is included in selling expense in our consolidated statements of operations.
See Notes 5 and 14 for further information about our revenue from contracts with customers.
Inventories
Inventories are valued at cost on a first-in, first-out basis, not in excess of market value. Cash flows from the sale of inventories are recorded in operating cash flows. On a quarterly basis, we review our inventories and record excess and obsolete inventory charges based upon our established objective excess and obsolete inventory criteria. Our criteria identify excess material as the quantity of material on hand that is greater than the average annual usage of that material over the prior three years. Effective January 1, 2021, our criteria identify obsolete material as material that has not been used in a work order during the prior twenty-four months. Prior to January 1, 2021, these criteria identified obsolete material as material that had not been used in a work order during the prior twelve months. In certain cases, additional excess and obsolete inventory charges are recorded based upon current market conditions, anticipated product life cycles, new product introductions and expected future use of the inventory. The excess and obsolete inventory charges we record establish a new cost basis for the related inventories.
Leases
We account for leases in accordance with ASC Topic 842 (Leases) which was effective for us as of January 1, 2019. Upon adoption of ASC Topic 842, we elected the package of practical expedients which included the grandfathering of the lease classification that had been made under prior guidance and, accordingly, we did not re-evaluate any of our leases for classification purposes in connection with the implementation of ASC Topic 842. All our lease contracts are still being treated as operating leases. We do not currently have any lease contracts that meet the criteria to be categorized as finance leases. We did not elect the hindsight practical expedient and therefore did not reevaluate the lease terms that we used under prior guidance. The implementation of ASC Topic 842 had a significant impact on our consolidated balance sheet as a result of recording ROU assets and lease liabilities for all our multi-year leases. Under prior guidance, none of these leases had any related asset recorded on our balance sheets. The only related liability recorded on our balance sheets was the amount which represented the difference between the lease payments we had made and the straight-line rent expense we had recorded in our statements of operations. The implementation of ASC Topic 842 did not have a significant impact on our pattern of expense recognition for any of our multi-year leases.
We determine if an arrangement is a lease at inception. A lease contract is within scope if the contract has an identified asset (property, plant or equipment) and grants the lessee the right to control the use of the asset during the lease term. The identified asset may be either explicitly or implicitly specified in the contract. In addition, the supplier must not have any practical ability to substitute a different asset and would not economically benefit from doing so for the lease contract to be in scope. The lessee’s right to control the use of the asset during the term of the lease must include the ability to obtain substantially all the economic benefits from the use of the asset as well as decision-making authority over how the asset will be used. Leases are classified as either operating leases or finance leases based on the guidance in ASC Topic 842. Operating leases are included in operating lease ROU assets and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment and finance lease liabilities. We do not currently have any finance leases. We do not have embedded leases nor do we have any initial direct costs related to our lease contracts.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. None of our leases provide an implicit rate; therefore, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease. We include these options in the determination of the amount of the ROU asset and lease liability when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Certain of our operating leases contain predetermined fixed escalations of minimum rentals and rent holidays during the original lease terms. Rent holidays are periods during which we have control of the leased facility but are not obligated to pay rent. For these leases, our ROU asset and lease liability are calculated including any rent holiday in the determination of the life of the lease.
We have lease agreements which contain both lease and non-lease components, which are generally accounted for separately. In addition to the monthly rental payments due, most of our leases for our offices and warehouse facilities include non-lease components representing our portion of the common area maintenance, property taxes and insurance charges incurred by the landlord for the facilities which we occupy. These amounts are not included in the calculation of the ROU assets and lease liabilities as they are based on actual charges incurred in the periods to which they apply.
Operating lease payments are included in cash outflows from operating activities on our consolidated statements of cash flows. Amortization of ROU assets is presented separately from the change in operating lease liabilities and is included in depreciation and amortization in our consolidated statements of cash flows.
We have made an accounting policy election not to apply the recognition requirements of ASC Topic 842 to short-term leases (leases with a term of one year or less at the commencement date of the lease). Lease expense for short-term lease payments is recognized on a straight-line basis over the lease term.
See Note 8 for further disclosures regarding our leases.
Contingent Liability for Repayment of State and Local Grant Proceeds
In connection with leasing a new facility in Rochester, New York, which our subsidiary, Ambrell, occupied in May 2018, we entered into agreements with the city of Rochester and the state of New York under which we received grants totaling $463 to help offset a portion of the cost of the leasehold improvements we have made to this facility. In exchange for the funds we received under these agreements, we are required to create and maintain specified levels of employment in this location through various dates ending in 2023. If we fail to meet these employment targets, we may be required to repay a proportionate share of the proceeds. As of June 30, 2021, $370 of the total proceeds received could still be required to be repaid if we do not meet the targets. We have recorded this amount as a contingent liability which is included in other liabilities on our balance sheet. Those portions of the proceeds which are no longer subject to repayment are reclassified to deferred grant proceeds and amortized to income on a straight-line basis over the remaining lease term for the Rochester facility. Deferred grant proceeds are included in other current liabilities and other liabilities on our balance sheet and totaled $78 at June 30, 2021.
As of December 31, 2020, we were not in compliance with the employment targets as specified in the grant agreement with the city of Rochester. We applied for and received a waiver of this requirement for the year ended December 31, 2020. The waiver provided us until December 31, 2021 to come into compliance with the targets as outlined in the waiver. As of June 30, 2021, we were in compliance with those targets.
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC Topic 718 (Compensation - Stock Compensation), which requires that employee share-based equity awards be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value of stock options granted, which is then amortized to expense over the service periods. See further disclosures related to our stock-based compensation plan in Note 9.10.
Subsequent EventsWe have made an assessment of our operations and determined that there were no material subsequent events requiring adjustment to, or disclosure in, our consolidated financial statements for the nine months ended September 30, 2017.Revenue RecognitionWe recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection of the related receivable is reasonably assured. Sales of our products are made through our sales employees, third-party sales representatives and distributors. There are no differences in revenue recognition policies based on the sales channel. We do not provide our customers with rights of return or exchanges. Revenue is generally recognized upon product shipment. Our customers' purchase orders do not typically contain any customer-specific acceptance criteria, other than that the product performs within the agreed upon specifications. We test all products manufactured as part of our quality assurance process to determine that they comply with specifications prior to shipment to a customer. To the extent that any customer purchase order contains customer-specific acceptance criteria, revenue recognition is deferred until customer acceptance.In addition, we lease certain of our equipment to customers under non-cancellable operating leases. These leases generally have an initial term of six months. We recognize revenue for these leases on a straight-line basis over the term of the lease.With respect to sales tax collected from customers and remitted to governmental authorities, we use a net presentation in our consolidated statement of operations. As a result, there are no amounts included in either our net revenues or cost of revenues related to sales tax.
inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except share and per share data)
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Product WarrantiesWe generally provide product warranties and record estimated warranty expense at the time of sale based upon historical claims experience. Warranty expense is included in selling expense in our consolidated statement of operations.
Income Taxes
The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carryforwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.
Net Earnings (Loss) Per Common Share
Net earnings (loss) per common share - basic is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during each period. Net earnings (loss) per common share - diluted is computed by dividing net earnings (loss) by the weighted average number of common shares and common share equivalents outstanding during each period. Common share equivalents represent unvested shares of restricted stock and stock options and are calculated using the treasury stock method. Common share equivalents are excluded from the calculation if their effect is anti-dilutive.
The table below sets forth, for the periods indicated, a reconciliation of weighted average common shares outstanding - basic to weighted average common shares and common share equivalents outstanding - diluted and the average number of potentially dilutive securities that were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive:
Three Months Ended | Nine Months Ended | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Weighted average common shares outstanding - basic | 10,288,325 | 10,295,447 | 10,276,682 | 10,327,095 | ||||||||||||
Potentially dilutive securities: | ||||||||||||||||
Unvested shares of restricted stock and stock options | 62,684 | 23,268 | 50,398 | 17,652 | ||||||||||||
Weighted average common shares and common share | 10,351,009 | 10,318,715 | 10,327,080 | 10,344,747 | ||||||||||||
Average number of potentially dilutive securities excluded | 96,000 | 19,800 | 79,753 | 18,277 |
Three Months Ended | Six Months Ended | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Weighted average common shares outstanding - basic | 10,442,916 | 10,252,490 | 10,386,183 | 10,236,672 | ||||||||||||
Potentially dilutive securities: | ||||||||||||||||
Unvested shares of restricted stock and employee stock options | 322,020 | 6,427 | 259,198 | 0 | ||||||||||||
Weighted average common shares and common share equivalents outstanding - diluted | 10,764,936 | 10,258,917 | 10,645,381 | 10,236,672 | ||||||||||||
Average number of potentially dilutive securities excluded from calculation | 274,345 | 711,499 | 307,069 | 719,832 |
Effect of Recently AdoptedIssued Amendments to Authoritative Accounting Guidance
In MarchJune 2016, the Financial Accounting Standards Board (the "FASB"(“FASB”) issued amendments to the current guidance onfor accounting for stock-based compensation issued to employees which is contained in ASC Topic 718 (Compensation - Stock Compensation). Thecredit losses. In November 2019, the FASB deferred the effective date of these amendments simplify several aspectsfor certain companies, including smaller reporting companies. As a result of the accounting for share-based payment transactions, includingdeferral, the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments wereare effective for us for reporting periods beginning after December 15, 2022. The amendments replace the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The amendments require a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We plan to adopt the amendments when they become effective for us on January 1, 2017. The implementation2023. We do not currently expect that the adoption of these amendments did notwill have a material impact on our consolidated financial statements.In July 2015, the FASB issued amendments
(3) | RESTRUCTURING AND OTHER CHARGES |
EMS Segment Restructuring and Facility Consolidation
As discussed in Note 3 to update the current guidance on the subsequent measurement of inventory, which is presented in ASC Topic 330 (Inventory). The purpose of the amendments is to simplify the subsequent measurement of inventory and reduce the number of potential outcomes. It applies to all inventory other than inventory measured using last-in, first-out or the retail inventory method. Current guidance requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less a normal profit margin. The updated guidance amends this to require that an entity measure inventory within the scope of the updated guidance at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments were effective for us as of January 1, 2017. The implementation of these amendments did not have a material impact on our consolidated financial statements.
inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except sharestatements in our 2020 Form 10-K, on September 21, 2020, we notified employees in our Fremont, California facility of a plan to consolidate all manufacturing for our EMS segment into our manufacturing operations located in Mt. Laurel, New Jersey. The consolidation of manufacturing operations resulted in the closure of the Fremont facility and per share data)
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Effectthe termination of Recently Issued Amendmentscertain employees at that location. As a result of the consolidation, we incurred charges for severance and other one-time termination benefits, other associated costs, including moving and production start-up costs, and charges related to Authoritative Accounting GuidanceIn May 2017,exiting the FASB issued amendmentsfacility, including an impairment charge related to the guidance on accounting for a change to the terms or conditions (modification) of a share-based payment award. The amendments provide that an entity should accountROU asset for the effects of a modification unless the fair value and vesting conditionslease of the modified award and the classification of the modified award (equity or liability instrument)Fremont facility. These charges are the same as the original award immediately before the modification. The amendments are effective for us as of January 1, 2018. Early adoption is permitted. The amendments aremore fully discussed in Note 3 to be applied prospectively to an award modified on or after the adoption date. We do not expect the implementation of the amendments to have a material impact on our consolidated financial statements.
statements in our 2020 Form 10-K. During the six months ended June 30, 2021, we incurred $132 of additional charges associated with finalizing the integration of the manufacturing operations. All of these charges were cash charges and are included in restructuring and other charges in our consolidated statement of operations. The integration of our EMS manufacturing operations has taken longer than originally anticipated, primarily as a result of the significant increase in our business activity in the first half of 2021. During the second quarter of 2021, we delayed some final integration activities and instead allocated our resources to meet customer demand for shipments of our products. We currently expect to complete the integration of the EMS manufacturing operations in the third quarter of 2021 and expect to incur additional cash charges in the range of $50 to $100.
Executive Management Changes
On June 10, 2021, our Board of Directors (the “Board”) accepted the retirement of Hugh T. Regan, Jr. from the positions of Chief Financial Officer, Treasurer, and Secretary (the “Retirement”). In January 2017,connection with the FASBRetirement, we entered into a Separation and Consulting Agreement (the “Separation and Consulting Agreement”) with Mr. Regan effective June 11, 2021 pursuant to which Mr. Regan has agreed to provide consulting services for three months, subject to an extension of up to an additional three months at our option. The Separation and Consulting Agreement also provides that Mr. Regan is entitled to a severance benefit of $120. In connection with the Retirement, we have also agreed that certain options issued amendmentsto Mr. Regan in March 2020 to purchase shares of our common stock that remained unvested on the date of the Retirement shall continue to vest after the Retirement and expire one year from their respective vesting dates. The full text of the Separation and Consulting Agreement is included as Exhibit 10.1 to our Current Report on Form 8-K filed on June 14, 2021.
