Item 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Risk Factors and Forward-Looking Statements
In addition to historical information, this report including this management’s discussion and analysis (“MD&A”) contain statements that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements do not convey historical information but relate to predicted or potential future events and financial results, such as statements of our plans, strategies and intentions, or our future performance or goals that are based upon management's current expectations. Our forward-looking statements can often be identified by the use of forward-looking terminology such as “believes,” “expects,” “intends,” “may,” “will,” “should,” “plans,” “projects,” “forecasts,” “outlook,” or “anticipates” or similar terminology. See “Cautionary Statement Regarding Forward-Looking Statements" in our 2019 Form 10-K for examples of statements made in this report which may be "forward-looking statements." These statements involve risks and uncertainties and are based on various assumptions. Although we believe that our expectations are based on reasonable assumptions, investors and prospective investors are cautioned that such statements are only projections, and there cannot be any assurance that these events or results will occur. We undertake no obligation to update the information in this report including this MD&A to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated or unanticipated events.
Information about the primary risks and uncertainties that could cause our actual future results to differ materially from our historic results or the results described in the forward-looking statements made in this report or presented elsewhere by management from time to time include, but are not limited to:
|
●
|
the impact of COVID-19 on our business, liquidity, financial condition and results of operations, including as a result of evolving public health requirements in response to COVID-19, such as:
|
|
o
|
government mandated facility closures;
|
|
o
|
availability of employees;
|
|
o
|
supply chain and distribution interruptions;
|
|
o
|
price increases and/or lack of availability from our normal suppliers for the materials needed to produce our products in a timely manner and/or with the level of margins we typically expect to achieve;
|
|
o
|
customers’ inability or refusal to accept product deliveries and the sufficiency of our revolving credit facility to address the impact of COVID-19;
|
|
●
|
indications of a change in the market cycles in the Semi Market or other markets we serve including as a result of COVID-19;
|
|
●
|
changes in business conditions and general economic conditions both domestically and globally including as a result of COVID-19;
|
|
●
|
changes in the demand for semiconductors, generally and as a result of COVID-19;
|
|
●
|
the success of our strategy to diversify our business by entering markets outside the Semi Market;
|
|
●
|
the possibility of future acquisitions or dispositions and the successful integration of any acquired operations;
|
|
●
|
the ability to borrow funds or raise capital to finance potential acquisitions;
|
|
●
|
changes in the rates of, and timing of, capital expenditures by our customers including as a result of COVID-19;
|
|
●
|
progress of product development programs;
|
|
●
|
increases in raw material and fabrication costs associated with our products including as a result of COVID-19;
|
|
●
|
and other risk factors included in Part I, Item 1A - "Risk Factors" in our 2019 Form 10-K and Part II, Item 1A - "Risk Factors" in this Quarterly Report on Form 10-Q.
|
Material changes to such risk factors may be reported in subsequent Quarterly Reports on Form 10-Q in Part II, Item 1A.
COVID-19 Pandemic
In early January 2020, a human infection was traced to a novel strain of coronavirus, referred to as COVID-19. COVID-19 has subsequently spread to virtually all parts of the world and has caused massive disruptions in the global economy. On March 11, 2020, the World Health Organization (“WHO”) officially declared COVID-19 a pandemic. Our business has been, and will continue to be, adversely affected by COVID-19. Since March 17, 2020, several states, including all of the states in which we have manufacturing facilities, have instituted “shelter-in place” orders as well as guidance in response to COVID-19 and the need to contain it. As of July 2020, all of the states in which we operate had begun the process of re-opening to varying degrees. However, some of these states have paused their re-opening plans or reversed actions they had taken with respect to their re-opening plans because of increased spread. Despite these changes, all of our operations remain deemed “critical and essential business operations” under the various governmental COVID-19 mandates which has allowed us to continue to operate our business with certain modifications as discussed below.
