INTEST CORP - Quarter Report: 2019 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________

 

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 September 30, 2019 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 (State or other jurisdiction of incorporation or organization)

22-2370659 (I.R.S. Employer Identification Number)

 

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 Common Stock, par value $0.01 per share	Trading Symbol INTT	Name of Each Exchange on Which Registered NYSE American

 

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 ☒      NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
YES ☒      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 an 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 ☐      NO ☒

 

Number of shares of Common Stock, $0.01 par value, outstanding as of the close of business on October 31, 2019: 10,494,761  

 

 

 

inTEST CORPORATION

INDEX

 

 

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018	1
	Unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 2019 and 2018	2
	Unaudited Consolidated Statements of Comprehensive Earnings (Loss) for the three months and nine months ended September 30, 2019 and 2018	3
	Unaudited Consolidated Statements of Stockholders' Equity for the three months and nine months ended September 30, 2019 and 2018	4
	Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
Signatures		30

 

 

 

		September 30,				December 31,
		2019				2018
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	8,025			$	17,861
Trade accounts receivable, net of allowance for doubtful accounts of $232 and $233, respectively			9,223				10,563
Inventories			7,721				6,520
Prepaid expenses and other current assets			905				677
Total current assets			25,874				35,621
Property and equipment:
Machinery and equipment			5,294				5,166
Leasehold improvements			2,357				2,341
Gross property and equipment			7,651				7,507
Less: accumulated depreciation			(5,228	)			(4,790	)
Net property and equipment			2,423				2,717
Right-of-use assets, net			5,138				-
Goodwill			13,738				13,738
Intangible assets, net			13,967				14,911
Restricted certificates of deposit			140				175
Other assets			25				25
Total assets		$	61,305			$	67,187
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	2,728			$	1,787
Accrued wages and benefits			1,948				2,921
Accrued professional fees			963				774
Customer deposits and deferred revenue			738				1,258
Accrued sales commission			444				703
Current portion of operating lease liabilities			1,317				-
Domestic and foreign income taxes payable			868				700
Earnout payable			-				12,167
Other current liabilities			590				1,108
Total current liabilities			9,596				21,418
Operating lease liabilities, net of current portion			4,095				-
Contingent liability for repayment of state and local grant funds received			463				200
Deferred tax liabilities			2,382				2,689
Total liabilities			16,536				24,307
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued or outstanding			-				-
Common stock, $0.01 par value; 20,000,000 shares authorized; 10,604,132 and 10,523,035 shares issued, respectively			106				105
Additional paid-in capital			26,971				26,513
Retained earnings			17,281				15,683
Accumulated other comprehensive earnings			615				783
Treasury stock, at cost; 33,077 shares			(204	)			(204	)
Total stockholders' equity			44,769				42,880
Total liabilities and stockholders' equity		$	61,305			$	67,187

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Net revenues		$	14,632			$	20,160			$	47,046			$	60,128
Cost of revenues			7,427				10,068				24,286				29,731
Gross margin			7,205				10,092				22,760				30,397
Operating expenses:
Selling expense			2,044				2,291				6,505				7,305
Engineering and product development expense			1,261				1,207				3,753				3,733
General and administrative expense			3,094				3,318				10,549				9,643
Adjustment to contingent consideration liability			-				3,057				-				4,073
Total operating expenses			6,399				9,873				20,807				24,754
Operating income			806				219				1,953				5,643
Other income (loss)			(12	)			(57	)			3				(103	)
Earnings before income tax expense			794				162				1,956				5,540
Income tax expense			147				728				358				1,711
Net earnings (loss)		$	647			$	(566	)		$	1,598			$	3,829
Net earnings (loss) per common share - basic		$	0.06			$	(0.05	)		$	0.15			$	0.37
Weighted average common shares outstanding - basic			10,421,383				10,355,673				10,405,892				10,341,552
Net earnings (loss) per common share - diluted		$	0.06			$	(0.05	)		$	0.15			$	0.37
Weighted average common shares and common share equivalents outstanding - diluted			10,429,536				10,355,673				10,423,121				10,377,505