On June 10, 2021, the Board approved, effective as of June 14, 2021 (the “Start Date”), the appointment of Duncan Gilmour to the guidanceposition of Chief Financial Officer, Treasurer, and Secretary. Mr. Gilmour entered into a letter agreement (the “Letter Agreement”), dated June 10, 2021, subject to his appointment as our Chief Financial Officer, Treasurer, and Secretary, which appointments were approved on accounting for goodwill impairment. The amendments simplify the accounting for goodwill impairment by removing Step II of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amendments, a goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendments will be applied prospectively June 10, 2021 and are effective for us as of January 1, 2020, with early application permitted beginning January 1, 2017. We do not expect the implementation of the amendments to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued amendments to clarify the current guidance on the definition of a business. The objective of the amendments is to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments are effective for us as of January 1, 2018, with early application permitted. We do not expect the implementation of these amendments to have a material impact on our consolidated financial statements.In November 2016, the FASB issued amendments to the guidance on presentation of restricted cash within the statement of cash flows. The amendments require that restricted cash be included within cash and cash equivalents on the statement of cash flows. The amendments are effective for us as of January 1, 2018, and are to be applied retrospectively. Early application is permitted. We do not expect the implementation of these amendments to have a material impact on our consolidated financial statements.In February 2016, the FASB issued amendments to the current guidance on accounting for lease transactions, which is presented in ASC Topic 842 (Leases). The intent of the updated guidance is to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and to disclose key information about leasing arrangements. Under the new guidance, a lessee will be required to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The amendments are effective for us as of January 1, 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of the implementation of these amendments on our consolidated financial statements.In May 2014, the FASB issued new guidance on the recognition of revenue from contracts with customers. Subsequent to May, 2014, the FASB has issued additional clarifying guidance on certain aspects of this new guidance. This new guidance is presented in ASC Topic 606 (Revenue from Contracts with Customers) and will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. Companies can use either the retrospective or cumulative effect transition method. In August 2015, the FASB deferred the effective date of this new guidance for one additional year. As a result, this new guidance is effective for us as of January 1, 2018. Early application is only permitted as of the prior effective date,Start Date. The full text of the Letter Agreement is included as Exhibit 10.2 to our Current Report on Form 8-K filed on June 14, 2021.
Total costs incurred during the six months ended June 30, 2021 related to these executive management changes were $347, which consisted of $136 for legal fees related to the transition, $120 for severance paid to our former Chief Financial Officer (“CFO”) and $91 of stock-based compensation expense, primarily as a result of the modification of the March 2020 option awards issued to our former CFO, as discussed above. The $120 of severance is included in restructuring and other charges in our case would be asconsolidated statement of January 1, 2017. We currently plan to implement this new guidance on January 1, 2018 with a cumulative adjustment to retained earnings as opposed to retrospectively adjusting prior periods. During the fourth quarter of 2016, we completed a preliminary review of all our revenue streams to identify any differences in timing, measurement or presentation of revenue recognition. Our implementation process is ongoing; however, based on the results of our assessment to date, we currently do not expect the implementation of this new guidance to have a significant impact on the timing or amount of revenue we recognize in any given period in comparison to the amount recognized under current guidance.
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On May 24, 2017, we completed our acquisition of Ambrell, a manufacturer of precision induction heating systems. Ambrell's systems are used to conduct fast, efficient, repeatable non-contact heating of metals or other electrically conductive materials, in order to transform raw materials into finished parts.operations. The Ambrell acquisition complements our current thermal technologies and broadens our diverse customer base, allowing expansion within many non-ATE related markets, such as consumer product packaging, fiber-optics, automotive and other markets.The purchase price for Ambrell was $22,000 in cash paid at closing, subject to a customary post-closing working capital adjustment. Additional consideration in the form of earnouts may be paid based upon a multiple of adjusted EBITDA for 2017 and 2018, as further discussed below. The acquisition was completed by acquiring allbalance of the outstanding capital stock of Ambrell. Total acquisition costs incurred to complete this transaction were $880. Acquisition costs were expensed as incurred andare included in general and administrative expense.expense in our consolidated statement of operations. We expect to incur an additional $24 in consulting fees during the third quarter of 2021 related to these actions.
Other Restructuring Actions
During the six months ended June 30, 2020, we recorded cash charges for severance and other one-time termination benefits of $46 related to headcount reductions in our corporate office and at Ambrell.
inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAccrued Restructuring(Unaudited)(In thousands, except share and per share data)
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The acquisition of Ambrell has been accounted for as a business combination using purchase accounting, and, accordingly, the results of Ambrell have been included in our consolidated results of operations from the date of acquisition. The allocation of the Ambrell purchase price was based on estimated fair values as of May 24, 2017. The determination of fair value reflects the assistance of third-party valuation specialists, as well as our own estimates and assumptions.The excess of the purchase price over the identifiable intangible and net tangible assets was allocated to goodwill and is not deductible for tax purposes. Goodwill is attributed to synergies that are expected to result from the operations of the combined businesses.The total purchase price of $26,733 was comprised of:
Cash paid to acquire the capital stock of Ambrell | $ | 22,610 | ||
Estimated fair value of contingent consideration | 4,123 | |||
Total purchase price | $ | 26,733 |
As noted above, the consideration paid for the acquisition of Ambrell includes contingent consideration in the form of earnouts based on the future adjusted EBITDA of Ambrell. Adjusted EBITDA is earnings (or loss) from operations before interest expense, benefit or provision for income taxes, depreciation and amortization, and excludes other non-recurring income and expense items as defined in the stock purchase agreement for Ambrell. The first earnout, to be paid after calendar year 2017 is completed, will be an amount equal to 8x Ambrell's adjusted EBITDA for 2017 minus the $22,000 paid at closing. The second earnout, to be paid after calendar year 2018 is completed, is an amount equal to 8x Ambrell's adjusted EBITDA for 2018 minus the sum of the $22,000 paid at closing and any earnout paid with respect to 2017. The 2017 and 2018 earnouts, in the aggregate, are capped at $18,000. To estimate the fair value of the contingent consideration at the acquisition date, an option based income approach using a Monte Carlo simulation model was utilized due to the non-linear payout structure. This resulted in an estimated fair value of $4,123, which was recorded as a contingent consideration liability as of the acquisition date.The total purchase price of $26,733 has been allocated as follows:
Goodwill | $ | 12,032 | ||
Identifiable intangible assets | 16,300 | |||
Tangible assets acquired and liabilities assumed: | ||||
Cash | 648 | |||
Trade accounts receivable | 3,621 | |||
Inventories | 1,917 | |||
Other current assets | 200 | |||
Property and equipment | 614 | |||
Accounts payable | (1,420 | ) | ||
Accrued expenses | (1,280 | ) | ||
Customer advances | (554 | ) | ||
Deferred tax liability | (5,345 | ) | ||
Total purchase price | $ | 26,733 |
We estimated the fair value of identifiable intangible assets acquired using a combination of the income, cost and market approaches. Identifiable intangible assets acquired include customer relationships, customer backlog, technology and trademarks. We generally amortize our finite-lived intangible assets over their estimated useful lives on a straight-line basis, unless an alternate amortization method can be reliably determined. Any such alternate amortization method would be based on the pattern in which the economic benefits of the intangible asset are expected to be consumed.
inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except share and per share data)
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The following table summarizes the estimated fair value of Ambrell's identifiable intangible assets and their estimated useful lives as of the acquisition date:
| Weighted | |||||||
(in years) | ||||||||
Finite-lived intangible assets: | ||||||||
Customer relationships | $ | 9,000 | 9.0 | |||||
Technology | 600 | 9.0 | ||||||
Customer backlog | 500 | 0.3 | ||||||
Total finite-lived intangible assets | 10,100 | 8.6 | ||||||
Indefinite-lived intangible assets: | ||||||||
Trademarks | 6,200 | |||||||
Total intangible assets | $ | 16,300 |
For the period from May 24, 2017 to September 30, 2017, Ambrell contributed $6,925 of net revenues and had net earnings of $336, which includes the impact of a $549 reductionliability for accrued restructuring charges is included in other current liabilities on our consolidated balance sheet. Changes in the amount of our contingent considerationthe liability duringfor accrued restructuring for the third quarter of 2017.The following unaudited pro forma information gives effect to the acquisition of Ambrellsix months ended June 30, 2021 is as if the acquisition occurred on January 1, 2016. These proforma summaries do not reflect any operating efficiencies or costs savings that may be achieved by the combined businesses. These proforma summaries are presented for informational purposes only and are not necessarily indicative of what the actual results of operations would have been had the acquisition taken place as of that date, nor are they indicative of future consolidated results of operations:follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net revenues | $ | 17,352 | $ | 15,458 | $ | 55,040 | $ | 44,225 | ||||||||
Net earnings | $ | 2,291 | $ | 709 | $ | 6,452 | $ | 593 | ||||||||
Diluted earnings per share | $ | 0.22 | $ | 0.07 | $ | 0.61 | $ | 0.06 |
EMS Facility Consolidation | CFO Retirement | Total | ||||||||||
Balance - January 1, 2021 | $ | 340 | $ | 0 | $ | 340 | ||||||
Accruals for severance | 0 | 120 | 120 | |||||||||
Accruals for other costs associated with facility consolidation | 132 | 0 | 132 | |||||||||
Cash payments | (250 | ) | 0 | (250 | ) | |||||||
Balance – June 30, 2021 | $ | 222 | $ | 120 | $ | 342 |
The pro forma results shown above do not reflect the impact on general and administrative expense of investment advisory costs, legal costs and other costs of $880 incurred by us as a direct result of the transaction. The pro forma results shown above include a $549 reduction in the amount of our contingent consideration liability which we recorded during the third quarter of 2017.
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ASC Topic 820 (Fair Value Measurement) establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.
ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes among the following:
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To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except share and per share data)
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Recurring Fair Value Measurements
The contingent consideration liability on our balance sheet is measured at fair value on a recurring basis using Level 3 inputs. Our contingent consideration liability is a result of our acquisition of Ambrell on May 24, 2017, and it represents the estimated fair value of the additional cash consideration payable that is contingent upon the achievement of certain financial results by Ambrell in 2017 and 2018, as discussed more fully in Note 3. The fair value of this Level 3 instrument involves generating various scenarios for projected adjusted EBITDA over a specified time period, calculating the associated contingent consideration payments and discounting the average payments to present value. During the third quarter of 2017, we recorded a $549 reduction in the fair value of our contingent consideration liability, primarily as a result of a reduction in the projected adjusted EBITDA of Ambrell for the year ended December 31, 2017.The following fair value hierarchy table presents information about liabilities measured at fair value on a recurring basis:
Amounts at | Fair Value Measurement Using | |||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
As of September 30, 2017 | ||||||||||||||||
Contingent consideration liability | $ | 3,574 | $ | - | $ | - | $ | 3,574 |
Changes in the fair value of our Level 3 contingent consideration liability for the three and nine months ended September 30, 2017 were as follows:
Three Months | Nine Months | |||||||
Balance at beginning of period | $ | 4,123 | $ | - | ||||
Contingent consideration liability established in connection with the acquisition of Ambrell | - | 4,123 | ||||||
Fair value adjustment | (549 | ) | (549 | ) | ||||
Balance at end of period | $ | 3,574 | $ | 3,574 |
| GOODWILL AND INTANGIBLE ASSETS |
We have 2 operating segments which are also our reporting units: Thermal and EMS. Goodwill and intangible assets on our balance sheets are the result of our acquisitions of Sigma Systems Corp. ("Sigma") in October 2008, Thermonics, Inc. ("Thermonics") in January 2012 and Ambrell in May 2017. All of our goodwill and intangible assets are allocated to our Thermal segment.
GoodwillChanges in the amount
Goodwill totaled $13,738 at both June 30, 2021 and December 31, 2020 and was comprised of the carrying value of goodwill for the nine months ended September 30, 2017 are as follows:following:
Sigma | Thermonics | Ambrell | Total | |||||||||||||
Balance - January 1, 2017 | $ | 1,656 | $ | 50 | $ | - | $ | 1,706 | ||||||||
Acquisition of Ambrell | - | - | 12,032 | 12,032 | ||||||||||||
Balance - September 30, 2017 | $ | 1,656 | $ | 50 | $ | 12,032 | $ | 13,738 |
Sigma | $ | 1,656 | ||
Thermonics | 50 | |||
Ambrell | 12,032 | |||
Total | $ | 13,738 |
Intangible Assets
Changes in the amount of the carrying value of finite-lived intangible assets for the ninesix months ended SeptemberJune 30, 2017 2021 are as follows:
Balance - January 1, 2017 | $ | 365 | ||
Acquisition of Ambrell | 10,100 | |||
Amortization | (916 | ) | ||
Balance - September 30, 2017 | $ | 9,549 |
inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except share and per share data)
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Balance - January 1, 2021 | $ | 5,711 | ||
Amortization | (609 | ) | ||
Balance June 30, 2021 | $ | 5,102 |
The following tables provide further detail about our intangible assets as of SeptemberJune 30, 2017 2021 and December 31, 2016:2020:
September 30, 2017 | June 30, 2021 | |||||||||||||||||||||||
Gross |
Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||
Finite-lived intangible assets: | ||||||||||||||||||||||||
Customer relationships | $ | 10,480 | $ | 1,640 | $ | 8,840 | $ | 10,480 | $ | 5,474 | $ | 5,006 | ||||||||||||
Technology | 600 | 54 | 546 | 600 | 516 | 84 | ||||||||||||||||||
Patents | 590 | 454 | 136 | 590 | 578 | 12 | ||||||||||||||||||
Software | 270 | 243 | 27 | 270 | 270 | 0 | ||||||||||||||||||
Trade name | 140 | 140 | - | 140 | 140 | 0 | ||||||||||||||||||
Customer backlog | 500 | 500 | - | |||||||||||||||||||||
Total finite-lived intangible assets | 12,580 | 3,031 | 9,549 | 12,080 | 6,978 | 5,102 | ||||||||||||||||||
Indefinite-lived intangible assets: | ||||||||||||||||||||||||
Trademarks | 6,710 | - | 6,710 | 6,710 | - | 6,710 | ||||||||||||||||||
Total intangible assets | $ | 19,290 | $ | 3,031 | $ | 16,259 | $ | 18,790 | $ | 6,978 | $ | 11,812 |
December 31, 2016 | ||||||||||||
Gross Carrying Amount |
Amortization | Net Amount | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 1,480 | $ | 1,328 | $ | 152 | ||||||
Patents | 590 | 424 | 166 | |||||||||
Software | 270 | 223 | 47 | |||||||||
Trade name | 140 | 140 | - | |||||||||
Total finite-lived intangible assets | 2,480 | 2,115 | 365 | |||||||||
Indefinite-lived intangible assets: | ||||||||||||
Sigma trademark | 510 | - | 510 | |||||||||
Total intangible assets | $ | 2,990 | $ | 2,115 | $ | 875 |
December 31, 2020 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Amount | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 10,480 | $ | 4,912 | $ | 5,568 | ||||||
Technology | 600 | 477 | 123 | |||||||||
Patents | 590 | 570 | 20 | |||||||||
Software | 270 | 270 | 0 | |||||||||
Trade name | 140 | 140 | 0 | |||||||||
Total finite-lived intangible assets | 12,080 | 6,369 | 5,711 | |||||||||
Indefinite-lived intangible assets: | ||||||||||||
Trademarks | 6,710 | - | 6,710 | |||||||||
Total intangible assets | $ | 18,790 | $ | 6,369 | $ | 12,421 |
We generally amortize our finite-lived intangible assets over their estimated useful lives on a straight-line basis, unless an alternate amortization method can be reliably determined. Any such alternate amortization method would be based on the pattern in which the economic benefits of the intangible asset are expected to be consumed. None of our intangible assets have any residual value.