The impact of COVID-19 on our operations has been intensified because it has occurred and continues during a time when our business operations continue to be negatively affected by a global downturn in the Semi Market. The Semi Market, from which approximately half of our net revenues are derived, has been in a cyclical downturn since the beginning of 2019. This downturn has resulted in significant declines in our net revenues from the Semi Market and contributed to the net loss we recorded in the first half of 2020 of $973. Our net revenues from the Semi Market for the first half of 2020 totaled $11.9 million compared to $17.8 million in the first half of 2019. During the first quarter of 2020, before the spread of COVID-19, we had started to see indications that the downturn was coming to an end and that the beginning of the next cyclical upturn in the Semi Market was imminent. However, COVID-19 impacted this timing, and, as a result, the recovery in the Semi Market has been delayed by at least a quarter, if not more. Although we have seen increasing order rates from our customers in the Semi Market during the second quarter of 2020, there can be no assurance that this will continue, in particular, if the spread of COVID-19 is not further contained and the global economy continues to be negatively impacted.
During 2019, we made adjustments to reduce our fixed cost structure, which included staff reductions and limits on all discretionary spending. As a result of the delay in the Semi Market recovery discussed above and the impacts of COVID-19 on our operations, we have taken actions to further reduce our fixed cost structure with the goal of limiting future losses and maintaining an adequate level of liquidity to operate our business. To date, these additional actions have included further staff reductions, the temporary closure of our EMS manufacturing facility in Fremont, California for approximately three weeks beginning in late March and the temporary closure of our Thermal segment manufacturing facility in Mansfield, Massachusetts for a two-week period at the beginning of April. As discussed further in Notes 1 and 8 to our consolidated financial statements, on April 10, 2020, we entered into a Loan and Security Agreement (the “Agreement”) with M&T Bank (“M&T”). Under the terms of the Agreement, M&T has provided us with a $7.5 million revolving credit facility. This revolving credit facility was put in place to provide us with additional liquidity in response to the current business environment as a result of COVID-19.
As of the date of the filing of this report, all of our facilities are open. While we do not currently have any further plans for facility closures, if the current pace of COVID-19 cannot be sufficiently slowed and the spread of the virus is not contained, our business operations could be further interrupted. In addition, the aftermarket service and support that we provide to our customers has been, and we expect will continue to be, adversely impacted by COVID-19 due to travel restrictions which continue to exist in some locations and limitations on visitors allowed into customer facilities, which has resulted in some of these activities being reduced or suspended. Therefore, the net revenues associated with these aftermarket service and support activities, which typically range from 8% to 10% of our consolidated net revenues, may continue to be depressed. If the spread of the virus cannot be contained, government and health authorities may announce new or extend existing restrictions, which could require us to make further adjustments to our operations in order to comply with any such restrictions. These adjustments to our operations could include additional facility closures in the future if demand slows down, which could have a material negative impact on our business, results of operations and financial condition. The funds we may be able to draw down under the Agreement may not be sufficient to prevent the need to take further actions, such as staff reductions, facility closures or other salary and benefits adjustments for remaining employees. As a result of our current level of working capital as well as the availability of the revolving credit facility under the Agreement, we currently expect to have sufficient liquidity to operate our business throughout the balance of 2020, as further described in this report.
Generally, global supply chains and the timely availability of products have been, and will continue to be, materially disrupted by quarantines, factory slowdowns or shutdowns, border closings and travel restrictions resulting from COVID-19. We have experienced, and expect that we may continue to experience, price increases and/or lack of availability from our normal suppliers for the materials needed to produce our products in a timely manner and/or with the level of margins we typically expect to achieve. We are working to mitigate and address these delays and price increases, but there can be no assurance that we will not experience delays or price increases in the future which could have a material negative impact on our business, results of operations and financial condition.
We have implemented workplace safeguards designed to protect the health and well-being of our employees. A significant number of employees have been authorized to work from home and have been provided with the tools and technology necessary to do so. However, the process of working remotely may result in those employees not being as effective or responsive to our customers’ needs as they would be under more normal conditions. This could result in lost business opportunities or have other negative impacts on our business. Remaining employees in our facilities are following WHO and CDC recommended safety practices, as well as state and local directives, but there can be no assurances that we can successfully avoid one or more of our employees contracting COVID-19 and entering our facilities while infected. Should this occur, or should we have employees who become ill or otherwise are unable to work, we may experience limitations in employee resources or may be required to close affected facilities for a time to clean and disinfect appropriately.
