inTEST (INTT) - 2018 Q4 - Annual Report

FORM 10-K Filing Information Basic Company Information This section details the registrant's name, incorporation state, principal offices, stock, and filer status - Registrant: inTEST Corporation, incorporated in Delaware[2] - Fiscal Year End: December 31, 2018[2] - Filer Status: Non-accelerated filer and Smaller reporting company[3] - Common Stock: Traded on NYSE American, symbol "INTT"[4][129] - Shares Outstanding (as of March 15, 2019): 10,570,258[6][129] - Aggregate Market Value of Non-Affiliate Equity (as of June 30, 2018): $73,323,770[5] Documents Incorporated by Reference Portions of the definitive proxy statement for the 2019 Annual Meeting of Stockholders will be incorporated by reference into Part III of this report - Portions of the 2019 Annual Meeting of Stockholders proxy statement are incorporated into Part III[8] Table of Contents Cautionary Statement Regarding Forward-Looking Statements Forward-Looking Statements Disclosure This section warns investors that the report contains forward-looking statements based on management's current expectations, which involve risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are projections based on current estimations and involve risks and uncertainties[17] - Risks and uncertainties are discussed under Item 1A "Risk Factors"[17] - The company is not obligated to update these forward-looking statements[17] PART I Item 1. Business inTEST designs and markets thermal management and ATE interface solutions, plus induction heating products, operating through Thermal and EMS segments, aiming to diversify beyond semiconductors Introduction Markets Our Solutions Our Strategies Our Segments Financial Information About Product Segments and Geographic Areas Marketing, Sales and Customer Support Customers Manufacturing and Supply Engineering and Product Development Patents and Other Proprietary Rights Competition Backlog Employees Additional Information - inTEST Corporation is an independent designer, manufacturer, and marketer of thermal management products and ATE interface solutions[19] - Products are used by semiconductor manufacturers for testing ICs and wafers, and for other electronic test across industries including automotive, defense/aerospace, energy, industrial, and telecommunications[19] - The company also offers induction heating products for joining and forming metals in various industrial markets[19] - The company has two reportable segments: Thermal Products ("Thermal") and Electromechanical Semiconductor Products ("EMS")[23] - A key strategy is to diversify business by entering markets outside the semiconductor and ATE markets to reduce cyclicality[25][46] Item 1A. Risk Factors This section outlines significant risks including acquisition challenges, intense competition, market cyclicality, customer concentration, technological obsolescence, and international operational factors Acquisition Risks Competition Risks Market Cyclicality and Seasonality Risks Customer Buying Pattern Risks Customer Concentration Risks Operating Results Fluctuation Risks Operational and Security Systems Breach Risks Technological Change Risks Supplier Dependency Risks Key Employee Retention Risks International Operations Risks Tax Rate Variability and Liability Risks Intellectual Property Infringement Risks - Acquisition Strategy Risks: Inability to identify suitable businesses, secure financing, outbid competitors, or successfully integrate acquired operations[99][104] - Market Cyclicality: Sales are significantly affected by the cyclicality and seasonality of the semiconductor and ATE markets, leading to fluctuating operating results[106] - Customer Concentration: Texas Instruments accounted for 11% of consolidated net revenues in both 2018 and 2017; the top ten customers accounted for approximately 40% and 46% of consolidated net revenues in 2018 and 2017, respectively[109] - Technological Change: Failure to quickly and effectively respond to innovation in the semiconductor and ATE markets could negatively affect business prospects[113][115] - International Operations: Foreign subsidiaries generated 16% and 17% of consolidated net revenues in 2018 and 2017, respectively, exposing the company to foreign political and economic risks[118] Item 1B. Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - No unresolved staff comments[123] Item 2. Properties As of December 31, 2018, the company leased eight facilities worldwide, with principal manufacturing and corporate operations located in Mansfield, MA; Mt. Laurel, NJ; Fremont, CA; and Rochester, NY - Leased 8 facilities worldwide as of December 31, 2018[124] - Principal facilities include Mansfield, MA (Corporate HQ, Thermal segment), Mt. Laurel, NJ (Principal Executive Offices, EMS segment), Fremont, CA (EMS segment), and Rochester, NY (Ambrell's principal facility for Thermal segment)[124] Item 3. Legal Proceedings The company is not currently involved in any material legal proceedings - No material legal proceedings[125] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[126] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details the company's common stock trading on NYSE American, shares outstanding, dividend policy of reinvesting earnings, and the status of its $5.0 million stock repurchase plan Market for Common Stock Purchases of Equity Securities - Common stock is traded on NYSE American under the symbol "INTT"[129] - As of March 15, 2019, there were 10,570,258 shares outstanding[129] - No dividends were paid on common stock in 2018 or 2017; current policy is to reinvest future earnings[130] - The 2015 Repurchase Plan authorized up to $5.0 million for common stock repurchases[131] - No shares were repurchased in 2018. In 2017, 13,883 shares were repurchased for $62,000[132] - As of December 31, 2018, a total of 297,020 shares were repurchased for $1.2 million under the 2015 Repurchase Plan[132] Item 6. Selected Financial Data This section presents a five-year summary of selected consolidated financial data, including key figures from the statements of operations and balance sheets, highlighting the impact of the Ambrell acquisition in 2017 Selected Financial Data (in thousands, except per share data) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--------------------------------- | :--------- | :--------- | :--------- | :--------- | :--------- | | Net revenues | $78,563 | $66,801 | $40,227 | $38,889 | $41,796 | | Gross margin | $39,401 | $34,690 | $20,378 | $18,698 | $20,462 | | Adjustment to contingent consideration liability | $6,901 | $6,976 | $- | $- | $- | | Operating income | $5,180 | $3,611 | $4,146 | $2,562 | $4,916 | | Net earnings | $3,037 | $975 | $2,658 | $1,861 | $3,439 | | Basic EPS | $0.29 | $0.09 | $0.26 | $0.18 | $0.33 | | Diluted EPS | $0.29 | $0.09 | $0.26 | $0.18 | $0.33 | | Cash and cash equivalents | $17,861 | $13,290 | $28,611 | $25,710 | $23,126 | | Working capital | $14,203 | $16,580 | $32,950 | $30,205 | $28,032 | | Total assets | $67,187 | $62,493 | $42,844 | $39,984 | $38,738 | | Long-term obligations | $2,889 | $8,786 | $- | $- | $- | | Total stockholders' equity | $42,880 | $39,288 | $37,788 | $35,925 | $34,368 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, highlighting the impact of cyclical semiconductor markets, strategic diversification, the Ambrell acquisition, and changes in key financial metrics Overview Acquisition Orders and Backlog Net Revenues Product/Customer Mix Results of Operations Liquidity and Capital Resources New or Recently Adopted Accounting Standards Critical Accounting Policies and Estimates Off-Balance Sheet Arrangements - The company's business and results of operations are substantially dependent upon the demand for ATE by semiconductor manufacturers, a highly cyclical and seasonal market[137][138][139] - An ongoing strategy is to diversify served markets to address thermal test requirements in non-semiconductor markets (automotive, consumer electronics, defense/aerospace, energy, industrial, telecommunications) to reduce market volatility[141] - The acquisition of Ambrell in May 2017 reduced dependence on the semiconductor market, with future orders and net revenues expected to be approximately equally split between semiconductor and non-semiconductor markets[137] Orders by Segment and Market (in thousands) | Category | 2018 | 2017 | Change ($) | Change (%) | | :------------------------ | :--------- | :--------- | :--------- | :--------- | | Orders by Segment: | | | | | | Thermal | $55,110 | $43,953 | +$11,157 | +25% | | EMS | $23,124 | $25,058 | -$1,934 | -8% | | Total Orders | $78,234 | $69,011 | +$9,223 | +13% | | Orders by Market: | | | | | | Semiconductor market | $45,954 | $39,214 | +$6,740 | +17% | | Non-semiconductor market | $32,280 | $29,797 | +$2,483 | +8% | | Total Orders | $78,234 | $69,011 | +$9,223 | +13% | Net Revenues by Segment and Market (in thousands) | Category | 2018 | 2017 | Change ($) | Change (%) | | :------------------------ | :--------- | :--------- | :--------- | :--------- | | Net Revenues by Segment: | | | | | | Thermal | $55,994 | $42,233 | +$13,761 | +33% | | EMS | $22,569 | $24,568 | -$1,999 | -8% | | Total Net Revenues | $78,563 | $66,801 | +$11,762 | +18% | | Net Revenues by Market: | | | | | | Semiconductor market | $45,378 | $37,763 | +$7,615 | +20% | | Non-semiconductor market | $33,185 | $29,038 | +$4,147 | +14% | | Total Net Revenues | $78,563 | $66,801 | +$11,762 | +18% | Item 7A. Quantitative and Qualitative Disclosures About Market Risk This disclosure is not required for a smaller reporting company, and therefore, no information is provided - Disclosure not required for a smaller reporting company[180] Item 8. Financial Statements and Supplementary Data This item incorporates by reference the consolidated financial statements and supplementary data, which begin on page F-1 of the report - Consolidated financial statements and supplementary data are incorporated by reference, starting on page F-1[181] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[182] Item 9A. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018, with no material changes during the period Evaluation of Disclosure Controls and Procedures CEO/CFO Conclusions about the Effectiveness of the Disclosure Controls and Procedures Changes in Internal Control Over Financial Reporting Management's Report on Internal Control over Financial Reporting - CEO and CFO concluded that disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2018[184] - No material changes in internal control over financial reporting occurred during the period[185] - Management assessed the effectiveness of internal control over financial reporting as effective based on the COSO 2013 Framework[188] Item 9B. Other Information The company reported no other information required by this item - No other information to report[191] PART III Item 10. Directors, Executive Officers and Corporate Governance The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2019 Annual Meeting of Stockholders - Information incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[193] Item 11. Executive Compensation The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2019 Annual Meeting of Stockholders - Information incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[194] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plan information, including outstanding options, their exercise price, and securities available for future issuance, with other data incorporated by reference Equity Compensation Plan Information Equity Compensation Plan Information (as of December 31, 2018) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | | :------------------------------------------------- | :----------------------------------------------------------------------- | :----------------------------------------------------------------------- | :--------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | 264,400 | $7.54 | 561,600 | | Equity compensation plans not approved by security holders | - | - | - | | Total | 264,400 | $7.54 | 561,600 | - Securities remaining available for future issuance are under the Amended and Restated 2014 Stock Plan[198] Item 13. Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2019 Annual Meeting of Stockholders - Information incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[199] Item 14. Principal Accounting Fees and Services The information required for this item is incorporated by reference from the company's definitive proxy statement for its 2019 Annual Meeting of Stockholders - Information incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[201] PART IV Item 15. Exhibits, Financial Statement Schedules This item lists the documents filed as part of the Annual Report on Form 10-K, including consolidated financial statements, financial statement schedules (Schedule II), and exhibits required by Item 601 of Regulation S-K - Documents filed include consolidated financial statements, Schedule II – Valuation and Qualifying Accounts, and exhibits required by Item 601 of Regulation S-K[203][204] Item 16. Form 10-K Summary The company reported no Form 10-K Summary - No Form 10-K Summary provided[205] Index to Exhibits This section provides a detailed index of all exhibits filed with the Form 10-K, including various agreements, corporate documents, and certifications - The index lists various exhibits, such as the Stock Purchase Agreement for Ambrell, Certificate of Incorporation, Bylaws, Lease Agreements, Stock Plans, and Certifications[208] Signatures This section contains the required signatures of the registrant's authorized officers and directors, certifying the filing of the