Total amortization expense for our finite-lived intangible assets was $916$305 and $173, respectively,$609 for the ninethree months and six months ended SeptemberJune 30, 20172021, respectively, and 2016.$309 and $620 for the three months and six months ended June 30, 2020, respectively. The following table sets forth the estimated annual amortization expense for each of the next five years:
2017 (remainder) | $ | 246 | ||
2018 | $ | 1,102 | ||
2019 | $ | 1,257 | ||
2020 | $ | 1,233 | ||
2021 | $ | 1,227 |
2021 (remainder) | $ | 618 | ||
2022 | $ | 1,167 | ||
2023 | $ | 1,067 | ||
2024 | $ | 980 | ||
2025 | $ | 905 |
| REVENUE FROM CONTRACTS WITH CUSTOMERS |
The following tables provide additional information about our revenue from contracts with customers, including revenue by customer and product type and revenue by market. See also Note 14 for information about revenue by operating segment and geographic region.
Three Months Ended | Six Months Ended | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Net revenues by customer type: | ||||||||||||||||
End user | $ | 19,266 | $ | 11,946 | $ | 36,925 | $ | 21,867 | ||||||||
OEM/Integrator | 2,554 | 1,329 | 4,451 | 2,638 | ||||||||||||
$ | 21,820 | $ | 13,275 | $ | 41,376 | $ | 24,505 | |||||||||
Net revenues by product type: | ||||||||||||||||
Thermal test | $ | 4,537 | $ | 3,703 | $ | 8,842 | $ | 7,850 | ||||||||
Thermal process | 6,807 | 4,563 | 12,373 | 8,311 | ||||||||||||
Semiconductor production test | 8,954 | 3,665 | 17,274 | 5,489 | ||||||||||||
Service/other | 1,522 | 1,344 | 2,887 | 2,855 | ||||||||||||
$ | 21,820 | $ | 13,275 | $ | 41,376 | $ | 24,505 | |||||||||
Net revenues by market: | ||||||||||||||||
Semi Market | $ | 15,677 | $ | 6,858 | $ | 28,997 | $ | 11,869 | ||||||||
Multimarket: | ||||||||||||||||
Industrial | 4,244 | 3,899 | 8,072 | 8,126 | ||||||||||||
Defense/aerospace | 1,268 | 1,496 | 2,397 | 2,904 | ||||||||||||
Telecommunications | 215 | 597 | 555 | 1,008 | ||||||||||||
Other Multimarket | 416 | 425 | 1,355 | 598 | ||||||||||||
$ | 21,820 | $ | 13,275 | $ | 41,376 | $ | 24,505 |
There was not a significant change in the amount of the allowance for doubtful accounts for the six months ended June 30,2021.
(6) | MAJOR CUSTOMERS |
During the ninesix months ended SeptemberJune 30, 2017 and 2016, 2021, Texas Instruments Incorporated accounted for 12% and 11%14% of our consolidated net revenues, respectively.revenues. While both of our operating segments sold products to this customer, these revenues were primarily generated by our EMS segment. During the nine months ended September 30, 2017 and 2016, Hakuto Co., Ltd., one of our distributors, accounted for 11% and 13% of our consolidated net revenues, respectively. These revenues were generated by our Thermal segment. NoNaN other customers accounted for 10% or more of our consolidated net revenues during the ninesix months ended SeptemberJune 30, 2017 and 2016.2021. During the six months ended June 30, 2020, 0 customer accounted for 10% or more of our consolidated net revenues.
inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except share and per share data)
| INVENTORIES |
Inventories held at SeptemberJune 30, 2017 2021 and December 31, 2016 2020 were comprised of the following:
September 30, | December 31, | June 30, | December 31, | |||||||||||||
Raw materials | $ | 3,892 | $ | 2,695 | $ | 6,382 | $ | 5,371 | ||||||||
Work in process | 1,013 | 728 | 1,036 | 1,085 | ||||||||||||
Inventory consigned to others | 72 | 81 | 44 | 45 | ||||||||||||
Finished goods | 1,056 | 172 | 1,240 | 975 | ||||||||||||
Total inventories | $ | 6,033 | $ | 3,676 | $ | 8,702 | $ | 7,476 |
Total charges incurred for excess and obsolete inventory for the three months and six months ended June 30, 2021 and 2020, respectively, were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Excess and obsolete inventory charges | $ | 54 | $ | 134 | $ | 93 | $ | 305 |
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We lease our offices, warehouse facilities and certain equipment under non-cancellable operating leases which expire at various dates through 2031. Total operating lease and short-term lease costs for the three months and six months ended June 30, 2021 and 2020 were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Operating lease cost | $ | 294 | $ | 389 | $ | 618 | $ | 781 | ||||||||
Short-term lease cost | $ | 32 | $ | 10 | $ | 40 | $ | 22 |
The following is additional information about our leases as of June 30, 2021:
Range of remaining lease terms (in years) | 0.8 | to | 9.8 | |||
Weighted average remaining lease term (in years) | 6.3 | |||||
Weighted average discount rate | 4.3 | % |
Maturities of lease liabilities as of June 30, 2021 were as follows:
2021 (remainder) | $ | 706 | ||
2022 | 1,403 | |||
2023 | 1,414 | |||
2024 | 1,398 | |||
2025 | 722 | |||
Thereafter | 1,845 | |||
Total lease payments | $ | 7,488 | ||
Less imputed interest | (870 | ) | ||
Total | $ | 6,618 |
Supplemental Cash Flow Information
Total amortization of ROU assets was $249 and $529 for the three months and six months ended June 30, 2021, respectively, and $328 and $653 for the three months and six months ended June 30, 2020, respectively.
During the six months ended June 30, 2020, we recorded a non-cash increase in our ROU assets and operating lease liabilities as a result of a modification of the lease for our EMS facility in Fremont, California. On January 23, 2020, we executed an amendment to this lease, which extended the term for a period of 61 months commencing on November 1, 2020 and expiring on November 30, 2025. At the effective date of this modification, we recorded an increase in our ROU assets and operating lease liabilities of approximately $1,176.
(9) | DEBT |
Letters of Credit
We have issued letters of credit as the security deposits for certain of our domestic leases. These letters of credit are secured by pledged certificates of deposit which are classified as Restricted Certificates of Deposit on our consolidated balance sheets. The terms of our leases require us to renew these letters of credit at least 30 days prior to their expiration dates for successive terms of not less than one year until lease expiration.
Our outstanding letters of credit at SeptemberJune 30, 2017 2021 and December 31, 2016 2020 consisted of the following:
|
| Letters of Credit | Letters of Credit | ||||||||||||||||||||||||
Original L/C | Expiration | Expiration | September 30, | December 31, | Original L/C | L/C | Lease | June 30, | December 31, | ||||||||||||||||||
Mt. Laurel, NJ | 3/29/2010 | 3/31/2018 | 4/30/2021 | $ | 125 | $ | 125 | 3/29/2010 | 4/30/2022 | 4/30/2031 | $ | 50 | $ | 90 | |||||||||||||
Mansfield, MA | 10/27/2010 | 11/08/2018 | 8/23/2021 | 50 | 50 | 10/27/2010 | 12/31/2024 | 12/31/2024 | 50 | 50 | |||||||||||||||||
$ | 175 | $ | 175 | $ | 100 | $ | 140 |
Line of Credit
As discussed more fully in Note 10 to our consolidated financial statements in our 2020 Form 10-K, on April 10, 2020, we entered into a Loan and Security Agreement (the “Agreement”) with M&T Bank (“M&T”). Under the terms of the Agreement, M&T has provided us with a $7,500 revolving credit facility which is guaranteed by our subsidiaries. This facility was put in place at that time to provide us with additional liquidity in response to the business environment resulting from the COVID-19 pandemic. This facility, which had no outstanding balance, was set to mature on April 9, 2021. On April 10,2021, we amended our Agreement with M&T, with the execution of the Second Amendment to the Agreement (the “Second Amendment”). Under the terms of the Second Amendment, the maximum amount available under the revolving credit facility was increased from $7,500 to $10,000, and an unused facility fee of fifteen basis points per annum was added. This facility was amended to provide us with additional liquidity to operate our business, if needed. This facility will mature on April 9, 2024.
| STOCK-BASED COMPENSATION |
As of SeptemberJune 30, 2017, 2021, we havehad unvested restricted stock awards and stock options granted under stock-based employee compensation plans that are described more fully in Note 1213 to the consolidated financial statements in our 20162020 Form 10-K.As of September 30, 2017, total unrecognized compensation expense related to10-K.
Our unvested restricted stock awards and stock options was $691.are accounted for based on their grant date fair value. As of June 30, 2021, total compensation expense to be recognized in future periods is $3,296. The weighted average period over which this expense is expected to be recognized is 2.82.9 years. The following table shows the allocation of the compensation expense we recorded during the three months and ninesix months ended SeptemberJune 30, 2017 2021 and 2016,2020, respectively, related to stock-based compensation:
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Cost of revenues | $ | 1 | $ | 2 | $ | 5 | $ | 7 | $ | 7 | $ | 0 | $ | 7 | $ | 0 | ||||||||||||||||
Selling expense | - | 1 | - | 4 | 6 | 3 | 9 | 6 | ||||||||||||||||||||||||
Engineering and product development expense | 1 | 3 | 5 | 8 | 16 | 11 | 26 | 21 | ||||||||||||||||||||||||
General and administrative expense | 104 | 38 | 282 | 203 | 425 | 194 | 681 | 368 | ||||||||||||||||||||||||
$ | 106 | $ | 44 | $ | 292 | $ | 222 | $ | 454 | $ | 208 | $ | 723 | $ | 395 |
There was no0 stock-based compensation expense capitalized in the ninethree months or six months ended SeptemberJune 30, 2017 2021 or 2016.
2020.
Restricted Stock Awards
We record compensation expense for restricted stock awards based on the quoted market price of our stock at the grant date and amortize the expense over the vesting period. Restricted stock awards generally vest over four years. However, during January 2016, we granted 22,500 shares of restricted stock to years for employees and over one year for our independent directors (25% at each of March 31, June 30, September 30, and December 31 of the year in which vestedthey were granted).
On August 24, 2020, our new President and CEO received two restricted stock awards totaling 141,610 shares valued at $650 as of the date of grant, which was also his hire date. Of the total shares awarded, 66,448 shares vest over 4 years (25% at each anniversary) and 75,162 vest on the third anniversary of the grant date at a vesting percentage that could range from 0% to 150% of the number of shares awarded on August 24, 2020. The final vesting percentage will be based on the achievement of certain performance metrics, including net revenue compound annual growth rate and diluted earnings per share excluding amortization of intangibles, for specified time periods as determined by the Compensation Committee of our Board of Directors. As of June 30, 2021, we have estimated that these shares will vest at 100% uponof the re-electionoriginal amount awarded and are recording expense based on this estimate on a straight-line basis over the three-year vesting period. Our estimate of these directorsthe final expected vesting percentage is reassessed and adjusted, as needed, at the end of each reporting period.
On March 10, 2021, we issued restricted stock awards totaling 18,000 shares to members of the senior management within our annual meetingoperating segments. These shares will vest on the third anniversary of stockholders in June 2016. the grant date at a vesting percentage that could range from 0% to 150% of the number of shares awarded on March 10, 2021. The total compensation expensefinal vesting percentage will be based on the achievement of certain performance metrics related to the operating results of the business units for which these members of management are responsible. As of June 30, 2021, we have estimated that these shares granted in 2016 was $98,will vest at 100% of the original amount awarded and it was recorded uponare recording expense based on this estimate on a straight-line basis over the re-electionthree-year vesting period. Our estimate of these directors. In March 2017, we granted 22,500 sharesthe final expected vesting percentage is reassessed and adjusted, as needed, at the end of each reporting period.
On June 14, 2021, our new CFO received two restricted stock awards totaling 7,941 shares valued at $133 as of the date of grant, which was also his hire date. Of the total shares awarded, 1,988 shares vest over 4 years (25% at each anniversary) and 5,953 vest on August 24, 2023 at a vesting percentage that could range from 0% to 150% of the number of shares awarded on June 14, 2021. The final vesting percentage will be based on the achievement of certain performance metrics, including net revenue compound annual growth rate and diluted earnings per share excluding amortization of intangibles, for specified time periods as determined by the Compensation Committee of our Board of Directors. As of June 30, 2021, we have estimated that these same directors. These shares vested 25% upon the grant date and will vest an additional 25% at 100% of the original amount awarded and are recording expense based on this estimate on a straight-line basis over the vesting period. Our estimate of the final expected vesting percentage is reassessed and adjusted, as needed, at the end of each of June 30, September 30, and December 31, 2017. The total compensation expense related to these shares is $143 and it will be recorded as the shares vest during 2017.reporting period.
inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except share and per share data)
|
|
The following table summarizes the activity related to unvested shares of restricted stock for the ninesix months ended September June 30, 2017:2021:
| Weighted | Number | Weighted | |||||||||||||
Unvested shares outstanding, January 1, 2017 | 97,025 | $ | 4.04 | |||||||||||||
Unvested shares outstanding, January 1, 2021 | 237,155 | $ | 4.93 | |||||||||||||
Granted | 64,000 | 6.48 | 126,209 | 11.74 | ||||||||||||
Vested | (45,975 | ) | 4.70 | (45,744 | ) | 7.87 | ||||||||||
Forfeited | - | - | (18,125 | ) | 9.02 | |||||||||||
Unvested shares outstanding, September 30, 2017 | 115,050 | 5.13 | ||||||||||||||
Unvested shares outstanding, June 30, 2021 | 299,495 | 7.10 |
The total fair value of the shares that vested during the ninesix months ended SeptemberJune 30, 2017 2021 and 20162020 was $290$577 and $138,$210, respectively, as of the vesting dates of these shares.