The duration of any business disruption and related financial impact cannot be reasonably estimated at this time but may materially affect our ability to operate our business and result in additional costs. The extent to which COVID-19 may impact our operating results, financial condition, and liquidity will depend on future developments, which are highly uncertain and cannot be predicted as of the date of the filing of this report, including new information that may emerge concerning the severity of COVID-19 and steps taken to contain COVID-19 or treat its impact, among others. The adverse effects of COVID-19 on our business could be material in future periods.
Overview
This MD&A should be read in conjunction with the accompanying consolidated financial statements.
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: 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.
Our EMS segment sells its products to semiconductor manufacturers and third-party test and assembly houses (end user sales) and to ATE manufacturers (OEM sales), who ultimately resell our equipment with theirs to both semiconductor manufacturers and third-party test and assembly houses. 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, defense/aerospace, energy, industrial and telecommunications markets. As a result of the acquisition of 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.
Markets
Historically, we have referred to our markets as “Semiconductor” (which includes both the broader semiconductor market as well as the more specialized semiconductor ATE and wafer processing sectors within the broader semiconductor market), and “Non-Semiconductor” (which included all of the other markets we serve). In the second quarter of 2019, we began referring to the semiconductor market, including the ATE and wafer processing sectors within that market, as the “Semi Market.” All other markets are designated as “Multimarket.” While the Semi Market represents the historical roots of inTEST and remains a very important component of our business, Multimarket is where we have focused our strategic growth efforts in the last several years. Our goal has been to grow our business, both organically and through acquisition, in these markets as we believe these markets have historically been less cyclical than the Semi Market. It is important to note that business within our Thermal segment can fall into either the Semi Market or Multimarket, depending upon how our customers utilize our products or upon their respective applications. Prior to the acquisition of Ambrell in May 2017, we offered only highly specialized engineering solutions used for testing applications in Multimarket, the demand for which is limited and which varies significantly from period to period. Our acquisition of Ambrell not only provided expansion into new markets but also broadened our offerings to include products sold into process or manufacturing applications. Historically, Ambrell sold its precision induction heating systems almost exclusively to customers in the industrial market, but since 2018, has also had significant sales into the Semi Market. Overall, however, the acquisition of Ambrell has reduced our dependence on customers in the Semi Market. We expect that our future orders and net revenues will be approximately equally split between the Semi Market and Multimarket.
The portion of our business that is derived from the Semi Market is substantially dependent upon the demand for ATE by semiconductor manufacturers and companies that specialize in the testing of integrated circuits ("ICs") or, for Ambrell, the demand for wafer processing equipment. Demand for ATE or wafer processing equipment is driven by semiconductor manufacturers that are opening new, or expanding existing, semiconductor fabrication facilities or upgrading equipment, which in turn is dependent upon the current and anticipated market demand for semiconductors and products incorporating semiconductors. Such market demand can be the result of market expansion, development of new technologies or redesigned products to incorporate new features, or the replacement of aging equipment. In addition, we continue to focus on design improvements and new approaches for our own products that contribute to our net revenues as our customers adopt these new products.
In the past, the Semi Market has been highly cyclical with recurring periods of oversupply, which often severely impact the Semi Market's demand for the products we manufacture and sell into the market. This cyclicality can cause wide fluctuations in both our orders and net revenues and, depending on our ability to react quickly to these shifts in demand, can significantly impact our results of operations. Market cycles are difficult to predict, and because they are generally characterized by sequential periods of growth or declines in orders and net revenues during each cycle, year over year comparisons of operating results may not always be as meaningful as comparisons of periods at similar points in either up or down cycles. In addition, during both downward and upward cycles in the Semi Market, in any given quarter, the trend in both our orders and net revenues can be erratic. This can occur, for example, when orders are canceled or currently scheduled delivery dates are accelerated or postponed by a significant customer or when customer forecasts and general business conditions fluctuate during a quarter.
In addition to being cyclical, the Semi Market has also developed a seasonal pattern, with the second and third quarters being the periods of strong demand and the first and fourth quarters being periods of weaker demand. These periods of heightened or reduced demand can shift depending on various factors impacting both our customers and the markets that they serve.