report - The report was signed by James Pelrin (President and CEO), Hugh T. Regan, Jr. (Treasurer, CFO, and Secretary), Robert E. Matthiessen (Chairman), Steven J. Abrams, Joseph W. Dews IV, and William Kraut (Directors) on March 26, 2019[213] Index to Consolidated Financial Statements and Financial Statement Schedule This index lists the consolidated financial statements and the financial statement schedule included in the report, starting from page F-1 - The index includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Earnings, Stockholders' Equity, Cash Flows, Notes to Consolidated Financial Statements, and Schedule II – Valuation and Qualifying Accounts[215] Consolidated Financial Statements Report of Independent Registered Public Accounting Firm RSM US LLP, the independent registered public accounting firm, issued an unqualified opinion on inTEST Corporation's consolidated financial statements for the years ended December 31, 2018 and 2017 - The independent auditor is RSM US LLP[220] - An unqualified opinion was issued on the consolidated financial statements for the years ended December 31, 2018 and 2017[216] - The financial statements present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[216] Consolidated Balance Sheets The consolidated balance sheets present the company's financial position as of December 31, 2018 and 2017, detailing assets, liabilities, and equity, with notable changes in cash, inventories, and earnout payable Consolidated Balance Sheet Data (in thousands) | Metric | December 31, 2018 | December 31, 2017 | Change (2018 vs 2017) | | :------------------------------------------ | :------------------ | :------------------ | :-------------------- | | Cash and cash equivalents | $17,861 | $13,290 | +$4,571 | | Trade accounts receivable, net | $10,563 | $12,166 | -$1,603 | | Inventories | $6,520 | $4,966 | +$1,554 | | Total current assets | $35,621 | $30,999 | +$4,622 | | Net property and equipment | $2,717 | $1,541 | +$1,176 | | Goodwill | $13,738 | $13,738 | $0 | | Intangible assets, net | $14,911 | $16,014 | -$1,103 | | Total assets | $67,187 | $62,493 | +$4,694 | | Accounts payable | $1,787 | $2,032 | -$245 | | Earnout payable | $12,167 | $5,355 | +$6,812 | | Contingent consideration liability, net of current portion | $- | $5,744 | -$5,744 | | Total current liabilities | $21,418 | $14,419 | +$6,999 | | Total liabilities | $24,307 | $23,205 | +$1,102 | | Total stockholders' equity | $42,880 | $39,288 | +$3,592 | Consolidated Statements of Operations The consolidated statements of operations show increased net revenues and net earnings for 2018 compared to 2017, despite a slight gross margin percentage decrease and significant contingent consideration liability adjustments Consolidated Statements of Operations Data (in thousands, except per share data) | Metric | 2018 | 2017 | Change ($) | Change (%) | | :------------------------------------------ | :--------- | :--------- | :--------- | :--------- | | Net revenues | $78,563 | $66,801 | +$11,762 | +17.6% | | Cost of revenues | $39,162 | $32,111 | +$7,051 | +22.0% | | Gross margin | $39,401 | $34,690 | +$4,711 | +13.6% | | Gross margin percentage | 50.1% | 51.9% | -1.8% | | | Operating expenses | $34,221 | $31,079 | +$3,142 | +10.1% | | Adjustment to contingent consideration liability | $6,901 | $6,976 | -$75 | -1.1% | | Operating income | $5,180 | $3,611 | +$1,569 | +43.4% | | Earnings before income tax expense | $5,043 | $3,838 | +$1,205 | +31.4% | | Income tax expense | $2,006 | $2,863 | -$857 | -29.9% | | Net earnings | $3,037 | $975 | +$2,062 | +211.5% | | Basic EPS | $0.29 | $0.09 | +$0.20 | +222.2% | | Diluted EPS | $0.29 | $0.09 | +$0.20 | +222.2% | Consolidated Statements of Comprehensive Earnings The consolidated statements of comprehensive earnings show an increase in comprehensive earnings from $1,218 thousand in 2017 to $2,938 thousand in 2018, driven by higher net earnings despite a negative foreign currency translation adjustment in 2018 Consolidated Statements of Comprehensive Earnings (in thousands) | Metric | 2018 | 2017 | Change ($) | Change (%) | | :-------------------------------- | :--------- | :--------- | :--------- | :--------- | | Net earnings | $3,037 | $975 | +$2,062 | +211.5% | | Foreign currency translation adjustments | $(99) | $243 | -$342 | -140.7% | | Comprehensive earnings | $2,938 | $1,218 | +$1,720 | +141.2% | Consolidated Statements of Stockholders' Equity The consolidated statements of stockholders' equity reflect an increase in total stockholders' equity from $39,288 thousand in 