Stock Options
We record compensation expense for stock options based on the fair market value of the options as of the grant date. No option may be granted with an exercise period in excess of ten years from the date of grant. Generally, stock options will be granted with an exercise price equal to the fair market value of our stock on the date of grant and will vest over four years.
The fair value for stock options granted during the ninesix months ended SeptemberJune 30, 2017 2021 and 20162020 was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
2017 | 2016 | 2021 | 2020 | |||||||||||||
Risk-free interest rate | 2.14 | % | 1.30 | % | 1.03 | % | 0.46 | % | ||||||||
Dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||
Expected common stock market price volatility factor | .39 | .40 | .50 | .44 | ||||||||||||
Weighted average expected life of stock options (years) | 6 | 4 | 6.25 | 6.25 |
The per share weighted average fair value of stock options issued during the ninesix months ended SeptemberJune 30, 2017 2021 and 20162020 was $2.64$5.70 and $1.43,$1.48, respectively.
The following table summarizes the activity related to stock options for the ninesix months ended SeptemberJune 30, 2017:2021:
| Weighted | Number | Weighted | |||||||||||||
Options outstanding, January 1, 2017 (none exercisable) | 19,800 | $ | 4.37 | |||||||||||||
Options outstanding, January 1, 2021 (204,630 exercisable) | 438,200 | $ | 6.25 | |||||||||||||
Granted | 96,000 | 6.35 | 282,404 | 11.77 | ||||||||||||
Exercised | - | - | (145,575 | ) | 6.89 | |||||||||||
Forfeited | - | - | (80,550 | ) | 9.55 | |||||||||||
Options outstanding, September 30, 2017 (4,950 exercisable) | 115,800 | 6.01 | ||||||||||||||
Options outstanding, June 30, 2021 (142,230 exercisable) | 494,479 | 8.67 |
| STOCK REPURCHASE PLAN |
As discussed further in our 2016 Form 10-K, on October 27, 2015, On July 31, 2019, our Board of Directors authorized the repurchase of up to $5,000$3,000 of our common stock from time to time on the open market, in compliance with Rule 10b-1810b-18 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), or in privately negotiated transactions pursuant to a newly authorized stock repurchase plan (the "2015“2019 Repurchase Plan"Plan”). Repurchases are to be made under a Rule 10b5-1 plan entered into with RW Baird & Co., which permits shares to be repurchased when we might otherwise be precluded from doing so under insider trading laws and our internal trading windows. The 20152019 Repurchase Plan does not obligate us to repurchasepurchase any particular amount of common stock and maycan be suspended or discontinued at any time without prior notice. The 20152019 Repurchase Plan is funded using our operating cash flow or available cash.During Purchases began on September 18, 2019 under this plan. On March 2, 2020, we suspended repurchases under the nine months ended September 30, 2017 and 2016,2019 Repurchase Plan. From the adoption of the 2019 Repurchase Plan through the suspension of the plan, we repurchased 13,883 and 209,271 shares, respectively, at a cost of $62 and $841, respectively. As of September 30, 2017, we had repurchased a total of 297,020243,075 shares at a cost of $1,195 under the 2015 Repurchase Plan.$1,216, which includes fees paid to our broker of $6. All of the repurchased shares were retired.
(12) | EMPLOYEE STOCK PURCHASE PLAN |
The inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except share and per share data)Corporation Employee Stock Purchase Plan (the “ESPP”) was adopted by the Board in April 2021 subject to approval by our stockholders, which occurred on June 23, 2021 at our Annual Meeting of Stockholders. The ESPP provides our eligible employees with an opportunity to purchase common stock through accumulated payroll deductions at a discounted purchase price. The ESPP will become effective on October 1, 2021.
The ESPP provides that an aggregate of up to 250,000 shares of our common stock will be available for issuance under the ESPP. The shares of our common stock purchasable under the ESPP will be shares of authorized but unissued or reacquired shares, including shares repurchased by us on the open market.
| EMPLOYEE BENEFIT PLANS |
We have defined contribution 401(k)401(k) plans for our employees who work in the U.S. All permanent employees of inTEST Corporation, inTEST EMS LLC, Temptronic Corporation (“Temptronic”) and inTEST Silicon Valley Corporation who are at least 18 years of age are eligible to participate in the inTEST Corporation Incentive Savings Plan. We match employee contributions dollar for dollar up to 10% of the employee's annual compensation, with a maximum limit of $5. Employer contributions vest ratably over four years. Matching contributions are discretionary. For the ninethree months and six months ended SeptemberJune 30, 2017 and 2016, 2021, we recorded $299$100 and $311$271 of expense for matching contributions, respectively.
For the three months and six months ended June 30, 2020, we recorded $92 and $257 of expense for matching contributions, respectively.
All permanent employees of Ambrell are immediately eligible to participate in the Ambrell Corporation Savings & Profit Sharing Plan (the "Ambrell Plan") upon employment and are eligible for employer matching contributions after completing one yearsix months of service, as defined in the Ambrell Plan. The Ambrell Plan allows eligible employees to make voluntary contributions up to 100% of compensation, up to the federal government contribution limits. We will make a matching contribution of 25%50% of each employee's contributions up to a maximum of 2%10% of suchthe employee's annual compensation. Fromdeferral with a maximum limit of $5. For the datethree months and six months ended June 30, 2021, we recorded $44 and $87 of acquisition through September 30, 2017, we madeexpense for matching contributions, respectively. For the three months and six months ended June 30, 2020, we recorded $15 and $32 of $21.expense for matching contributions, respectively.
| SEGMENT INFORMATION |
As discussed in Note 1, during 2016, we reorganized our business from three productWe have 2 reportable segments, (Thermal Products, Mechanical ProductsThermal and Electrical Products) into two product segments (Thermal and EMS). Accordingly, effective January 1, 2017, we have two reportable segments,EMS, which are also our reporting units. Prior period information has been reclassified to be comparable to the presentation for 2017.
Thermal includes the operations of Temptronic, Thermonics, Sigma, inTEST Thermal Solutions GmbH (Germany), inTEST Pte, Limited (Singapore) and Ambrell, which we acquired in May 2017, as discussed in Note 3.Ambrell. Sales of this segment consist primarily of temperature management systems which we design, manufacture and market under our Temptronic, Thermonics and Sigma product lines, and precision induction heating systems which are designed, manufactured and marketed by Ambrell. In addition, this segment provides post-warranty service and support.
EMS includes the operations of our manufacturing facilities in Mt. Laurel, New Jersey and, prior to the consolidation of manufacturing operations late in the fourth quarter of 2020, Fremont, California. Sales of this segment consist primarily of manipulator, docking hardware and tester interface products, which we design, manufacture and market.
We operate our business worldwide and sell our products both domestically and internationally. Both of our segments sell to semiconductor manufacturers, third-partythird-party test and assembly houses and ATE manufacturers. Thermal also sells into a variety of markets outside of the ATE market,Semi Market, including the automotive, consumer electronics, consumer product packaging, defense/aerospace, energy, fiber optics,medical, industrial, telecommunications and other markets.
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Net Revenues: | ||||||||||||||||||||||||||||||||
Thermal | $ | 11,470 | $ | 6,641 | $ | 28,440 | $ | 17,429 | $ | 12,766 | $ | 9,476 | $ | 23,821 | $ | 18,810 | ||||||||||||||||
EMS | 5,882 | 4,182 | 18,980 | 12,526 | 9,054 | 3,799 | 17,555 | 5,695 | ||||||||||||||||||||||||
$ | 17,352 | $ | 10,823 | $ | 47,420 | $ | 29,955 | $ | 21,820 | $ | 13,275 | $ | 41,376 | $ | 24,505 | |||||||||||||||||
Earnings (loss) before income tax expense (benefit): | ||||||||||||||||||||||||||||||||
Thermal | $ | 1,539 | $ | 1,402 | $ | 4,735 | $ | 2,709 | $ | 1,023 | $ | (13 | ) | $ | 1,126 | $ | (439 | ) | ||||||||||||||
EMS | 1,594 | 374 | 5,455 | 733 | 2,869 | 261 | 5,489 | (743 | ) | |||||||||||||||||||||||
Corporate | (292 | ) | (55 | ) | (1,841 | ) | (848 | ) | (836 | ) | (65 | ) | (981 | ) | (28 | ) | ||||||||||||||||
$ | 2,841 | $ | 1,721 | $ | 8,349 | $ | 2,594 | $ | 3,056 | $ | 183 | $ | 5,634 | $ | (1,210 | ) | ||||||||||||||||
Net earnings (loss): | ||||||||||||||||||||||||||||||||
Thermal | $ | 1,183 | $ | 888 | $ | 3,228 | $ | 1,737 | $ | 875 | $ | (3 | ) | $ | 963 | $ | (353 | ) | ||||||||||||||
EMS | 1,021 | 236 | 3,471 | 469 | 2,449 | 226 | 4,697 | (598 | ) | |||||||||||||||||||||||
Corporate | (186 | ) | (34 | ) | (1,158 | ) | (549 | ) | (715 | ) | (53 | ) | (839 | ) | (22 | ) | ||||||||||||||||
$ | 2,018 | $ | 1,090 | $ | 5,541 | $ | 1,657 | $ | 2,609 | $ | 170 | $ | 4,821 | $ | (973 | ) |
September 30, | December 31, | |||||||
Identifiable assets: | ||||||||
Thermal | $ | 49,443 | $ | 19,893 | ||||
EMS | 10,771 | 22,951 | ||||||
$ | 60,214 | $ | 42,844 |
June 30, | December 31, | |||||||
Identifiable assets: | ||||||||
Thermal | $ | 53,096 | $ | 50,782 | ||||
EMS | 15,647 | 9,667 | ||||||
Corporate | 1,944 | 1,581 | ||||||
$ | 70,687 | $ | 62,030 |
inTEST CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except share and per share data)
|
|
The following table providestables provide information about our geographic areas of operation. Net revenues from unaffiliated customers are based on the location to which the goods are shipped.
Three Months Ended | Nine Months Ended | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net revenues: | ||||||||||||||||
U.S. | $ | 4,746 | $ | 3,268 | $ | 12,212 | $ | 8,898 | ||||||||
Foreign | 12,606 | 7,555 | 35,208 | 21,057 | ||||||||||||
$ | 17,352 | $ | 10,823 | $ | 47,420 | $ | 29,955 |
September 30, | December 31, | Three Months Ended | Six Months Ended | |||||||||||||||||||||
Property and equipment: | ||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
U.S. | $ | 1,003 | $ | 691 | $ | 6,632 | $ | 4,954 | $ | 12,379 | $ | 10,673 | ||||||||||||
Foreign | 541 | 253 | 15,188 | 8,321 | 28,997 | 13,832 | ||||||||||||||||||
$ | 1,544 | $ | 944 | $ | 21,820 | $ | 13,275 | $ | 41,376 | $ | 24,505 |
June 30, | December 31, | |||||||
Net property and equipment: | ||||||||
U.S. | $ | 2,162 | $ | 2,053 | ||||
Foreign | 300 | 297 | ||||||
$ | 2,462 | $ | 2,350 |
(15) | SUBSEQUENT EVENTS |
As discussed further in Note 3 to our consolidated financial statements in our 2020 Form 10-K, during the fourth quarter of 2020 we consolidated all manufacturing for our EMS segment into our manufacturing operations located in Mt. Laurel, New Jersey. Prior to the consolidation, our interface products were manufactured in our facility in Fremont, California. As a result of the consolidation and our decision to cease manufacturing in California, we incurred charges related to exiting our facility in Fremont, including an impairment charge of $522 related to the ROU asset for the lease of this facility. At the time of the consolidation of manufacturing operations, we intended to try to sublease the facility in Fremont, but we did not expect to sublet the facility for the full remaining term of the lease.