Third party market share statistics are not available for the products we manufacture and sell into the Semi Market; therefore, comparisons of period over period changes in our market share are not easily determined. As a result, it is difficult to ascertain if Semi Market volatility in any period is the result of macro-economic or customer-specific factors impacting Semi Market demand, or if we have gained or lost market share to a competitor during the period.
While the majority of our orders and net revenues are derived from the Semi Market, and our operating results generally follow the overall trend in the Semi Market, in any given period we may experience anomalies that cause the trend in our net revenues to deviate from the overall trend in the Semi Market. We believe that these anomalies may be driven by a variety of factors within the Semi Market, including, for example, changing product requirements, longer periods between new product offerings by OEMs and changes in customer buying patterns. In addition, in recent periods, we have seen instances when demand within the Semi Market is not consistent for each of our operating segments or for any given product within a particular operating segment. This inconsistency in demand can be driven by a number of factors but, in most cases, we have found that the primary reason is unique customer-specific changes in demand for certain products driven by the needs of their customers or markets served. These shifts in market practices and customer-specific needs have had, and may continue to have, varying levels of impact on our operating results and are difficult to quantify or predict from period to period. Management has taken, and will continue to take, such actions it deems appropriate to adjust our strategies, products and operations to counter such shifts in market practices as they become evident.
As previously mentioned, as part of our ongoing strategy to reduce the impact of Semi Market volatility on our business operations, we continue to diversify our served markets to address the thermal test and thermal process requirements of several markets outside the Semi Market. These include the automotive, defense/aerospace, energy, industrial, telecommunications and other markets, which we refer to as Multimarket. We believe that these markets are usually less cyclical than the Semi Market. While market share statistics exist for some of these markets, due to the nature of our highly specialized product offerings in these markets, we do not expect broad market penetration in many of these markets and therefore do not anticipate developing meaningful market shares in most of these markets.
In addition, our Multimarket orders and net revenues in any given period do not necessarily reflect the overall trends in the markets within Multimarket due to our limited market shares. Consequently, we are continuing to evaluate buying patterns and opportunities for growth in Multimarket that may affect our performance. The level of our Multimarket orders and net revenues has varied in the past, and we expect will vary significantly in the future, as we work to build our presence in Multimarket and establish new markets for our products.
Orders and Backlog
The following table sets forth, for the periods indicated, a breakdown of the orders received by operating segment and market (in thousands).
|
|
Three
Months Ended
June 30,
|
|
|
Change
|
|
|
Three
Months
Ended
March 31,
|
|
|
Change
|
|
|
|
2020
|
|
|
2019
|
|
|
|
$
|
|
|
%
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
Orders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thermal
|
|
$
|
10,446
|
|
|
$
|
12,112
|
|
|
$
|
(1,666
|
)
|
|
|
(14
|
)%
|
|
$
|
10,499
|
|
|
$
|
(53
|
)
|
|
|
(1
|
)%
|
EMS
|
|
|
3,472
|
|
|
|
3,809
|
|
|
|
(337
|
)
|
|
|
(9
|
)%