2017 to $42,880 thousand in 2018, primarily due to net earnings and amortization of stock-based compensation, partially offset by a negative foreign currency translation adjustment - Total stockholders' equity increased by $3,592 thousand (9.1%) from $39,288 thousand in 2017 to $42,880 thousand in 2018[229] - Key changes in 2018 include net earnings of +$3,037 thousand, amortization of deferred compensation related to stock-based awards of +$654 thousand, and other comprehensive loss (foreign currency translation) of -$99 thousand[229] Consolidated Statements of Cash Flows The consolidated statements of cash flows show a significant increase in net cash from operating activities in 2018, a substantial decrease in cash used for investing, and minimal financing activities - Net cash provided by operating activities increased by $3,718 thousand (51.3%) from $7,242 thousand in 2017 to $10,960 thousand in 2018[231] - Net cash used in investing activities decreased by $16,336 thousand (72.1%) from $(22,671) thousand in 2017 to $(6,335) thousand in 2018, primarily due to the Ambrell acquisition payment in 2017[231] - Cash and cash equivalents at the end of the period increased by $4,571 thousand (34.4%) from $13,290 thousand in 2017 to $17,861 thousand in 2018[231] Notes to Consolidated Financial Statements (1) Nature of Operations Nature of Operations Summary inTEST designs thermal management and ATE interface solutions, plus induction heating products, operating through Thermal and EMS segments, facing risks from technological change, competition, and market cyclicality - inTEST Corporation is an independent designer, manufacturer, and marketer of thermal management products and semiconductor ATE interface solutions[234] - The company operates through two reportable segments: Thermal Products (Thermal) and Electromechanical Semiconductor Products (EMS)[234] - The acquisition of Ambrell Corporation on May 24, 2017, complemented thermal technologies and broadened the customer base into non-semiconductor related markets[235] - The company operates in a market characterized by rapid technological change, competitive pricing pressures, and cyclical/seasonal market patterns, leading to potential significant period-to-period fluctuations in operating results[236] (2) Summary of Significant Accounting Policies Summary of Significant Accounting Policies Overview This note details the significant accounting policies for consolidated financial statements, covering areas such as revenue recognition, business combinations, fair value measurements, and the impact of new accounting standards - Consolidated financial statements include inTEST Corporation and its wholly-owned subsidiaries, with all significant intercompany accounts and transactions eliminated[237] - Effective January 1, 2018, revenue is recognized in accordance with ASC 606, when performance obligations are satisfied and control of the product or service has been transferred to the customer[244] - The company implemented new guidance on goodwill impairment (ASC 350 amendments) in Q4 2018, simplifying the impairment test by removing step two[259][272] - The company will adopt new lease accounting guidance (ASC Topic 842) on January 1, 2019, using the cumulative effect adjustment approach, expecting to record an increase of approximately $4,873 thousand in total assets and liabilities[277][278] (3) Acquisition Ambrell Acquisition Details On May 24, 2017, inTEST acquired Ambrell Corporation for $22.0 million cash plus earnouts, recognizing goodwill and intangible assets, with Ambrell contributing $26,446 thousand in 2018 net revenues - Ambrell Corporation was acquired on May 24, 2017, for $22,000 thousand in cash at closing, plus contingent consideration of up to $18,000 thousand in earnouts[279] Total Purchase Price Allocation (in thousands) | Item | Amount | | :------------------------------------------ | :------- | | Goodwill | $12,032 | | Identifiable intangible assets | $16,300 | | Tangible assets acquired and liabilities assumed (net) | $(1,600) | | Contingent consideration (estimated fair value at acquisition) | $4,123 | | Total Purchase Price | $26,733 | - The first earnout for 2017 was $5,833 thousand, paid in April 2018. The second earnout for 2018 was accrued at $12,167 thousand as of December 31, 2018[282] - Ambrell contributed $26,446 thousand in net revenues and a net loss of $5,162 thousand in 2018 (including a $6,901 thousand increase in contingent consideration liability)[284] (4) Fair Value Measurements Fair Value Measurements Details This