On July 19, 2021, we executed a sublease for our facility in Fremont. The sublease will commence in September 2021 and ends November 30, 2025, which is the termination date of our lease for this facility. We entered into this sublease approximately 14 months earlier than we had estimated in December 2020. As a result, we will record approximately $350 of incremental sublease income above the level that we had estimated at the time that we recorded the impairment charge in December 2020. This income will be recorded ratably over the term of the sublease and will be included in other income in our consolidated statements of operations.
inTEST CORPORATION
Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Risk Factors and Forward-Looking Statements
In addition to historical information, this report andQuarterly Report on Form 10-Q for the period ended June 30, 2021 (this “Report”), including this management’s discussion and analysis (“MD&A”), contains statements relating to possible future events and results that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.1995, as amended. These statements do not convey historical information but relate to predicted or potential future events and financial results, such as statements of our plans, strategies and intentions, or our future performance or goals that are based upon management's current expectations. Our forward-looking statements can often be identified by the use of forward-looking terminology such as "believes," "expects," "intends," "may," “could,” "will," "should," “plans”"plans," “projects,” “forecasts,” “seeks,” “anticipates,” “goal,” “objective,” “target,” “future,” “outlook,” “vision,” or "anticipates"variations of such words or similar terminology. See Part I, Item 1 - "Business - Cautionary Statement Regarding Forward-Looking Statements" in our 2016 Form 10-K for examples ofInvestors and prospective investors are cautioned that such forward-looking statements made in this report which may be "forward-looking statements."are only projections based on current estimations. These statements involve risks and uncertainties and are based onupon various assumptions. Although we believe that our expectations are based on reasonable assumptions, investors and prospective investors are cautioned that such statements are only projections, and there cannot be any assurance that these events or results will occur. We undertake no obligation to update the information in this report and MD&A to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated or unanticipated events.Information about the primarySuch risks and uncertainties that could cause our actual future results to differ materially from our historic results or the results described in the forward-looking statements made in this report or presented elsewhere by management from time to timeinclude, but are included in Part I, Item 1A - "Risk Factors" in our 2016 Form 10-K. not limited to:
● | the impact of COVID-19 and its variant strains on our business, liquidity, financial condition and results of operations; | |
● | our ability to successfully consolidate our EMS manufacturing operations without any impact on customer shipments, quality or the level of our warranty claims and to realize the benefits of the consolidation; | |
● | indications of a change in the market cycles in the Semi Market or other markets we serve; | |
● | developments and trends in the Semi Market, including changes in the demand for semiconductors; | |
● | the loss of any one or more of our largest customers, or a reduction in orders by a major customer; | |
● | changes in the rate of, and timing of, capital expenditures by our customers; | |
● | the availability of materials used to manufacture our products; | |
● | the impact of interruptions in our supply chain caused by external factors; | |
● | the sufficiency of cash balances, lines of credit and net cash from operations; | |
● | stock price fluctuations; | |
● | the possibility of future acquisitions or dispositions and the successful integration of any acquired operations; | |
● | ability to borrow funds or raise capital to finance major potential acquisitions; | |
● | the success of our strategy to diversify our business by entering markets outside the Semi Market, including the automotive, defense/aerospace, industrial, medical, telecommunications and other markets and changes in demand in these markets; | |
● | competitive pricing pressures; | |
● | the development of new products and technologies by us or our competitors; | |
● | effects of exchange rate fluctuations; | |
● | progress of product development programs; | |
● | the anticipated market for our products; | |
● | the availability of and retention of key personnel or our ability to hire personnel at anticipated costs; | |
● | general economic conditions both domestically and globally; | |
● | other projections of net revenues, taxable earnings (loss), net earnings (loss), net earnings (loss) per share, capital expenditures and other financial items; and | |
● | other risk factors included in Part I, Item 1A - "Risk Factors" in our 2020 Form 10-K. |
Material changes to such risk factors may be reported in subsequent Quarterly Reports on Form 10-Q in Part II, Item 1A. There have been no such changesThese risks and uncertainties, among others, could cause our actual future results to differ materially from the risk factors set forththose described in our 2016 Form 10-K. OverviewInforward-looking statements or from our prior results. Any forward-looking statement made by us in this reportReport is based only on information currently available to us and MD&A, "we," "us," "our," andspeaks to circumstances only as of the "Company" referdate on which it is made. We are not obligated to inTEST Corporation and its consolidated subsidiaries. update these forward-looking statements, even though our situation may change in the future.
Overview
This MD&A should be read in conjunction with the accompanying consolidated financial statements.
We are a global supplier of innovative test and process solutions for use in manufacturing and testing across a wide range of markets including automotive, defense/aerospace, industrial, medical, semiconductor and telecommunications. We manage our business as two operating segments: Thermal and EMS. Our Thermal segment designs, manufactures and sells our thermal test and thermal process products while our EMS segment designs, manufactures and sells our semiconductor test products.
Our EMS segment sells its products to semiconductor manufacturers and third-party test and assembly houses (end user sales) and to ATE manufacturers (“OEM sales”), who ultimately resell our equipment with theirs to both semiconductor manufacturers and third-party test and assembly houses. These sales all fall within the ATE sector of the broader semiconductor market. Our Thermal segment sells its products to many of these same types of customers; however, it also sells to customers in the wafer processing sector within the broader semiconductor market and to customers in a variety of other markets outside the semiconductor market, including the automotive, defense/aerospace, industrial (including consumer products packaging, fiber optics and other sectors within the broader industrial market), medical and telecommunications markets.
Both of our operating segments have multiple products that we design, manufacture and market to our customers. Due to a number of factors, our products have varying levels of gross margin. These factors include, for example, the amount of engineering time required to develop the product, the market or customer to which we sell the product and the level of competing products available from other suppliers. The needs of our customers ultimately determine the products that we sell in a given time period. Therefore, the mix of products sold in a given period can change significantly when compared against the prior period. As a result, our consolidated gross margin may be significantly impacted by a change in the mix of products sold in a particular period.
Markets
We refer to the semiconductor market, including the more specialized semiconductor ATE and wafer processing sectors within the broader semiconductor market, as the “Semi Market.” All other markets are designated as “Multimarket.” Business within our Thermal segment can fall into either the Semi Market or Multimarket, depending upon how our customers utilize our products or upon their respective applications.
While the Semi Market represents the historical roots of inTEST and remains a very important component of our business, Multimarket is where we have focused our strategic growth efforts in the last several years. Our goal was to grow our business, both organically and resultsthrough acquisition, in these markets as we believe these markets have historically been less cyclical than the Semi Market. Moving forward, with the launch of operations areour new strategic plan which is discussed in Part 1, Item 1 under “Our Strategies” in our 2020 Form 10-K, we intend to broaden our strategic growth efforts to target both organic and inorganic growth in all of our currently served markets, which includes the Semi Market. Our goal is to further expand our existing product lines, strengthen our positions in served markets and drive expansion into new markets.
Prior to our acquisition of Ambrell in May 2017, we offered only highly specialized engineering solutions used for testing applications in Multimarket, the demand for which is limited and which varies significantly from period to period. Our acquisition of Ambrell not only provided expansion into new markets but also broadened our product offerings to include products sold into process or manufacturing applications. Historically, Ambrell sold its precision induction heating systems almost exclusively to customers in the industrial market but since 2018, has also had significant sales into the Semi Market. Overall, however, the acquisition of Ambrell has helped to diversify our customer base.
The portion of our business that is derived from the Semi Market is substantially dependent upon the demand for ATE by semiconductor manufacturers and companies that specialize in the testing of ICs. As further discussed below, on May 24, 2017, we acquiredintegrated circuits or, for Ambrell, which sells its products almost exclusively to customers in the industrial market, which is a non-ATE market. We expect that the acquisition of Ambrell will significantly reduce our dependence on customers in the ATE market. We expect that our future orders and net revenues will be approximately equally split between the ATE and non-ATE markets.demand for wafer processing equipment. Demand for ATE or wafer processing equipment is driven by semiconductor manufacturers that are opening new, or expanding existing, semiconductor fabrication facilities or upgrading equipment, which in turn is dependent upon the current and anticipated market demand for semiconductors and products incorporating semiconductors. Such market demand can be the result of market expansion, development of new technologies or redesigned products to incorporate new features, or the replacement of aging equipment. In addition, we continue to focus on design improvements and new approaches for our own products whichthat contribute to our net revenues as our customers adopt these new products.
In the past, the semiconductor industrySemi Market has been highly cyclical with recurring periods of oversupply, which often have a severeseverely impact on the semiconductor industry'sSemi Market's demand for ATE, including the products we manufacture.manufacture and sell into the market. This cyclicality can cause wide fluctuations in both our orders and net revenues and, depending on our ability to react quickly to these shifts in demand, can significantly impact our results of operations. ATE marketMarket cycles are difficult to predict and, in recent years have become more volatile and, in certain cases, shorter in duration. Because the market cyclesbecause they are generally characterized by sequential periods of growth or declines in orders and net revenues during each cycle, year over year comparisons of operating results may not always be as meaningful as comparisons of periods at similar points in either up or down cycles. These periods of heightened or reduced demand can shift depending on various factors impacting both our customers and the markets that they serve. In addition, during both downward and upward cycles in our industry,the Semi Market, in any given quarter, the trend in both our orders and net revenues can be erratic. This can occur, for example, when orders are canceled or currently scheduled delivery dates are accelerated or postponed by a significant customer or when customer forecasts and general business conditions fluctuate during a quarter.In addition to being cyclical, the ATE market has also developed a seasonal pattern in the last several years, with the second and third quarters being the periods of strong demand and the first and fourth quarters being periods of weakened demand. We believe this change has been driven by the strong demand for consumer products containing semiconductor content sold during the year-end holiday shopping season.
inTEST CORPORATION
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Third-partyThird party market share statistics are not available for the products we manufacture and sell into the ATE market;Semi Market; therefore, comparisons of period over period changes in our market share are not easily determined. As a result, it is difficult to ascertain if ATE marketSemi Market volatility in any period is the result of macro-economic or customer-specific factors impacting ATE marketSemi Market demand, or if we have gained or lost market share to a competitor during the period.As part of our ongoing strategy to reduce the impact of ATE market volatility on our business operations, we continue to diversify our served markets to address the thermal test requirements of several other markets outside the ATE market. These include the automotive, consumer electronics, consumer product packaging, defense/aerospace, energy, fiber optics, industrial, telecommunications and other markets. We believe that these markets usually are less cyclical than the ATE market.
While market share statistics exist for some of the markets we serve outside the ATE market, due to the nature of our highly specialized product offerings in these non-ATE markets, we do not expect broad market penetration in many of these markets and, therefore, do not anticipate developing meaningful market shares in these non-ATE markets. In addition, our orders and net revenues in any given period in these markets do not necessarily reflect the overall trends in these non-ATE markets due to our limited market shares. Consequently, we are continuing to evaluate buying patterns and opportunities for growth in these non-ATE markets that may affect our performance. The level of our orders and net revenues from these non-ATE markets has varied in the past, and we expect will vary significantly in the future, as we work to build our presence in these markets and establish new markets for our products. As previously mentioned, Ambrell, which we acquired in May 2017, sells its products almost exclusively to customers in the industrial market, which is one of the non-ATE markets we serve. We expect that the acquisition of Ambrell will significantly increase our orders and net revenues from markets outside the ATE market. As a result, we expect that our future orders and net revenues will be approximately equally split between the ATE and non-ATE markets.While the majorityhalf of our orders and net revenues are generally derived from the ATE market,Semi Market, and our operating results do not alwaysgenerally follow the overall trend in the ATE marketSemi Market, in any given period.period we may experience anomalies that cause the trend in our net revenues to deviate from the overall trend in the Semi Market. We believe that these anomalies may be driven by a variety of factors within the ATE market,Semi Market, including, for example, changing product requirements, longer time periods between new product offerings by original equipment manufacturers ("OEMs")OEMs and changes in customer buying patterns. In particular, demand for our mechanical and electrical products, which are sold exclusively within the ATE market, and our operating margins in these product segments have been affected by shifts in the competitive landscape, including (i) customers placing heightened emphasis on shorter lead times (which places increased demands on our available engineering and production capacity increasing unit costs) and ordering in smaller quantities (which prevents us from acquiring component materials in larger volumes at lower cost and increasing unit costs), (ii) the practice of OEMs specifying other suppliers as primary vendors, with less frequent opportunities to compete for such designations, (iii) the in-house manufacturing activities of OEMs building certain products we have historically sold to them, including manipulators, docking hardware and tester interfaces, which has had the impact of significantly reducing the size of the available market for those certain products, (iv) the role of third-party test and assembly houses in the ATE market and their requirement of products with a greater range of use at the lowest cost, (v) customer supply chain management groups demanding lower prices and spreading purchases across multiple vendors, and (vi) certain competitors aggressively reducing their products' sales prices (causing us to either reduce our products' sales prices to be successful in obtaining the sale or causing loss of the sale).
In addition, in recent periods, we have seen instances wherewhen demand for ATEwithin the Semi Market is not consistent for each of our productoperating segments or for any given product within a particular productoperating segment. This inconsistencylack of consistency in demand for ATE can be driven by a number of factors but, in most cases, we have found that the primary reason is unique customer-specific changes in demand for certain products driven by the needs of their customers or markets served. Recently this has become more pronounced for our sales into the wafer processing sector within the broader semiconductor market due to the limited market penetration we have into this sector and the variability of orders we have experienced from the few customers we support. These shifts in market practices and customer-specific needs have had, and may continue to have, varying levels of impact on our operating results and are difficult to quantify or predict from period to period. Management has taken, and will continue to take, such actions it deems appropriate to adjust our strategies, products and operations to counter such shifts in market practices as they become evident.
inTEST CORPORATION
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)As previously mentioned, as part of our ongoing strategy to grow our business, we continue to diversify our served markets to address the thermal test and thermal process requirements of several markets outside the Semi Market. These include the automotive, defense/aerospace, industrial, medical, telecommunications and other markets, which we refer to as Multimarket. We believe that these markets are usually less cyclical than the Semi Market. While market share statistics exist for some of these markets, due to the nature of our highly specialized product offerings in these markets, we do not expect broad market penetration in many of these markets and therefore do not anticipate developing meaningful market shares in most of these markets.
In addition, because of our limited market share, our Multimarket orders and net revenues in any given period do not necessarily reflect the overall trends in the markets within Multimarket. Consequently, we are continuing to evaluate buying patterns and opportunities for growth in Multimarket that may affect our performance. The level of our Multimarket orders and net revenues has varied in the past, and we expect will vary significantly in the future, as we work to build our presence in Multimarket and establish new markets for our products.
AcquisitionRestructuring and Other Charges
On May 24, 2017,September 21, 2020, we completednotified employees in our Fremont, California facility of a plan to consolidate all manufacturing for our EMS segment into our manufacturing operations located in Mt. Laurel, New Jersey. Prior to the acquisition of Ambrell by acquiring all ofconsolidation, our interface products were manufactured in the outstanding capital stock of Ambrell. Ambrell is a manufacturer of precision induction heating systems. Ambrell's systemsFremont facility, and our manipulator and docking hardware products were manufactured in the Mt. Laurel facility. The consolidation was undertaken to better serve customers through streamlined operations and reduce the fixed annual operating costs for the EMS segment. A small engineering and sales office will be maintained in northern California. The costs related to these actions are used to conduct fast, efficient, repeatable non-contact heating of metals or other electrically conductive materials,included in order to transform raw materials into finished parts. The Ambrell acquisition complements our current thermal technologies and broadens our diverse customer base, allowing expansion within many non-ATE related markets, such as consumer product packaging, fiber-optics, automotiverestructuring and other markets. This acquisition has been accounted for as a business combination using purchase accounting. The purchase price for Ambrell was $22.6 millioncharges on our consolidated statement of operations and are discussed in cash. Additional considerationmore detail in the form of earnouts may be paid based upon a multiple of adjusted EBITDA for 2017 and 2018. The 2017 and 2018 earnouts, in the aggregate, are capped at $18 million. For further discussion of the acquisition, see Note 3 to our consolidated financial statements.
statements in this Report and in our 2020 Form 10-K.