|
|
|
3,277
|
|
|
|
195
|
|
|
|
6
|
%
|
|
|
$
|
13,918
|
|
|
$
|
15,921
|
|
|
$
|
(2,003
|
)
|
|
|
(13
|
)%
|
|
$
|
13,776
|
|
|
$
|
142
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semi Market
|
|
$
|
7,299
|
|
|
$
|
8,629
|
|
|
$
|
(1,330
|
)
|
|
|
(15
|
)%
|
|
$
|
6,692
|
|
|
$
|
607
|
|
|
|
9
|
%
|
Multimarket
|
|
|
6,619
|
|
|
|
7,292
|
|
|
|
(673
|
)
|
|
|
(9
|
)%
|
|
|
7,084
|
|
|
|
(465
|
)
|
|
|
(7
|
)%
|
|
|
$
|
13,918
|
|
|
$
|
15,921
|
|
|
$
|
(2,003
|
)
|
|
|
(13
|
)%
|
|
$
|
13,776
|
|
|
$
|
142
|
|
|
|
1
|
%
|
|
|
Six
Months Ended
June 30,
|
|
|
Change
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
%
|
|
Orders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thermal
|
|
$
|
20,945
|
|
|
$
|
20,933
|
|
|
$
|
12
|
|
|
|
-
|
%
|
EMS
|
|
|
6,749
|
|
|
|
6,883
|
|
|
|
(134
|
)
|
|
|
(2
|
)%
|
|
|
$
|
27,694
|
|
|
$
|
27,816
|
|
|
$
|
(122
|
)
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semi Market
|
|
$
|
13,991
|
|
|
$
|
14,202
|
|
|
$
|
(211
|
)
|
|
|
(1
|
)%
|
Multimarket
|
|
|
13,703
|
|
|
|
13,614
|
|
|
|
89
|
|
|
|
1
|
%
|
|
|
$
|
27,694
|
|
|
$
|
27,816
|
|
|
$
|
(122
|
)
|
|
|
-
|
%
|
Total consolidated orders for the three months ended June 30, 2020 were $13.9 million compared to $15.9 million for the same period in 2019 and $13.8 million for the three months ended March 31, 2020. Orders from customers in Multimarket for the three months ended June 30, 2020 were $6.6 million, or 48% of total consolidated orders, compared to $7.3 million, or 46% of total consolidated orders for the same period in 2019 and $7.1 million or 51% of total consolidated orders for the three months ended March 31, 2020.
We believe that the decrease in our consolidated orders during the three months ended June 30, 2020 as compared to the same period in 2019 reflects both the downturn in the Semi Market, where approximately half of our business is derived, and the impact of COVID-19, in particular as it relates to demand for our Thermal segment’s aftermarket service and support as well as demand for induction heating products from certain of our customers who have been impacted by government mandated closures during the three months ended June 30, 2020. In contrast, we believe the increase in our Semi Market orders and the orders of our EMS segment, which sells exclusively into the Semi Market, during the three months ended June 30, 2020 as compared to the three months ended March 31, 2020 reflects that the downturn in the Semi Market is coming to an end. Although we have recently experienced increasing order rates from our customers in the Semi Market, as previously mentioned, there can be no assurance that this will continue, in particular, if the spread of COVID-19 cannot be further contained and the global economy continues to be negatively impacted.
At June 30, 2020, our backlog of unfilled orders for all products was approximately $8.7 million compared with approximately $8.8 million at June 30, 2019 and $8.1 million at March 31, 2020. Our backlog includes customer orders which we have accepted, substantially all of which we expect to deliver in 2020. While backlog is calculated on the basis of firm purchase orders, a customer may cancel an order or accelerate or postpone currently scheduled delivery dates. Our backlog may be affected by the tendency of customers to rely on short lead times available from suppliers, including us, in periods of depressed demand. In periods of increased demand, there is a tendency towards longer lead times that has the effect of increasing backlog. As a result, our backlog at a particular date is not necessarily indicative of sales for any future period.
Net Revenues
The following table sets forth, for the periods indicated, a breakdown of the net revenues by operating segment and market (in thousands).