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Net earnings (loss)		$	647			$	(566	)		$	1,598			$	3,829
Foreign currency translation adjustments			(144	)			(4	)			(168	)			(86	)
Comprehensive earnings (loss)		$	503			$	(570	)		$	1,430			$	3,743

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		Nine Months Ended September 30, 2019
																		Accumulated
										Additional								Other								Total
		Common Stock								Paid-in				Retained				Comprehensive				Treasury				Stockholders'
		Shares				Amount				Capital				Earnings				Earnings				Stock				Equity
Balance, January 1, 2019			10,523,035			$	105			$	26,513			$	15,683			$	783			$	(204	)		$	42,880
Net earnings			-				-				-				1,138				-				-				1,138
Other comprehensive loss			-				-				-				-				(83	)			-				(83	)
Amortization of deferred compensation related to stock-based awards			-				-				183				-				-				-				183
Issuance of unvested shares of restricted stock			80,300				1				(1	)			-				-				-				-
Balance, March 31, 2019			10,603,335				106				26,695				16,821				700				(204	)			44,118
Net loss			-				-				-				(187	)			-				-				(187	)
Other comprehensive income			-				-				-				-				59				-				59
Amortization of deferred compensation related to stock-based awards			-				-				213				-				-				-				213
Issuance of unvested shares of restricted stock			35,380				-				-				-				-				-				-
Forfeiture of unvested shares of restricted stock			(12,325	)			-				-				-				-				-				-
Balance, June 30, 2019			10,626,390				106				26,908				16,634			$	759				(204	)			44,203
Net earnings			-				-				-				647				-				-				647
Other comprehensive loss			-				-				-				-				(144	)			-				(144	)
Amortization of deferred compensation related to stock-based awards			-				-				242				-				-				-				242
Issuance of unvested shares of restricted stock			16,900				-				-				-				-				-				-
Repurchase and retirement of common stock			(39,158	)			-				(179	)			-				-				-				(179	)
Balance, September 30, 2019			10,604,132			$	106			$	26,971			$	17,281			$	615			$	(204	)		$	44,769

		Nine Months Ended September 30, 2018
																		Accumulated
										Additional								Other								Total
		Common Stock								Paid-in				Retained				Comprehensive				Treasury				Stockholders'
		Shares				Amount				Capital				Earnings				Earnings				Stock				Equity
Balance, January 1, 2018			10,427,435			$	104			$	25,860			$	12,646			$	882			$	(204	)		$	39,288
Net earnings			-				-				-				381				-				-				381
Other comprehensive income			-				-				-				-				38				-				38
Amortization of deferred compensation related to stock-based awards			-				-				121				-				-				-				121
Issuance of unvested shares of restricted stock			79,200				1				(1	)			-				-				-				-
Balance, March 31, 2018			10,506,635				105				25,980				13,027				920				(204	)			39,828
Net earnings			-				-				-				4,014				-				-				4,014
Other comprehensive loss			-				-				-				-				(120	)			-				(120	)
Amortization of deferred compensation related to stock-based awards			-				-				171				-				-				-				171
Issuance of unvested shares of restricted stock			11,900				-				-				-				-				-				-
Balance, June 30, 2018			10,518,535				105				26,151				17,041				800				(204	)			43,893
Net loss			-				-				-				(566	)			-				-				(566	)
Other comprehensive loss			-				-				-				-				(4	)			-				(4	)
Amortization of deferred compensation related to stock-based awards			-				-				180				-				-				-				180
Issuance of unvested shares of restricted stock			4,500				-				-				-				-				-				-
Balance, September 30, 2018			10,523,035			$	105			$	26,331			$	16,475			$	796			$	(204	)		$	43,503