The integration of our EMS manufacturing operations has taken longer than originally anticipated primarily as a result of the significant increase in our business activity in the first half of 2021. During the second quarter of 2021, we delayed some final integration activities and instead allocated our resources to meet customer demand for shipments of our products. We currently expect to complete the integration of the EMS manufacturing operations in the third quarter of 2021 and expect to incur additional cash charges in the range of $50,000 to $100,000.
The EMS facility consolidation resulted in the termination of certain employees at the Fremont location, including all of our interface product line assembly staff who were located at that facility. As a result of transitioning our interface manufacturing operations to New Jersey, we have hired new production staff for this product line in our Mt. Laurel facility. These new employees are being trained to assemble our products which may impact customer shipments and quality of our interface products over the next several months. In addition, we have recently experienced difficulty in hiring personnel at the costs projected in our forecasts. This has resulted in the need to increase the labor rates offered for certain positions. If we cannot find savings in other areas or increase the price for which we sell our products in an amount sufficient to cover these additional labor costs, we may experience reduced margins in future periods. See “Risks Related to Our Business Operations” in Item 1A “Risk Factors” of our 2020 Form 10-K.
Orders and Backlog
The following table sets forth, for the periods indicated, a breakdown of the orders received by productoperating segment and market (in thousands).
Three | Change | Three | Change | Three Months Ended June 30, | Change | Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | $ | % | 2017 | $ | % | 2021 | 2020 | $ | % | 2021 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
Orders: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Thermal | $ | 12,133 | $ | 7,316 | $ | 4,817 | 66 | % | $ | 8,775 | $ | 3,358 | 38 | % | $ | 14,826 | $ | 10,446 | $ | 4,380 | 42 | % | $ | 14,746 | $ | 80 | 1 | % | ||||||||||||||||||||||||||||
EMS | 5,500 | 3,966 | 1,534 | 39 | % | 5,817 | (317 | ) | (5 | )% | 10,279 | 3,472 | 6,807 | 196 | % | 10,484 | (205 | ) | (2 | )% | ||||||||||||||||||||||||||||||||||||
$ | 17,633 | $ | 11,282 | $ | 6,351 | 56 | % | $ | 14,592 | $ | 3,041 | 21 | % | $ | 25,105 | $ | 13,918 | $ | 11,187 | 80 | % | $ | 25,230 | $ | (125 | ) | - | % | ||||||||||||||||||||||||||||
ATE market | $ | 8,915 | $ | 7,008 | $ | 1,907 | 27 | % | $ | 8,689 | $ | 226 | 3 | % | ||||||||||||||||||||||||||||||||||||||||||
Non-ATE market | 8,718 | 4,274 | 4,444 | 104 | % | 5,903 | 2,815 | 48 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Semi Market | $ | 16,532 | $ | 7,299 | $ | 9,233 | 126 | % | $ | 17,174 | $ | (642 | ) | (4 | )% | |||||||||||||||||||||||||||||||||||||||||
Multimarket | 8,573 | 6,619 | 1,954 | 30 | % | 8,056 | 517 | 6 | % | |||||||||||||||||||||||||||||||||||||||||||||||
$ | 17,633 | $ | 11,282 | $ | 6,351 | 56 | % | $ | 14,592 | $ | 3,041 | 21 | % | $ | 25,105 | $ | 13,918 | $ | 11,187 | 80 | % | $ | 25,230 | $ | (125 | ) | - | % |
Nine | Change | Six | Change | |||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | $ | % | 2021 | 2020 | $ | % | |||||||||||||||||||||||||||||||||||||
Orders: | ||||||||||||||||||||||||||||||||||||||||||||
Thermal | $ | 28,168 | $ | 20,618 | $ | 7,550 | 37 | % | $ | 29,572 | $ | 20,945 | $ | 8,627 | 41 | % | ||||||||||||||||||||||||||||
EMS | 19,089 | 13,101 | 5,988 | 46 | % | 20,763 | 6,749 | 14,014 | 208 | % | ||||||||||||||||||||||||||||||||||
$ | 47,257 | $ | 33,719 | $ | 13,538 | 40 | % | $ | 50,335 | $ | 27,694 | $ | 22,641 | 82 | % | |||||||||||||||||||||||||||||
ATE market | $ | 29,163 | $ | 23,072 | $ | 6,091 | 26 | % | ||||||||||||||||||||||||||||||||||||
Non-ATE market | 18,094 | 10,647 | 7.447 | 70 | % | |||||||||||||||||||||||||||||||||||||||
Semi Market | $ | 33,706 | $ | 13,991 | $ | 19,715 | 141 | % | ||||||||||||||||||||||||||||||||||||
Multimarket | 16,629 | 13,703 | 2,926 | 21 | % | |||||||||||||||||||||||||||||||||||||||
$ | 47,257 | $ | 33,719 | $ | 13,538 | 40 | % | $ | 50,335 | $ | 27,694 | $ | 22,641 | 82 | % |
Total consolidated orders for the three months ended SeptemberJune 30, 20172021 were $17.6$25.1 million compared to $11.3$13.9 million for the same period in 20162020 and $14.6$25.2 million for the three months ended March 31, 2021. Orders from customers in Multimarket for the three months ended June 30, 2017. During the three months ended September 30, 2017, the orders of our Thermal segment included $6.4 million of orders attributable to Ambrell, which we acquired on May 24, 2017, as previously discussed. Of the orders attributable to Ambrell, $334,0002021 were from customers in the ATE market and the balance were from non-ATE market customers. When adjusted to eliminate the impact of the orders attributable to Ambrell, our consolidated orders would have decreased $63,000, or 1%, as compared to the same period in 2016, and $1.0 million, or 9%, as compared to the three months ended June 30, 2017. These reductions primarily represent a decrease in orders from our non-ATE market customers in the telecommunications market and were partially offset by continued strong demand from our customers in the ATE market.
inTEST CORPORATION
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Total consolidated orders for the nine months ended September 30, 2017 were $47.3 million compared to $33.7 million for the same period in 2016. When adjusted to eliminate the impact of orders attributable to Ambrell, our consolidated orders for the nine months ended September 30, 2017 would have increased $4.8 million, or 14%, as compared to the same period in 2016. The increase was attributable to our customers in the ATE market. This higher level of demand is being driven, in part, by the increasing number of ICs utilized in the automotive industry and the need to test those ICs. In addition, demand for ATE is also being driven by products which enable the Internet of Things (IoT) and the increasing number of ICs in consumer electronics and industrial applications. The increase from customers in the ATE market was partially offset by a decrease in non-ATE market demand, primarily from customers in the defense/aerospace market.When adjusted to eliminate the orders attributable to Ambrell, orders from customers in non-ATE markets for the three months ended September 30, 2017 were $2.6 million, or 24%34% of total consolidated orders compared to $4.3 million, or 38%48% of total consolidated orders for the same period in 20162020 and $3.7 million, or 30%32% of total consolidated orders for the three months ended March 31, 2021.
We believe that the significant level of increase in orders from the Semi Market during the three months ended June 30, 2017. When adjusted to eliminate the orders attributable to Ambrell, orders from customers in non-ATE markets for the nine months ended September 30, 2017, were $9.8 million, or 25% of total consolidated orders2021 as compared to $10.6 million, or 32% of total consolidated orders for the same period in 2016. As previously mentioned,2020 reflects both the decreaseimpact of the interruption of the normal recovery in the Semi Market cycle that was caused by the onset of COVID-19 in the first half of 2020, as well as increased demand was primarily from customersfor semiconductors (also referred to as “integrated circuits” or “ICs”), generally, which has led to the current shortage in the global supply. We believe this increase in the demand for semiconductors is being driven both by changing technology as well as increased use of technology across all aspects of daily life, such as in devices that facilitate remote work and education, smart technology used in homes and businesses, the increase in the number of ICs used in the automotive industry and changes occurring in the telecommunications and defense/aerospacemobility markets. The level of ourTo a lesser extent, we also experienced an increase in orders from Multimarket for the three months ended June 30, 2021 as compared to the same period in these non-ATE markets has varied in2020 and to the past,three months ended March 31, 2021. This increase was primarily from the automotive and we expect it will vary significantly in the future as we build our presence in these markets and establish new markets for our products.
industrial markets.
At SeptemberJune 30, 2017,2021, our backlog of unfilled orders for all products was approximately $11.3$20.4 million compared with approximately $6.1 million at September 30, 2016 and $11.1$8.7 million at June 30, 2017. At September 30, 2017, our backlog included $5.92020 and $17.1 million attributable to Ambrell.at March 31, 2021. Our backlog includes customer orders which we have accepted, substantially all of which we expect to deliver in 2017.2021. While backlog is calculated on the basis of firm purchase orders, a customer may cancel an order or accelerate or postpone currently scheduled delivery dates. Our backlog may be affected by the tendency of customers to rely on short lead times available from suppliers, including us, in periods of depressed demand. In periods of increased demand, there is a tendency towards longer lead times that has the effect of increasing backlog. As a result, our backlog at a particular date is not necessarily indicative of sales for any future period.
Net Revenues
The following table sets forth, for the periods indicated, a breakdown of the net revenues by productoperating segment and market (in thousands).
Three | Change | Three | Change | Three | Change | Three Ended | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | $ | % | 2017 | $ | % | 2021 | 2020 | $ | % | 2021 | $ | % | |||||||||||||||||||||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Thermal | $ | 11,470 | $ | 6,641 | $ | 4,829 | 73 | % | $ | 9,194 | $ | 2,276 | 25 | % | $ | 12,766 | $ | 9,476 | $ | 3,290 | 35 | % | $ | 11,055 | $ | 1,711 | 15 | % | ||||||||||||||||||||||||||||
EMS | 5,882 | 4,182 | 1,700 | 41 | % | 6,694 | (812 | ) | (12 | )% | 9,054 | 3,799 | 5,255 | 138 | % | 8,501 | 553 | 7 | % | |||||||||||||||||||||||||||||||||||||
$ | 17,352 | $ | 10,823 | $ | 6,529 | 60 | % | $ | 15,888 | $ | 1,464 | 9 | % | $ | 21,820 | $ | 13,275 | $ | 8,545 | 64 | % | $ | 19,556 | $ | 2,264 | 12 | % | |||||||||||||||||||||||||||||
ATE market | $ | 9,162 | $ | 8,039 | $ | 1,123 | 14 | % | $ | 10,155 | $ | (993 | ) | (10 | )% | |||||||||||||||||||||||||||||||||||||||||
Non-ATE market | 8,190 | 2,784 | 5,406 | 194 | % | 5,733 | 2,457 | 43 | % | |||||||||||||||||||||||||||||||||||||||||||||||
Semi Market | $ | 15,677 | $ | 6,858 | $ | 8,819 | 129 | % | $ | 13,320 | $ | 2,357 | 18 | % | ||||||||||||||||||||||||||||||||||||||||||
Multimarket | 6,143 | 6,417 | (274 | ) | (4 | )% | 6,236 | (93 | ) | (1 | )% | |||||||||||||||||||||||||||||||||||||||||||||
$ | 17,352 | $ | 10,823 | $ | 6,529 | 60 | % | $ | 15,888 | $ | 1,464 | 9 | % | $ | 21,820 | $ | 13,275 | $ | 8,545 | 64 | % | $ | 19,556 | $ | 2,264 | 12 | % |
inTEST CORPORATION
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Nine | Change | Six | Change | |||||||||||||||||||||||||||||
2017 | 2016 | $ | % | 2021 | 2020 | $ | % | |||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||||||||||
Thermal | $ | 28,440 | $ | 17,429 | $ | 11,011 | 63 | % | $ | 23,821 | $ | 18,810 | $ | 5,011 | 27 | % | ||||||||||||||||
EMS | 18,980 | 12,526 | 6,454 | 52 | % | 17,555 | 5,695 | 11,860 | 208 | % | ||||||||||||||||||||||
$ | 47,420 | $ | 29,955 | $ | 17,465 | 58 | % | $ | 41,376 | $ | 24,505 | $ | 16,871 | 69 | % | |||||||||||||||||
ATE market | $ | 29,756 | $ | 22,068 | $ | 7,688 | 35 | % | ||||||||||||||||||||||||
Non-ATE market | 17,664 | 7,887 | 9,777 | 124 | % | |||||||||||||||||||||||||||
Semi Market | $ | 28,997 | $ | 11,869 | $ | 17,128 | 144 | % | ||||||||||||||||||||||||
Multimarket | 12,379 | 12,636 | (257 | ) | (2 | )% | ||||||||||||||||||||||||||
$ | 47,420 | $ | 29,955 | $ | 17,465 | 58 | % | $ | 41,376 | $ | 24,505 | $ | 16,871 | 69 | % |
Total consolidated net revenues for the three months ended SeptemberJune 30, 20172021 were $17.4$21.8 million compared to $10.8$13.3 million for the same period in 20162020 and $15.9$19.6 million for the three months ended March 31, 2021. We believe the increase in our consolidated net revenues as compared to the same period in 2020 reflects the aforementioned increase in demand from the Semi Market.