note details fair value measurements, specifically for the Level 3 contingent consideration liability related to the Ambrell acquisition, which increased significantly in 2018 and 2017 due to higher EBITDA - The contingent consideration liability is measured at fair value on a recurring basis using Level 3 inputs, which are unobservable and significant to the overall fair value measurement[288] - The fair value of the contingent consideration liability increased by $6,901 thousand in 2018 and $6,976 thousand in 2017, primarily reflecting higher actual adjusted EBITDA for Ambrell[289][290] - The contingent consideration liability balance was $5,744 thousand at December 31, 2017, and $0 at December 31, 2018 (transferred to earnout payable)[291] (5) Goodwill and Intangible Assets Goodwill and Intangible Assets Details This note details goodwill and intangible assets, primarily allocated to the Thermal segment from acquisitions, with goodwill remaining at $13,738 thousand and no impairment recorded for any assets - Goodwill totaled $13,738 thousand at both December 31, 2018 and 2017, with no impairment charges recorded[173][293] Intangible Assets (in thousands) | Type | December 31, 2018 (Net) | December 31, 2017 (Net) | | :-------------------------- | :---------------------- | :---------------------- | | Finite-lived intangible assets | $8,201 | $9,304 | | Indefinite-lived intangible assets (Trademarks) | $6,710 | $6,710 | | Total Intangible Assets | $14,911 | $16,014 | - Total amortization expense for finite-lived intangible assets was $1,103 thousand in 2018 and $1,161 thousand in 2017[297] - No impairment was found for goodwill or indefinite-lived intangible assets in 2018 or 2017[299][300] (6) Revenue From Contracts With Customers Revenue Breakdown This note breaks down net revenues by customer type, product type, and market for 2018 and 2017, highlighting end-user sales, induction heating growth, and contributions from semiconductor and non-semiconductor markets Net Revenues by Customer Type (in thousands) | Customer Type | 2018 | 2017 | | :---------------- | :--------- | :--------- | | End user | $68,093 | $60,731 | | OEM/Integrator | $10,470 | $6,070 | | Total | $78,563 | $66,801 | Net Revenues by Product Type (in thousands) | Product Type | 2018 | 2017 | | :-------------------------- | :--------- | :--------- | | Thermal test | $25,289 | $24,657 | | Induction heating | $24,104 | $11,915 | | Semiconductor production test | $21,445 | $22,952 | | Service/other | $7,725 | $7,277 | | Total | $78,563 | $66,801 | Net Revenues by Market (in thousands) | Market | 2018 | 2017 | | :-------------------------- | :--------- | :--------- | | Semiconductor | $45,378 | $37,763 | | Industrial | $21,220 | $14,148 | | Telecommunications | $5,574 | $10,262 | | Other non-semiconductor markets | $6,391 | $4,628 | | Total | $78,563 | $66,801 | (7) Major Customers Major Customers Overview Texas Instruments and Hakuto Co. Ltd. were major customers, each accounting for 11% of consolidated net revenues in certain years, with the top ten customers representing approximately 40-46% of total revenues - Texas Instruments Incorporated accounted for 11% of consolidated net revenues in both 2018 and 2017, primarily from the EMS segment[306] - Hakuto Co. Ltd. accounted for 11% of consolidated net revenues in 2017, primarily from the Thermal segment[306] - The ten largest customers accounted for approximately 40% of consolidated net revenues in 2018 and 46% in 2017[306] (8) Inventories Inventories Breakdown Inventories increased from $4,966 thousand in 2017 to $6,520 thousand in 2018, primarily due to higher raw materials and work-in-process, with excess and obsolete inventory charges recorded annually Inventories (in thousands) | Category | December 31, 2018 | December 31, 2017 | | :-------------------------- | :------------------ | :------------------ | | Raw materials | $4,654 | $3,424 | | Work in process | $1,026 | $791 | | Inventory consigned to others | $62 | $64 | | Finished goods | $778 | $687 | | Total Inventories | $6,520 | $4,966 | - Excess and obsolete inventory charges were $285 thousand in 2018 and $251 thousand in 2017[307] (9) Other Current Liabilities Other Current Liabilities Breakdown Other current liabilities increased from $2,166 thousand in 2017 to $2,585 thousand in 2018, primarily due to increases in accrued professional fees, accrued sales commissions, and accrued warranty, partially offset by a decrease in accrued rent Other Current Liabilities (in thousands) | Category | December 31, 2018 | December 