|
|
Three
Months Ended
June 30,
|
|
|
Change
|
|
|
Three
Months
Ended
March 31,
|
|
|
Change
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
|
2020
|
|
|
|
$
|
|
|
%
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thermal
|
|
$
|
9,476
|
|
|
$
|
10,519
|
|
|
$
|
(1,043
|
)
|
|
|
(10
|
)%
|
|
$
|
9,334
|
|
|
$
|
142
|
|
|
|
2
|
%
|
EMS
|
|
|
3,799
|
|
|
|
3,833
|
|
|
|
(34
|
)
|
|
|
(1
|
)%
|
|
|
1,896
|
|
|
|
1,903
|
|
|
|
100
|
%
|
|
|
$
|
13,275
|
|
|
$
|
14,352
|
|
|
$
|
(1,077
|
)
|
|
|
(8
|
)%
|
|
$
|
11,230
|
|
|
$
|
2,045
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semi Market
|
|
$
|
6,858
|
|
|
$
|
7,641
|
|
|
$
|
(783
|
)
|
|
|
(10
|
)%
|
|
$
|
5,011
|
|
|
$
|
1,847
|
|
|
|
37
|
%
|
Multimarket
|
|
|
6,417
|
|
|
|
6,711
|
|
|
|
(294
|
)
|
|
|
(4
|
)%
|
|
|
6,219
|
|
|
|
198
|
|
|
|
3
|
%
|
|
|
$
|
13,275
|
|
|
$
|
14,352
|
|
|
$
|
(1,077
|
)
|
|
|
(8
|
)%
|
|
$
|
11,230
|
|
|
$
|
2,045
|
|
|
|
18
|
%
|
|
|
Six
Months Ended
June 30,
|
|
|
Change
|
|
|
|
2020
|
|
|
2019
|
|
|
|
$
|
|
|
%
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thermal
|
|
$
|
18,810
|
|
|
$
|
23,153
|
|
|
$
|
(4,343
|
)
|
|
|
(19
|
)%
|
EMS
|
|
|
5,695
|
|
|
|
9,261
|
|
|
|
(3,566
|
)
|
|
|
(39
|
)%
|
|
|
$
|
24,505
|
|
|
$
|
32,414
|
|
|
$
|
(7,909
|
)
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Semi Market
|
|
$
|
11,869
|
|
|
$
|
17,752
|
|
|
$
|
(5,883
|
)
|
|
|
(33
|
)%
|
Multimarket
|
|
|
12,636
|
|
|
|
14,662
|
|
|
|
(2,026
|
)
|
|
|
(14
|
)%
|
|
|
$
|
24,505
|
|
|
$
|
32,414
|
|
|
$
|
(7,909
|
)
|
|
|
(24
|
)%
|
Total consolidated net revenues for the three months ended June 30, 2020 were $13.3 million compared to $14.4 million for the same period in 2019 and $11.2 million for the three months ended March 31, 2020. We believe the decrease in our consolidated net revenues as compared to the same period in 2019 primarily reflects the aforementioned downturn in the Semi Market, which we believe may be coming to an end based on recent increases we have experienced in our order levels, as discussed under the Orders and Backlog section above. We believe the increase in our consolidated net revenues for the three months ended June 30, 2020 as compared to the three months ended March 1, 2020 reflects this same trend. However, as also discussed under Orders and Backlog, we believe COVID-19 may slow the pace of the recovery in the Semi Market.
Net revenues from customers in Multimarket for the three months ended June 30, 2020 were $6.4 million, or 48% of total consolidated net revenues, compared to $6.7 million, or 47% of total consolidated net revenues for the same period in 2019 and $6.2 million or 55% of total consolidated orders for the three months ended March 31, 2020.
Results of Operations
The results of operations for our two operating segments are generally affected by the same factors described in the Overview and COVID-19 Pandemic sections above. Separate discussions and analyses for each segment would be repetitive. The discussion and analysis that follows, therefore, is presented on a consolidated basis and includes discussion of factors unique to each segment where significant to an understanding of that segment.
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Net Revenues. Net revenues were $13.3 million for the three months ended June 30, 2020 compared to $14.4 million for the same period in 2019, a decrease of $1.1 million, or 8%. We believe the decrease in our net revenues during the second quarter of 2020 primarily reflects the factors previously discussed in the Overview and COVID-19 Pandemic sections.
Gross Margin. Our consolidated gross margin was 46% of net revenues for the three months ended June 30, 2020 as compared to 47% of net revenues for the same period in 2019. The decrease in our gross margin primarily reflects an increase in our component material costs as a percentage of net revenues, which was a result of changes in product mix. To a lesser extent, we also had an increase in our fixed operating costs as a percentage of net revenues. Although our fixed operating costs decreased $122,000 in absolute dollar terms, they increased as a percentage of net revenues as a result of not being as fully absorbed by the lower net revenues levels in the three months ended June 30, 2020 as compared to the same period in 2019. The $122,000 decrease in our fixed operating costs primarily reflects a reduction in materials used in operations and service in our Thermal segment. To a lesser extent there were also reductions in freight, travel, headcount and the use of outsourced labor for our Thermal segment. These decreases were partially offset by an increase in facilities costs in our Thermal segment.