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		Nine Months Ended September 30,
		2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings		$	1,598			$	3,829
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization			2,431				1,370
Payment of earnout related to Ambrell acquisition			(12,167	)			(1,710	)
Adjustment to earnout payable			-				4,073
Provision for excess and obsolete inventory			341				195
Foreign exchange (gain) loss			37				(115	)
Amortization of deferred compensation related to stock-based awards			638				472
Loss on disposal of property and equipment			17				43
Proceeds from sale of demonstration equipment, net of gain			138				172
Deferred income tax benefit			(307	)			(211	)
Changes in assets and liabilities:
Trade accounts receivable			1,254				896
Inventories			(1,551	)			(2,336	)
Prepaid expenses and other current assets			(235	)			(205	)
Restricted certificates of deposit			35				-
Accounts payable			943				995
Accrued wages and benefits			(969	)			(79	)
Accrued professional fees			192				96
Customer deposits and deferred revenue			(509	)			170
Accrued sales commission			(257	)			(4	)
Operating lease liabilities			(1,059	)			-
Domestic and foreign income taxes payable			171				22
Contingent liability for repayment of state and local grant funds received			263				-
Long-term portion of federal transition tax payable			-				(436	)
Other current liabilities			(135	)			(15	)
Net cash provided by (used in) operating activities			(9,131	)			7,222
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment			(413	)			(2,134	)
Net cash used in investing activities			(413	)			(2,134	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of earnout related to Ambrell acquisition			-				(4,123	)
Repurchases of common stock			(179	)			-
Net cash used in financing activities			(179	)			(4,123	)
Effects of exchange rates on cash			(113	)			(53	)
Net cash provided by (used in) all activities			(9,836	)			912
Cash and cash equivalents at beginning of period			17,861				13,290
Cash and cash equivalents at end of period		$	8,025			$	14,202
Cash payments for:
Domestic and foreign income taxes		$	488			$	2,256

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(1)	NATURE OF OPERATIONS

 

We are a global supplier of precision-engineered solutions for use in manufacturing and testing across a wide range of markets including automotive, defense/aerospace, energy, industrial, semiconductor and telecommunications.  We manage our business as two operating segments which are also our reportable segments:  Thermal Products ("Thermal") and Electromechanical Semiconductor Products ("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.

 

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 equipment with theirs to both semiconductor manufacturers and third-party test and assembly houses. Our Thermal segment sells its products to many of these same types of customers. However, it also sells into a variety of other markets, including the automotive, consumer electronics, defense/aerospace, energy, industrial and telecommunications markets. As a result of the acquisition of Ambrell Corporation (“Ambrell”) in May 2017, our Thermal segment also sells into the consumer products packaging, fiber optics and other sectors within the broader industrial market, and into the wafer processing sector within the broader semiconductor market.

 

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 gross margin can be significantly impacted in any given period by a change in the mix of products sold in that period.

 

Historically, we have referred to our markets as “Semiconductor” (which includes both the broader semiconductor market as well as the more specialized ATE and wafer processing sectors within the broader semiconductor market), and “Non-Semiconductor” (which includes all of the other markets we serve). Starting in the second quarter of 2019, we are referring to the broader semiconductor market, including the ATE and wafer processing sectors within that market, as the “Semi Market.” All other markets are designated as “Multimarket.” The Semi Market, which is the principal 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 Semi 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 acquisition strategy that may cause us to incur substantial expense in reviewing and evaluating potential transactions. We may or may not be successful in locating suitable businesses to acquire and 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 future operating results.

 

 

(2)	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 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 and deferred tax assets and liabilities including related valuation allowances, 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 Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) filed on March 26, 2019 with the Securities and Exchange Commission.

 

Reclassification

Certain prior period amounts have been reclassified to be comparable with the current period's presentation.

 

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 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 in 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.

Goodwill, Intangible and Long-Lived Assets

We account for goodwill and intangible assets in accordance with Accounting Standards Codification (“ASC”) 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-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 that it is more-likely-than-not that the 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 quantitative goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized. 