Net revenues from customers in Multimarket for the three months ended June 30, 2017. During the three months ended September 30, 2017, we recorded $4.9 million in2021 were 28% of total consolidated net revenues attributablecompared to Ambrell, $91,00048% of which were from customers in the ATE market and the balance of which were from non-ATE market customers. Totaltotal consolidated net revenues for the first nine months of 2017 were $47.4 million compared to $30.0 million for the same period in 2016. During the nine months ended September 30, 2017, we recorded $6.9 million in net revenues attributable to Ambrell, $122,0002020 and 32% of which were from customers in the ATE market and the balance of which were from non-ATE market customers.When adjusted to eliminate the impact of the net revenues attributable to Ambrell, the increase in our net revenues for the three and nine months ended September 30, 2017, as compared to the same periods in 2016, primarily reflects strengthening in demand within the ATE market. When adjusted to eliminate the impact of the net revenues attributable to Ambrell, as a percent of our total consolidated net revenues, net revenues from customers in non-ATE markets were 27% for both the three and nine months ended September 30, 2017 compared to 26% in each of the comparable prior periods, and 27%orders for the three months ended June 30, 2017.Product/Customer MixBoth of our product segments each have multiple products that we design, manufacture and market to our customers. Due to a number of factors, our products have varying levels of gross margin. The mix of products we sell in any period is ultimately determined by our customers' needs. Therefore, the mix of products sold in any given period can change significantlyMarch 31, 2021. Decreased revenue from the prior period.defense/aerospace and telecommunications markets were partially offset by increases in revenue from the automotive and industrial markets.
COVID-19 Pandemic
During the second quarter of 2021, as more Americans became vaccinated and the spread of COVID-19 appeared to be lessening, governmental mandates and restrictions in the regions in the U.S. where we operate our business were reduced or eliminated. As a result, we began the process of reopening our consolidated gross margin can be significantly impactedoffices in any given period by a changethese regions. As of the date of this Report, due to the increasing spread of COVID-19 variants in the mixU.S., several regulatory authorities have either reinstated certain COVID-19 mandates or restrictions or have indicated they are considering taking such actions. We are following the guidance of products soldthe CDC. Accordingly, as of the date of this Report, our U.S. offices remain open, but we are requiring all employees to wear masks and maintain appropriate social distancing. As of the date of this Report, our offices in that period.We sellEurope have also reopened to varying degrees, while our employees in Asia remain under more significant restrictions. Our employees outside of the U.S. continue to follow the guidance of their local regulatory authorities, which in most cases includes wearing masks, observing social distancing, limiting travel and quarantining after travel, as required.
While the negative impact of COVID-19 on our business was reduced significantly in the second half of 2020 and the first half of 2021, the spread of the virus or variants of the virus could continue to worsen and one or more of our productssignificant customers or suppliers could be impacted, or significant additional governmental regulations and restrictions could be imposed, thus negatively impacting our business in the future. We continue to semiconductor manufacturersmonitor the situation closely in the regions in which we operate in the U.S. and third-party testabroad and assembly houses (end user sales)will adjust our operations as necessary to protect the health and well-being of our employees. To the extent that further governmental mandates or restrictions are implemented in the future, we currently expect to ATE manufacturers (OEM sales) who ultimately resellbe able to continue to operate our equipment with theirsbusiness in a manner similar to both semiconductor manufacturers and third-party test and assembly houses. Our Thermal segment also sells into a variety of other markets, includinghow we have operated over the automotive, consumer electronics, defense/aerospace, energy, industrial and telecommunications markets, and, aspast year. As a result of our current level of working capital as well as the acquisition of Ambrell, the consumer products packaging, fiber optics and other markets. The mix of customers during any given period will affectavailability under our gross margin duerevolving credit facility, which is discussed in Note 9, we currently expect to differing sales discounts and commissions. For the three months ended September 30, 2017 and 2016,have sufficient liquidity to operate our OEM sales as a percentage of net revenues were 2% and 3%, respectively. For the nine months ended September 30, 2017 and 2016, our OEM sales as a percentage of net revenues were 6% and 5%, respectively.OEM sales generally have a lower gross margin than end user sales, as OEM sales historically have had a more significant discount. Our current net operating margins on most OEM sales, however, are only slightly less than margins on end user sales because of the payment of third party sales commissions on most end user sales. We have also continued to experience demands from our OEM customers' supply chain managers to reduce our sales prices to them. If we cannot further reduce our manufacturing and operating costs, these pricing pressures will negatively affect our gross and operating margins.business throughout 2021.
inTEST CORPORATIONResults of Operations
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations
The results of operations for our two productoperating segments are generally affected by the same factors described in the Overview section above. Separate discussions and analyses for each product segment would be repetitive. The discussion and analysis that follows, therefore, is presented on a consolidated basis and includes discussion of factors unique to each product segment where significant to an understanding of that segment.
Three MonthsMonths Ended SeptemberJune 30, 20172021 Compared to Three MonthsMonths Ended SeptemberJune 30, 20162020
Net Revenues. Net revenues were $17.4$21.8 million for the three months ended SeptemberJune 30, 20172021 compared to $10.8$13.3 million for the same period in 2016,2020, an increase of $6.5$8.5 million, or 60%64%. Our net revenues for the three months ended September 30, 2017 included $4.9 million of net revenues attributable to Ambrell. We believe the increase in our net revenues during the thirdsecond quarter of 20172021 primarily reflects the factors previously discussed in the Overview.
Overview section.
Gross Margin. Our consolidated gross margin was 51%50% of net revenues for the three months ended SeptemberJune 30, 20172021 as compared to 52%46% of net revenues for the same period in 2016.2020. The decreaseincrease in our gross margin primarily reflects that our fixed operating costs were more fully absorbed by the higher net revenue levels in 2021. Although our fixed operating costs were relatively unchanged in absolute dollar terms, as a percentage of net revenues primarily reflects an increasethese costs decreased from 18% of net revenues for the three months ended June 30, 2020 to 11% of net revenues for the same period in 2021. During the three months ended June 30, 2021 as compared to the same period in 2020, decreases in facility-related costs and premiums for medical insurance in both our segments were offset by increased salaries and benefits expense due to additional headcount in our fixed operating costs. OfThermal segment. To a lesser extent, there were also increases in our corporate insurance premiums, which are based on the $1.1 million increasevolume of business, and supplies used in these costs, $913,000 represents the fixed operating costs attributable to Ambrell.our manufacturing plants. The remaining $166,000 increasedecrease in our fixed operating costs primarily reflects higher salary and benefits expense foras a percentage of net revenues during the three months ended June 30, 2021 as compared to the same period in 2020 was partially offset by an increase in our Thermal segment.
component material costs, reflecting changes in product mix.
Selling Expense. Selling expense was $2.3$2.6 million for the three months ended SeptemberJune 30, 20172021 compared to $1.4$1.8 million for the same period in 2016,2020 an increase of $928,000,$844,000, or 67%48%. Our expense forCommissions increased $562,000 and standard warranty accruals increased $65,000, both of which primarily reflect the three months ended September 30, 2017 included $850,000 of selling costs attributable to Ambrell. The remaining increase of $78,000 primarily reflectshigher net revenue levels. We also had an increase in salarysalaries and benefits expense for our Thermal segment.
due to additional headcount and higher levels of travel and trade show expense as COVID-19 restrictions were reduced or eliminated. We expect this increase in travel costs to continue throughout the balance of 2021 as we return to a more normal business model with regard to customer support and on-site visits.
Engineering and Product Development Expense. Engineering and product development expense was $1.1$1.4 million for the three months ended SeptemberJune 30, 20172021 compared to $905,000$1.2 million for the same period in 2016,2020, an increase of $234,000,$139,000, or 26%11%. Engineering expense attributable to Ambrell in the third quarter of 2017 was $269,000. When adjusted to eliminate this amount, engineering expense would have decreased $35,000, or 4%, for the third quarter of 2017 as compared to same period in 2016. This decreaseThe increase primarily reflects reduced spending on legal matters relatedhigher salaries and benefits expense as a result of headcount additions in our Thermal segment, and, to our intellectual property which was partially offset bya lesser extent, an increase in the cost of materialsspending on third-party consultants used in new product development forin both of our Thermal segment.
segments.
General and Administrative Expense. General and administrative expense was $3.1$3.8 million for the three months ended SeptemberJune 30, 20172021 compared to $1.6$2.9 million for the same period in 2016,2020, an increase of $1.6 million,$919,000, or 100%32%. Our expenses for the third quarter of 2017 included $31,000 of transaction costs related to the acquisition of Ambrell on May 24, 2017, and $1.3 million of general and administrative expense attributable to Ambrell. Ambrell’s general and administrative expense included $560,000 of amortization of intangible assets. When adjusted to eliminate these items, general and administrative expense would have increased $258,000 or 17%, primarily reflecting an increase in accruals for profit related bonuses, higher salary and benefits expense, including deferred compensation expense related to stock-based awards. To a lesser extent, there was also an increase in fees paid to third party professionals who assist us in a variety of compliance related matters and an increase in travel cost.Contingent Consideration Liability. During the three months ended SeptemberJune 30, 2017,2021, we recorded a reduction$227,000 of $549,000 inlegal fees and stock-based compensation costs related to the fair valueretirement of our liability for contingent consideration. This liability is a resultformer CFO and the appointment of our acquisition of Ambrell in May 2017 andnew CFO, which is discussed further in NotesNote 3 and 4 to our consolidated financial statements. The reductionstatements in this Report. In connection with our new corporate strategy, we have implemented certain corporate growth initiatives in both of our segments. Costs associated with these initiatives were $145,000 during the three months ended June 30, 2021. There were no similar costs in the fair value is primarily a resultthree months ended June 30, 2020. In addition to these increases, during the three months ended June 30, 2021, as compared to the same period in 2020, we recorded higher levels of a reductionstock-based compensation expense, reflecting an increase in the projected adjusted EBITDAprice of Ambrell forour common stock, and an increase in profit-based bonuses, reflecting our increased earnings in the year ending December 31, 2017.
three months ended June 30, 2021 as compared to the same period in 2020.
Restructuring and Other Charges. For the three months ended June 30, 2021, we recorded $197,000 in restructuring and other charges related to the retirement of our former CFO and the consolidation of our EMS manufacturing operations. During the same period in 2020, we recorded $38,000 in restructuring and other charges related to headcount reductions in our Thermal segment.
Income Tax Expense.Expense (Benefit). For the three months ended SeptemberJune 30, 2017,2021, we recorded income tax expense of $823,000$447,000 compared to $631,000income tax expense of $13,000 for the same period in 2016.2020. Our effective tax rate was 29%15% for the three months ended SeptemberJune 30, 20172021 compared to 37%7% for the same period in 2016.2020. On a quarterly basis, we record income tax expense or benefit based on the expected annualized effective tax rate for the various taxing jurisdictions in which we operate our businesses. The decrease in ourlower effective tax rate in the three months ended June 30, 2020 reflects recordingadjustments that were made to bring the aforementioned reductioneffective tax rate for the six-month period ended June 30, 2020 to the expected annualized effective tax rate as of $549,000 in our liability for contingent consideration which is not taxable.
inTEST CORPORATIONthat date.
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
NineSix Months Ended SeptemberJune 30, 20172021 Compared to NineSix Months Ended SeptemberJune 30, 20162020
Net Revenues. Net revenues were $47.4$41.4 million for the ninesix months ended SeptemberJune 30, 20172021 compared to $30.0$24.5 million for the same period in 2016,2020, an increase of $17.4$16.9 million, or 58%69%. Our net revenues for the nine months ended September 30, 2017 included $6.9 million of net revenues attributable to Ambrell. We believe the increase in our net revenues during the first ninesix months of 20172021 primarily reflects the factors previously discussed in the Overview section above.
section.
Gross Margin. Our consolidated gross margin was 53%50% of net revenues for the ninesix months ended SeptemberJune 30, 20172021 as compared to 50%45% of net revenues for the same period in 2016. Although2020. The increase in our gross margin primarily reflects that our fixed operating costs increased $1.8 million in absolute dollar terms, they were more fully absorbed by the higher net revenue levels. Of the $1.8 million increaselevels in the absolute dollar value of these costs, $1.3 million represents the fixed operating costs attributable to Ambrell. The remaining $506,000 increase in2021. Although our fixed operating costs primarily reflects higher salary and benefits expense for our Thermal segment as a result of an increased use of temporary labor for operations support due to the increased order and shipment activity. To a lesser extent, the increasewere relatively unchanged in gross marginabsolute dollar terms, as a percentage of net revenues also reflectsthese costs decreased from 20% of net revenues for the six months ended June 30, 2020 to 12% of net revenues for the same period in 2021. During the six months ended June 30, 2021 as compared to the same period in 2020, decreases in facility related costs, primarily in our EMS segment, and a reduction in premiums for medical insurance in both our component materialsegments were offset by increased salaries and benefits expense due to additional headcount in our Thermal segment. The decrease in our fixed operating costs as a percentage of net revenues during the six months ended June 30, 2021 as a result ofcompared to the same period in 2020 was partially offset by an increase in our component material costs, reflecting changes in product and customer mix.
Selling Expense. Selling expense was $5.9$5.0 million for the ninesix months ended SeptemberJune 30, 20172021 compared to $4.2$3.8 million for the same period in 2016,2020 an increase of $1.7$1.2 million, or 40%31%. OurCommissions increased $940,000 and standard warranty accruals increased $121,000, both of which primarily reflect the higher net revenue levels. We also had an increase in salaries and benefits expense for the nine months ended September 30, 2017 included $1.2 million of selling costs attributabledue to Ambrell. The remaining increase of $494,000 primarily reflectsadditional headcount in our EMS segment and higher levels of commissiontravel and trade show expense reflecting the higher net revenues, and to a lesser extent, anin both of our segments as COVID-19 restrictions were reduced or eliminated. We expect this increase in travel costs to continue throughout the balance of 2021 as we return to a more normal business model with regard to customer support and salary and benefits expense for our Thermal segment.
on-site visits.
Engineering and Product Development Expense. Engineering and product development expense was $3.1$2.7 million for the ninesix months ended SeptemberJune 30, 20172021 compared to $2.9$2.5 million for the same period in 2016,2020 an increase of $178,000,$169,000, or 6%7%. Our expense for the nine months ended September 30, 2017 included $351,000 of engineering costs attributable to Ambrell. When adjusted to eliminate this amount, engineering expense would have decreased $173,000, or 6%, for the first nine months of 2017 as compared to same period in 2016. This decreaseThe increase primarily reflects reduced spending on legal matters related to our intellectual property and lower salaryhigher salaries and benefits expense foras a result of headcount additions in our EMS productThermal segment.