Selling Expense. Selling expense was $1.8 million for the three months ended June 30, 2020 compared to $2.1 million for the same period in 2019, a decrease of $326,000, or 16%. The decrease primarily reflects a reduction in travel and trade show expense, reflecting the impact of COVID-19. In late March 2020, we suspended all non-essential travel, including attendance at trade shows. To a lesser extent, there was also a reduction in warranty expense and lower levels of commission expense, as a result of the lower net revenue levels.
Engineering and Product Development Expense. Engineering and product development expense was relatively unchanged at $1.2 million for both the three months ended June 30, 2020 and 2019. Increases in salaries and benefits expense in our Thermal segment were offset by a reduction in spending on third-party consultants and materials used in product development in both of our segments.
General and Administrative Expense. General and administrative expense was $2.9 million for the three months ended June 30, 2020 compared to $3.7 million for the same period in 2019, a decrease of $830,000, or 22%. The expense for the three months ended June 30, 2019 included $351,000 of costs related to an acquisition which we later decided not to pursue. There were no similar costs in the three months ended June 30, 2020. During the three months ended June 30, 2019, we also recorded restructuring costs of $223,000, primarily related to the consolidation of Ambrell’s European operations. This compares to restructuring costs of $38,000 recorded during the three months ended June 30, 2020, related to employee terminations in our Thermal segment which were a result of reduced levels of demand. During the three months ended June 30, 2020 we also recorded lower levels of expense for salaries and benefits, reflecting a reduction in administrative staff, reduced spending on third-party professionals who assist us in a variety of strategic and compliance related matters and lower travel costs.
Income Tax Expense (Benefit). For the three months ended June 30, 2020, we recorded income tax expense of $13,000 compared to an income tax benefit of $113,000 for the same period in 2019. Our effective tax rate was 7% for the three months ended June 30, 2020 compared to 38% for the same period in 2019. On a quarterly basis, we record income tax expense or benefit based on the expected annualized effective tax rate for the various taxing jurisdictions in which we operate our businesses. The effective tax rates in each of the three months ended June 30, 2020 and 2019 reflect adjustments that were made to bring the effective tax rates for the six-month periods ended June 30, 2020 and 2019 to the expected annualized effective tax rate as of June 30 in each year.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Net Revenues. Net revenues were $24.5 million for the six months ended June 30, 2020 compared to $32.4 million for the same period in 2019, a decrease of $7.9 million, or 24%. We believe the decrease in our net revenues during the first six months of 2020 primarily reflects the factors previously discussed in the Overview.
Gross Margin. Our consolidated gross margin was 45% of net revenues for the six months ended June 30, 2020 as compared to 48% of net revenues for the same period in 2019. The decrease in our gross margin as a percentage of net revenues primarily reflects an increase in our fixed operating costs as a percentage of net revenues. Although our fixed operating costs decreased by $415,000 in absolute dollar terms, they represented 20% of net revenues for the six months ended June 30, 2020 as compared to 16% of net revenues for the same period in 2019. This is a result of not being as fully absorbed by the lower net revenues levels in the first six months of 2020. The $415,000 decrease in our fixed operating costs primarily reflects headcount reductions, lower levels of outsourced labor, and a reduction in materials used in operations and service in our Thermal segment. These decreases were partially offset by an increase in facilities costs in our Thermal segment. The increase in our fixed operating costs as a percentage of net revenues was partially offset by a reduction in component material costs for the six months ended June 30, 2020 as compared to the same period in 2019, reflecting changes in product mix.
Selling Expense. Selling expense was $3.8 million for the six months ended June 30, 2020 compared to $4.5 million for the same period in 2019, a decrease of $648,000, or 15%. The decrease primarily reflects a reduction in travel and trade show expense, reflecting the aforementioned suspension of all non-essential travel and trade show attendance as a result of COVID-19. To a lesser extent, there was also a reduction in warranty expense and lower levels of commission expense, as a result of the lower net revenue levels.
Engineering and Product Development Expense. Engineering and product development expense was relatively unchanged at $2.5 million for each of the six months ended June 30, 2020 and 2019. Increases in salaries and benefits expense were offset by a reduction in spending on materials used in product development.