 

The quantitative goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The 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. 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, 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-not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is 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, 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 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 determine 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 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 net 30, net 45 or net 60 day payment terms. 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 sell thermal test and thermal process products (“thermal products”) and semiconductor test products. Our thermal products include ThermoStreams, ThermoChambers and process chillers, which we sell under our Temptronic, Sigma and Thermonics product lines, and Ambrell’s precision induction heating systems, including EkoHeat and EasyHeat products. Our semiconductor test products include manipulators, docking hardware and electrical interface products. We provide post-warranty service for the equipment we sell. We sell semiconductor test products and certain thermal products to the Semi Market. We also sell our thermal products to markets outside the Semi Market (referred to collectively as “Multimarket”) that include the automotive, defense/aerospace, industrial, telecommunications and other 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 an established percentage 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 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 no 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. In very limited cases, we offer customers an option to separately purchase an extended warranty for certain of our 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. 

 

Refer to Notes 4 and 12 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. 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 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 842 (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 of 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 842. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment and financing lease liabilities. We do not currently have any financing leases.

 

 

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.

We have made an accounting policy election not to apply the recognition requirements of ASC 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 “Effect of Recently Adopted Amendments to Authoritative Accounting Guidance” below and Note 7 for further disclosures regarding our leases.

  

Contingent Liability for Repayment of State and Local Grant Funds Received

 

In connection with 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 may receive grants totaling up to $550 to help offset a portion of the cost of the leasehold improvements we have made to this facility. In exchange for the funds we may receive 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 funds received. As of September 30, 2019, we have received $463 in grant funds. We do not expect to receive the remaining $87 of grant funds during 2019, as we currently do not expect to increase our number of employees to the level required to receive these funds during 2019. We have recorded the amounts received under these agreements as a contingent liability on our balance sheet. As time passes, portions of the funds received will no longer be subject to repayment if we have met the employment requirements of the agreements. Amounts that we are irrevocably entitled to keep will be reclassified to deferred revenue and amortized to income on a straight-line basis over the remaining lease term for the Rochester facility. 

 

Stock-Based Compensation

We account for stock-based compensation in accordance with ASC 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.

 

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 nine months ended September 30, 2019.

 

 

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.

 

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act. This legislation made significant changes in the U.S. tax laws including reducing the corporate tax rate to 21% and creating a territorial tax system with a one-time mandatory transition tax payable on previously unremitted earnings of foreign subsidiaries, among other things. See Note 12 to the consolidated financial statements in our 2018 Form 10-K for additional information regarding income taxes.

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:

 

 

Effect of Recently Adopted Amendments to Authoritative Accounting Guidance

 

In February 2016, the FASB issued amendments to the current guidance on accounting for lease transactions, which is presented in ASC 842. Subsequent to February 2016, the FASB has issued additional clarifying guidance on certain aspects of this new guidance, along with certain practical expedients that may be applied. 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 is required to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The two permitted transition methods under the guidance are the modified retrospective transition approach, which requires application of the guidance for all comparative periods presented, and the cumulative effect adjustment approach, which requires prospective application at the adoption date.

 

 

The amendments were effective for us as of January 1, 2019. We adopted the amendments on January 1, 2019 using the cumulative effect adjustment approach. Accordingly, prior periods have not been restated. We have decided to elect the package of practical expedients, which includes the grandfathering of lease classification and, accordingly, we have not re-evaluated any of our leases for classification purposes in connection with the implementation of ASC 842. They are all still being treated as operating leases under ASC 842. We do not currently have any lease contracts that meet the criteria to be categorized as financing leases under ASC 842. We have no embedded leases, nor do we have any initial direct costs. We are not electing the hindsight practical expedient and therefore are not reevaluating the lease terms that we used under ASC 840.The implementation of this new guidance had a significant impact on our consolidated balance sheet as a result of recording ROU assets and lease liabilities for all of 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 this new guidance did not have a significant impact on our pattern of expense recognition for any of our multi-year leases. See “Leases” above and Note 7 for further disclosures regarding our leases.