31, 2017 | | :-------------------------- | :------------------ | :------------------ | | Accrued professional fees | $774 | $717 | | Accrued sales commissions | $703 | $529 | | Accrued rent | $380 | $521 | | Accrued warranty | $346 | $233 | | Other | $382 | $166 | | Total | $2,585 | $2,166 | (10) Debt Debt Overview The company's debt primarily consists of $175 thousand in outstanding letters of credit, secured by pledged certificates of deposit for domestic lease security deposits - Outstanding letters of credit totaled $175 thousand as of December 31, 2018 and 2017[309] - Letters of credit are secured by pledged certificates of deposit[309] - The letter of credit for the Mt. Laurel, NJ facility will be reduced from $125 thousand to $90 thousand on April 1, 2019[309] (11) Commitments and Contingencies Operating Lease Commitments The company has non-cancellable operating lease commitments for facilities and equipment expiring through 2029, with total rental expense of $1,848 thousand in 2018 and aggregate minimum commitments of $6,193 thousand - Total rental expense was $1,848 thousand in 2018 and $1,600 thousand in 2017[310] Aggregate Minimum Rental Commitments (as of December 31, 2018, in thousands) | Year | Amount | | :--- | :------- | | 2019 | $1,710 | | 2020 | $1,612 | | 2021 | $868 | | 2022 | $296 | | 2023 | $286 | | Thereafter | $1,421 | | Total | $6,193 | (12) Income Taxes Income Taxes Overview Income tax expense decreased from $2,863 thousand in 2017 to $2,006 thousand in 2018, with the effective tax rate dropping to 40% due to the Tax Cuts and Jobs Act of 2017 and a transition tax accrual reversal - Income tax expense decreased from $2,863 thousand in 2017 to $2,006 thousand in 2018[315] - The effective tax rate was 40% for 2018, down from 75% for 2017[161] - The Tax Cuts and Jobs Act of 2017 reduced the corporate tax rate to 21% and created a territorial tax system[161][313] - A $476 thousand provisional accrual for transition tax from Q4 2017 was reversed in Q2 2018, as no transition tax was determined to be due[162][314] - Net deferred tax liabilities were $(2,689) thousand in 2018 and $(2,606) thousand in 2017[315] (13) Legal Proceedings Legal Proceedings Overview The company is not currently involved in any legal proceedings that are expected to have a material effect on its business, financial position, results of operations, or long-term liquidity - No material legal proceedings are currently ongoing that are expected to have a material effect on the company's business or financial condition[317] (14) Stock-Based Compensation Plan Stock-Based Compensation Overview The company has unvested restricted stock awards and stock options outstanding, with total future compensation expense of $1,253 thousand as of December 31, 2018, and annual expenses of $654 thousand in 2018 - Stock-based awards are granted under the 2007 Stock Plan and the Amended and Restated 2014 Stock Plan (which increased shares to 1,000,000 in 2018)[318] - Total compensation expense to be recognized in future periods was $1,253 thousand as of December 31, 2018, over a weighted average period of 2.9 years[319] Stock-Based Compensation Expense (in thousands) | Metric | 2018 | 2017 | | :------------------------------------------ | :--------- | :--------- | | Engineering and product development expense | $9 | $5 | | General and administrative expense | $645 | $333 | | Total Compensation Expense | $654 | $344 | - As of December 31, 2018, 264,400 stock options were outstanding with a weighted average exercise price of $7.54[324] - As of December 31, 2018, 114,750 unvested restricted stock awards were outstanding with a weighted average grant date fair value of $6.92[326][327] (15) Stock Repurchase Plan Stock Repurchase Plan Overview The company's 2015 Repurchase Plan authorized up to $5.0 million in common stock repurchases, with no shares bought in 2018 but 297,020 shares repurchased for $1,195 thousand cumulatively by year-end 2018 - The 2015 Repurchase Plan authorized the repurchase of up to $5.0 million of common stock[328] - No shares were repurchased in 2018. In 2017, 13,883 shares were repurchased for $62 thousand[329] - As of December 31, 2018, a total of 297,020 shares were repurchased for $1,195 thousand under the plan[329] - All 10b5-1 Plans associated with the 2015 Repurchase Plan had expired as of December 31, 2018[328] (16) Employee Benefit Plans Employee Benefit Plans Overview The company offers 401(k) plans with matching contributions for U.S. employees, including the inTEST Incentive Savings Plan (up to 