General and Administrative Expense. General and administrative expense was $8.4$6.9 million for the ninesix months ended SeptemberJune 30, 20172021 compared to $5.4$5.7 million for the same period in 2016,2020, an increase of $3.1$1.2 million, or 57%21%. Our expenses forAs previously discussed, during the first ninesix months ended June 30, 2021, we recorded $227,000 of 2017 included $880,000 of transactionlegal fees and stock-based compensation costs related to the acquisitionretirement of Ambrell on May 24, 2017,our former CFO and $1.8 millionthe appointment of general and administrativeour new CFO. In addition, in connection with our new corporate strategy, we have implemented certain corporate growth initiatives in both of our segments. Costs associated with these initiatives were $244,000 during the six months ended June 30, 2021. There were no similar costs in the six months ended June 30, 2020. In addition to these increases, during the six months ended June 30, 2021 as compared to the same period in 2020, we recorded higher levels of stock-based compensation expense, attributable to Ambrell. Ambrell’s general and administrative expense included $757,000reflecting an increase in the price of amortization of intangible assets. Our expenses for the first nine months of 2016 included $479,000 of transaction costs related to an acquisition that did not close. When adjusted to eliminate these items, general and administrative expense would have increased $850,000 or 17%, primarily reflecting higher salary and benefits expenseour common stock, and an increase in accruals for profit-related bonuses. To a lesser extent there was also an increaseprofit-based bonuses, reflecting our increased earnings in travel coststhe first half of 2021.
Restructuring and professional fees.Contingent Consideration Liability.Other Charges. For the six months ended June 30, 2021, we recorded $252,000 in restructuring and other charges related to retirement of our former CFO and the consolidation of our EMS manufacturing operations. During the nine months ended September 30, 2017,same period in 2020, we recorded a reduction of $549,000$46,000 in the fair value ofrestructuring and other charges related to headcount reductions in our liability for contingent consideration. This liability is a result ofCorporate staff and our acquisition of Ambrell in May 2017 and is discussed further in Notes 3 and 4 to our consolidated financial statements. The reduction in the fair value is primarily a result of a reduction in the projected adjusted EBITDA of Ambrell for the year ending December 31, 2017.
Thermal segment.
Income Tax Expense.Expense (Benefit). For the ninesix months ended SeptemberJune 30, 2017,2021, we recorded income tax expense of $2.8 million$813,000 compared to $937,000an income tax benefit of $237,000 for the same period in 2016.2020. Our effective tax rate was 34%14% for the ninesix months ended SeptemberJune 30, 20172021 compared to 36%20% for the same period in 2016.2020. On a quarterly basis, we record income tax expense or benefit based on the expected annualized effective tax rate for the various taxing jurisdictions in which we operate our businesses. The decrease in ourlower effective tax rate in the six months ended June 30, 2021 primarily reflects both an increase in the aforementioned adjustmentdeduction for foreign-derived intangible income and an increase in the level of our tax deductions related to our liability for contingent consideration.
stock-based compensation. To a lesser extent, we also recorded increased levels of expected tax credits driven by both research and development activities and foreign operations.
Liquidity and Capital Resources
As discussed more fully in the Overview, our business and results of operations are substantially dependent upon the demand for ATE by semiconductor manufacturers and companies that specialize in the testing of ICs. The cyclical and volatile nature of demand for ATE makes estimates of future revenues, results of operations and net cash flows difficult.
inTEST CORPORATION
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)difficult, especially in light of COVID-19.
Our primary historical source of liquidity and capital resources has been cash flow generated by our operations, and we manage our businesses to maximize operating cash flows as our primary source of liquidity. We use cash to fund growth in our operating assets, for new product research and development for acquisitions and for stock repurchases.acquisitions.
Liquidity
Our cash and cash equivalents and working capital were as follows:follows (in thousands):
September 30, 2017 | December 31, 2016 | June 30, | December 31, | |||||||||||||
Cash and cash equivalents | $ | 11,499 | $ | 28,611 | $ | 14,625 | $ | 10,277 | ||||||||
Working capital | $ | 19,604 | $ | 32,950 | $ | 24,970 | $ | 18,108 |
As of SeptemberJune 30, 2017, $2.72021, $3.3 million, or 22%, of our cash and cash equivalents was held by our foreign subsidiaries. When these funds are needed for our operations in the U.S., we may be required to accrue and pay U.S. taxes if we repatriate certain of these funds.
We currently expect our cash and cash equivalents, and projected future cash flowin combination with the borrowing availability under our revolving credit facility to be sufficient to support our short termshort-term working capital requirements the post-acquisition integration of Ambrell, the potential contingent consideration payments for Ambrell and other corporate requirements. Our revolving credit facility is discussed in Note 9 to our consolidated financial statements in this Report.
Our material short-term cash requirements include payments due under our various lease agreements, recurring payroll and benefits obligations to our employees and purchase commitments for materials that we use in the products we sell. We estimate that our minimum short-term working capital requirements currently range between $5.0 million and $7.0 million. We also anticipate making investments in our business in the next twelve months including hiring of additional staff, updates to our website and other systems and investments related to our geographic and market expansion efforts. We expect our current cash and cash equivalents, in combination with the borrowing capacity available under our revolving credit facility and the anticipated net cash to be provided by our operations to be sufficient to support these additional investments as well as our current short-term cash requirements. However, should the impact of COVID-19 or variants of the virus on our operations, including the disruption to our business that would be caused by any unanticipated facility closures or significantly reduced demand from our customers, be more significant than we currently expect, we may need additional financial resources, including additional debt or equity financings in the long-term. There can be no assurance that any such debt or equity financings would be available on favorable terms or rates or at all.
Our current growth strategy includes pursuing acquisition opportunities for complementary businesses, technologies or products. We currently anticipate that any long-term cash requirements related to consummate a significantour acquisition if the consideration in such a transactionstrategy would require us to utilize a substantial portion of, or an amount equal tobe funded all or in excess of, our available cash. Wepart through obtaining additional third-party debt or issuing equity. If we were to obtain additional third-party debt, we do not currently haveknow at what rates or on what terms any credit facilities under whichsuch debt would be available.
Cash Flows
Operating Activities. For the six months ended June 30, 2021, we can borrow to help fund our working capital or other requirements.Cash FlowsOperating Activities.recorded net earnings of $4.8 million. Net cash provided by operations for the nine months ended September 30, 2017during this period was $5.2$3.9 million. During the ninesix months ended SeptemberJune 30, 2017,2021, we recorded net earnings of $5.5 million which includedhad non-cash charges of $1.3$1.5 million for depreciation and amortization a $549,000 reduction inwhich included $529,000 of amortization related to our ROU assets. Our operating lease liabilities declined $641,000 during this same period. During the fair value of our contingent consideration liability, $292,000six months ended June 30, 2021, we also recorded $723,000 for amortization of deferred compensation expense related to stock-based awards and $161,000 as a provision for excess and obsolete inventory. Approximately $757,000 of our amortization expense was related toawards. Accounts receivable increased $4.4 million during the intangible assets acquired as part ofsix months ended June 30, 2021, reflecting the acquisition of Ambrellsignificant increase in May 2017, which is discussed furthernet revenues in the Overviewfirst half of 2021, while inventories, accounts payable and Note 3 to our consolidated financial statements. When adjusted to eliminate the assets and liabilities purchased in the acquisition of Ambrell, accounts receivable and inventoriesaccrued sales commissions increased $1.3 million, $1.1 million and $581,000,$399,000, respectively, duringalso reflecting the nine months ended September 30, 2017 compared to the levels at the end of 2016. These increases primarily reflect theincrease in business levels. Accrued wages and benefits increased business activity$663,000 during the first ninesix months of 2017 as compared to the fourth quarter2021 reflecting higher levels of 2016. During the nine month months ended September 30, 2017, domestic and foreign income taxes payable increased $472,000profit-based bonuses accruals as a result of higher levelsour level of taxable incomeprofit in the first six months of 2021. Customer deposits increased $499,000 during the first ninesix months of 2017.
ended June 30, 2021, primarily in our Thermal segment.
Investing Activities.Activities. During the ninesix months ended SeptemberJune 30, 2017, we completed the acquisition of Ambrell for $22.0 million, net of cash acquired, as discussed in further detail in the Overview and Note 3 to our consolidated financial statements. During the nine months ended September 30, 2017,2021, purchases of property and equipment were $435,000. We currently plan to spend approximately $1.5 million to $2.0 million on$463,000, primarily reflecting leasehold improvements for a newto our facility for Ambrell in Rochester,Mt. Laurel, New York. We expect to spend these funds during the fourth quarter of 2017 and the first quarter of 2018 and expect to take occupancy on May 1, 2018.Jersey which were funded using our working capital. We have no other significant commitments for capital expenditures for the balance of 2017;2021; however, depending upon changes in market demand or manufacturing and sales strategies, we may make such purchases or investments as we deem necessary and appropriate.
These additional cash requirements would be funded by our cash and cash equivalents, anticipated net cash to be provided by operations and our revolving credit facility.
Financing Activities.Activities. During the ninesix months ended SeptemberJune 30, 2017,2021, we utilized $62,000received $1.0 million as a result of the exercise of options to repurchase 13,883acquire 145,575 shares of our common stockstock. These options were issued to certain current and former employees under the 2015 Repurchase Plan.
our stock-based compensation plans which are discussed in Note 10 to our consolidated financial statements in this Report.
New or Recently Adopted Accounting Standards
See the Notes to our consolidated financial statements in this Report for information concerning the implementation and impact of new or recently adopted accounting standards.
inTEST CORPORATION
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Critical Accounting PoliciesEstimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of AmericaGAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, long-lived assets, goodwill, identifiable intangibles, contingent consideration liabilities and deferred income tax valuation allowances. We base our estimates on historical experience and on appropriate and customary assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Some of these accounting estimates and assumptions are particularly sensitive because of their significance to our consolidated financial statements and because of the possibility that future events affecting them may differ markedly from what had been assumed when the financial statements were prepared. As of SeptemberJune 30, 2017,2021, there have been no significant changes to the accounting policiesestimates that we have deemed critical. These policiescritical other than the change in accounting estimate that is discussed in Note 15 to our consolidated financial statements in this Report. Our critical accounting estimates are more fully described in our 20162020 Form 10-K.
Off -Balance Sheet Arrangements
There were no off-balance sheet arrangements during the ninesix months ended SeptemberJune 30, 20172021 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
This disclosure is not required for a smaller reporting company.
| CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act").Act. Because there are inherent limitations in all control systems, a control system, no matter how well conceived and operated, can provide only reasonable, as opposed to absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Our management, including ourthe Chief Executive Officer ("CEO"(“CEO”) and Chief Financial Officer ("CFO"(“CFO”), does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, our management has designed the disclosure controls and procedures to provide reasonable assurance that the objectives of the control system were met.
CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls and Procedures. As required by Rule 13a-15(b), of the Exchange Act, inTEST management, including our CEO and CFO, conducted an evaluation as of the end of the period covered by this report,Report, of the effectiveness of our disclosure controls and procedures.procedures, including the impact of COVID-19. Based on that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this report,Report, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial ReportingThere
During the period covered by this Report, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We will continue monitoring and assessing any impacts from COVID-19 on our internal controls.
PART II.OTHER INFORMATION
Item 1. | Legal Proceedings |
From time to time we may be a party to legal proceedings occurring in the ordinary course of business. We are not currently involved in any material legal proceedings.
Item 1A. | Risk Factors |
Information regarding the primary risks and uncertainties that could materially and adversely affect our future performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements, appears in Part I, Item 1A - "Risk Factors" of our 20162020 Form 10-K filed with the Securities and Exchange Commission on March 27, 2017.23, 2021. There have been no material changes from the risk factors set forth in our 2020 Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2.Unregistered Sales of Equity Securities and Use of ProceedsNone.
On October 27, 2015, our Board of Directors authorized the repurchase of up to $5.0 million of our common stock from time to time on the open market, in compliance with Rule 10b-18 under the Exchange Act, or in privately negotiated transactions (the "2015 Repurchase Plan"). Repurchases may also be made under trading plans entered into with RW Baird & Co. (each a "10b5-1 Plan"), which permit shares to be repurchased when we might otherwise be precluded from doing so under insider trading laws. The 2015 Repurchase Plan does not obligate us to repurchase any particular amount of common stock and may be suspended or discontinued at any time without prior notice. The 2015 Repurchase Plan is funded using our operating cash flow or available cash. The timing, price and amount of any shares repurchased under the 2015 Repurchase Plan is determined by our management, based on our evaluation of market conditions and other factors. To date, all purchases have been made in accordance with 10b5-1 Plans which provided for purchases to be made so long as the price did not exceed a maximum price. Recently, the price of our shares has exceeded the cap. Management is considering new parameters for future purchases and may enter into a new 10b5-1 Plan at some point under those new parameters. For the three months ended September 30, 2017, there were no shares repurchased. As of September 30, 2017 all of the Company’s 10b5-1 Plans had expired.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
PART II. OTHER INFORMATION
Item 6. | Exhibits |
(1) | Previously filed by the Company as an exhibit to the | |
(2) | Previously filed by the Company as an exhibit to the | |
(3) | Previously filed by the Company as an exhibit to the Company’s Current Report on Form 8-K dated June 10, 2021, File No. 001-36117, filed June 14, 2021, and incorporated herein by reference. | |
* | Indicates a management contract or compensatory plan, contract or arrangement in which directors or executive officers participate. |
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 12, 2021 | /s/ |
Richard N. Grant, Jr. | ||
| President and Chief Executive Officer | |
Date: | August 12, 2021 | /s/ |
Duncan Gilmour | ||
|
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