 

 

 

(3)	GOODWILL AND INTANGIBLE ASSETS

 

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. Goodwill totaled $13,738 at each of September 30, 2019 and December 31, 2018.

Intangible Assets

Changes in the amount of the carrying value of finite-lived intangible assets for the nine months ended September 30, 2019 are as follows:

 

 

The following tables provide further detail about our intangible assets as of September 30, 2019 and December 31, 2018: 

 

 

 

 

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 $312 and $944 for the three and nine months ended September 30, 2019, respectively, and $323 and $786 for the three and nine months ended September 30, 2018, respectively. The following table sets forth the estimated annual amortization expense for each of the next five years:

 

 

 

(4)	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 12 for information about revenue by operating segment and geographic region.

 

 

There was no significant change in the amount of the allowance for doubtful accounts for the nine months ended September 30, 2019.

 

 

 

(5)	MAJOR CUSTOMERS

 

During each of the nine months ended September 30, 2019 and 2018, Texas Instruments Incorporated accounted for 11% of our consolidated net revenues. While both of our segments sold to this customer, these revenues were primarily generated by our EMS segment. No other customers accounted for 10% or more of our consolidated net revenues during the nine months ended September 30, 2019 and 2018.  

 

 

 

(6)	INVENTORIES

 

Inventories held at September 30, 2019 and December 31, 2018 were comprised of the following:

 

 

Total charges incurred for excess and obsolete inventory for the three and nine months ended September 30, 2019 and 2018, respectively, were as follows:

 

 

 

 

(7)

LEASES

 

As previously discussed in Note 2, we account for our leases in accordance with the guidance in ASC 842, which was effective for us as of January 1, 2019. In connection with the implementation of ASC 842, we recorded non-cash increases in operating lease liabilities and ROU assets of $5,197 and $4,816, respectively, as of the effective date of this guidance.

We lease our offices, warehouse facilities and certain equipment under non-cancellable operating leases that expire at various dates through 2028. Total operating lease and short-term lease costs for the three and nine months ended September 30, 2019 and 2018, respectively, were as follows:

 

 

The following is additional information about our leases as of September 30, 2019:

 

 

 

Supplemental cash flow information related to leases for the nine months ended September 30, 2019 was as follows:

 

 

The lease for Ambrell’s U.K. facility had an original term of 15 years, which extended through August 2029. The lease included the option to terminate the lease at specified points in time without penalty. We exercised this option in March 2019, and the lease expired in September 2019. At the effective date of this modification, we recorded a reduction in our ROU assets and operating lease liabilities of approximately $486.

 

On April 8, 2019, we executed an amendment to the lease for our facility in Mansfield, Massachusetts that extended the term of the lease for an additional forty months to December 31, 2024 and expanded the amount of leased space by approximately 6,100 square feet. The current rate per square foot that is in place through August 31, 2021 (the original expiration date of the lease) did not change. After August 31, 2021, there are predetermined fixed escalations of the rate as outlined in the amendment. As a result of this modification, we recorded an increase in our ROU assets and operating lease liabilities of approximately $1,811.

 

During the third quarter of 2019, the lease for a portion of Ambrell’s facility in the Netherlands was modified to reduce the term of that lease to expire in September 2019 as that portion of the space was no longer needed. At the effective date of this modification, we recorded a reduction in our ROU assets and operating lease liabilities of approximately $48.

 

Maturities of lease liabilities as of September 30, 2019 were as follows:

 

 

 

 

(8)

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 that are classified as Restricted Certificates of Deposit on our 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. In accordance with the terms of our lease, the letter of credit related to our facility in Mt. Laurel, New Jersey was reduced from $125 to $90 on April 1, 2019. On April 8, 2019, the lease for our Mansfield, Massachusetts facility was modified as previously discussed.