10% match) and the Ambrell Plan (25% match up to 2% of compensation) - For the inTEST Corporation Incentive Savings Plan, the company matches employee contributions dollar for dollar up to 10% of annual compensation (maximum $5 thousand)[330] - Matching contributions for the inTEST plan were $299 thousand in 2018 and $338 thousand in 2017[330] - The Ambrell Corporation Savings & Profit Sharing Plan provides a matching contribution of 25% of employee contributions up to a maximum of 2% of annual compensation[331] - Matching contributions for the Ambrell plan were $68 thousand in 2018 and $35 thousand in 2017[331] (17) Segment Information Segment Information Overview The company operates two reportable segments, Thermal and EMS, serving semiconductor and diverse non-semiconductor markets, with this note detailing financial performance by segment and geographic area for 2018 and 2017 - The company has two reportable segments: Thermal (including Temptronic, Thermonics, Sigma, and Ambrell) and EMS[332] Net Revenues from Unaffiliated Customers (in thousands) | Segment | 2018 | 2017 | Change ($) | Change (%) | | :-------- | :--------- | :--------- | :--------- | :--------- | | Thermal | $55,994 | $42,233 | +$13,761 | +32.6% | | EMS | $22,569 | $24,568 | -$1,999 | -8.1% | | Total | $78,563 | $66,801 | +$11,762 | +17.6% | Operating Income (Loss) (in thousands) | Segment | 2018 | 2017 | Change ($) | Change (%) | | :-------- | :--------- | :--------- | :--------- | :--------- | | Thermal | $1,218 | $(822) | +$2,040 | +248.2% | | EMS | $5,382 | $6,830 | -$1,448 | -21.2% | | Corporate | $(1,420) | $(2,397) | +$977 | +40.8% | | Total | $5,180 | $3,611 | +$1,569 | +43.4% | Net Earnings (Loss) (in thousands) | Segment | 2018 | 2017 | Change ($) | Change (%) | | :-------- | :--------- | :--------- | :--------- | :--------- | | Thermal | $(307) | $(2,351) | +$2,044 | +86.9% | | EMS | $4,506 | $5,050 | -$544 | -10.8% | | Corporate | $(1,162) | $(1,724) | +$562 | +32.6% | | Total | $3,037 | $975 | +$2,062 | +211.5% | Net Revenues by Geographic Area (in thousands) | Region | 2018 | 2017 | Change ($) | Change (%) | | :-------- | :--------- | :--------- | :--------- | :--------- | | U.S. | $25,517 | $20,205 | +$5,312 | +26.3% | | Foreign | $53,046 | $46,596 | +$6,450 | +13.8% | | Total | $78,563 | $66,801 | +$11,762 | +17.6% | (18) Quarterly Consolidated Financial Data (Unaudited) Quarterly Financial Data Overview This note presents unaudited quarterly consolidated financial data for the eight quarters ended December 31, 2018, highlighting fluctuations in net revenues, gross margin, and net earnings, which are influenced by the cyclical and seasonal nature of the semiconductor and ATE markets Quarterly Financial Data (in thousands, except per share data) | Metric | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | | :------------------------------------------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | :------ | | Net revenues | $18,871 | $21,097 | $20,160 | $18,435 | $14,180 | $15,888 | $17,352 | $19,381 | | Gross margin | $9,395 | $10,910 | $10,092 | $9,004 | $7,728 | $8,421 | $8,796 | $9,745 | | Earnings (loss) before income tax expense | $982 | $4,396 | $162 | $(497) | $3,172 | $2,336 | $2,841 | $(4,511) | | Income tax expense | $601 | $382 | $728 | $295 | $1,094 | $891 | $823 | $55 | | Net earnings (loss) | $381 | $4,014 | $(566) | $(792) | $2,078 | $1,445 | $2,018 | $(4,566) | | Basic EPS | $0.04 | $0.39 | $(0.05) | $(0.08) | $0.20 | $0.14 | $0.20 | $(0.44) | | Diluted EPS | $0.04 | $0.39 | $(0.05) | $(0.08) | $0.20 | $0.14 | $0.19 | $(0.44) | - Quarterly fluctuations in operating results are influenced by the cyclical and seasonal activity of the semiconductor and ATE markets[339] Schedule II -- Valuation and Qualifying Accounts This schedule provides details on the changes in the allowance for doubtful accounts and warranty reserve for the years ended December 31, 2018 and 2017 Allowance for Doubtful Accounts (in thousands) | Year | Balance at Beginning of Period | Expense (Recovery) | Deductions | Balance at End of Period | | :--- | :----------------------------- | :----------------- | :--------- | :----------------------- | | 2018 | $213 | $20 | $- | $233 | | 2017 | $146 | $68 | $(1) | $213 | Warranty Reserve (in thousands) | Year | Balance at Beginning of Period | Expense (Recovery) | Deductions | Balance at End of Period | | :--- | :----------------------------- | :----------------- | :--------- | :----------------------- | | 2018 | $233 | $452 | $(339) | $346 | | 2017 | $125 | $209 | $(101) | $233 |