 

 

 

 

(9)	STOCK-BASED COMPENSATION

 

As of September 30, 2019, we have unvested restricted stock awards and stock options granted under stock-based compensation plans that are described more fully in Note 14 to the consolidated financial statements in our 2018 Form 10-K.

 

As of September 30, 2019, total unrecognized compensation expense related to unvested restricted stock awards and stock options was $2,023. The weighted average period over which this expense is expected to be recognized is 2.9 years. The following table shows the allocation of the compensation expense we recorded during the three and nine months ended September 30, 2019 and 2018, respectively, related to stock-based compensation:

 

 

There was no stock-based compensation expense capitalized in the three or nine months ended September 30, 2019 or 2018.

 

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 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 they were granted).

 

The following table summarizes the activity related to unvested shares of restricted stock for the nine months ended September 30, 2019:

 

 

The total fair value of the shares that vested during each of the nine months ended September 30, 2019 and 2018 was $370 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 nine months ended September 30, 2019 and 2018 was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

The per share weighted average fair value of stock options issued during the nine months ended September 30, 2019 and 2018 was $2.75 and $3.50, respectively.

 

The following table summarizes the activity related to stock options for the nine months ended September 30, 2019:

 

 

 

 

(10)	STOCK REPURCHASE PLANS

 

On July 31, 2019, our Board of Directors terminated the 2015 Stock Repurchase Plan which had been authorized on October 27, 2015 and under which we had repurchased a total of 297,020 shares at a cost of $1,195. The shares were repurchased between December 2015 and January 2017. All of the repurchased shares were retired.

 

On July 31, 2019, our Board of Directors authorized the repurchase of up to $3,000 of our common stock from time to time on the open market, in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or in privately negotiated transactions pursuant to a newly authorized stock repurchase plan (the “2019 Repurchase Plan”). Repurchases may be made under a Rule 10b5-1 plan entered into with RW Baird & Co., which would permit shares to be repurchased when we might otherwise be precluded from doing so under insider trading laws and our internal trading windows. The 2019 Repurchase Plan does not obligate us to purchase any particular amount of common stock and may be suspended or discontinued at any time without prior notice. The 2019 Repurchase Plan is funded using our operating cash flow or available cash. Purchases began on September 18, 2019 under this plan. During the nine months ended September 30, 2019, we repurchased 39,158 shares under the 2019 Repurchase Plan at a cost of $179, which includes fees paid to our broker of $1. All of the repurchased shares were retired.

 

 

 

(11)	EMPLOYEE BENEFIT PLANS

 

We have defined contribution 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 three and nine months ended September 30, 2019, we recorded $53 and $335 of expense for matching contributions, respectively. For the three and nine months ended September 30, 2018 we recorded $53 and $258 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 year 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 make a matching contribution of 25% of each employee's contributions up to a maximum of 2% of such employee's annual compensation. For the three and nine months ended September 30, 2019, we recorded $11 and $48 of expense for matching contributions, respectively. For the three and nine months ended September 30, 2018 we recorded $18 and $54 of expense for matching contributions, respectively

 

 

 

(12)	SEGMENT INFORMATION

 

We have two reportable segments, which are also our reporting units, Thermal and EMS. Thermal includes the operations of Temptronic, Thermonics, Sigma, inTEST Thermal Solutions GmbH (Germany), inTEST Pte, Limited (Singapore) and Ambrell. Sales of this segment consist primarily of temperature management systems that we design, manufacture and market under our Temptronic, Thermonics and Sigma product lines, and precision induction heating systems that 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 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-party test and assembly houses and ATE manufacturers. Thermal also sells into a variety of markets outside of the Semi Market, including the automotive, consumer electronics, consumer product packaging, defense/aerospace, energy, fiber optics, industrial, telecommunications and other markets. 

 

 

 

 

The following table provides information about our geographic areas of operation. Net revenues from unaffiliated customers are based on the location to which the goods are shipped.

 

 

 

 

 

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