General and Administrative Expense. General and administrative expense was $5.8 million for the six months ended June 30, 2020 compared to $7.5 million for the same period in 2019, a decrease of $1.7 million, or 23%. During the six months ended June 30, 2019, we incurred $703,000 related to an acquisition opportunity which we have decided not to pursue. There were no similar costs in the six months ended June 30, 2020. During the six months ended June 30, 2019, we also recorded restructuring costs of $223,000, primarily related to the consolidation of Ambrell’s European operations. This compares to restructuring costs of $46,000 recorded during the six months ended June 30, 2020, primarily related to employee terminations in our Thermal segment which were a result of reduced levels of demand. During the six months ended June 30, 2020 we also recorded lower levels of expense for profit-based bonuses, reduced spending on third-party professionals who assist us in a variety of strategic and compliance related matters and lower travel costs.
Income Tax Expense (Benefit). For the six months ended June 30, 2020, we recorded an income tax benefit of $237,000 compared to income tax expense of $211,000 for the same period in 2019. Our effective tax rate was 20% for the six months ended June 30, 2020 compared to 18% for the same period in 2019. On a quarterly basis, we record income tax expense or benefit based on the expected annualized effective tax rate for the various taxing jurisdictions in which we operate our businesses.
Liquidity and Capital Resources
As discussed more fully in the Overview, our business and results of operations are substantially dependent upon the demand for ATE by semiconductor manufacturers and companies that specialize in the testing of ICs. The cyclical and volatile nature of demand for ATE makes estimates of future revenues, results of operations and net cash flows difficult, especially in light of COVID-19.
Our primary historical source of liquidity and capital resources has been cash flow generated by our operations, and we manage our businesses to maximize operating cash flows as our primary source of liquidity. We use cash to fund growth in our operating assets, for new product research and development, for acquisitions and for stock repurchases.
Liquidity
Our cash and cash equivalents and working capital were as follows (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Cash and cash equivalents
|
|
$
|
7,424
|
|
|
$
|
7,612
|
|
Working capital
|
|
$
|
16,466
|
|
|
$
|
16,534
|
|
As of June 30, 2020, $2.8 million, or 38%, of our cash and cash equivalents was held by our foreign subsidiaries. We currently expect our cash and cash equivalents, in combination with the borrowing availability under our revolving credit facility to be sufficient to support our short-term working capital requirements and other corporate requirements. Our revolving credit facility is discussed in Notes 1 and 8 to our consolidated financial statements. Should the impact of COVID-19 on our operations, including the disruption to our business caused by potential future closures of our facilities or reduced demand from our customers, be more significant than we currently anticipate, we may need additional financial resources, including additional debt or equity financings. There can be no assurance that any such debt or equity financings would be available on favorable terms or rates or at all.
Cash Flows
Operating Activities. For the six months ended June 30, 2020, we recorded a net loss of $1.0 million. Our net cash provided by operations was $81,000. During this same period, we had non-cash charges of $1.6 million for depreciation and amortization, which included $653,000 of amortization related to our right-of-use assets. During the six months ended June 30, 2020, we also recorded $395,000 for amortization of deferred compensation expense related to stock-based awards. During the six months ended June 30, 2020, accounts receivable increased $205,000, inventories increased $1.1 million and accounts payable increased $635,000, reflecting the recent increase in order levels.
Investing Activities. During the six months ended June 30, 2020, purchases of property and equipment were $190,000. We have no significant commitments for capital expenditures for the balance of 2020; however, depending upon changes in market demand or manufacturing and sales strategies, we may make such purchases or investments as we deem necessary and appropriate.
Financing Activities. As discussed more fully in Note 13 to our consolidated financial statements in our Q1 2020 Form 10-Q, during April 2020, we applied for and received loans through the PPP) of the CARES Act administered by the SBA totaling $2.8 million. We repaid the full amount of the PPP loans on May 5, 2020 with the applicable interest. During the six months ended June 30, 2020 we borrowed and repaid $2.8 million on our revolving credit facility. During the six months ended June 30, 2020, we utilized $74,000 to repurchase 13,767 shares of our common stock under the 2019 Repurchase Plan. On March 2, 2020, we suspended repurchases under the 2019 Repurchase Plan.
New or Recently Adopted Accounting Standards
See the Notes to our consolidated financial statements for information concerning the implementation and impact of new or recently adopted accounting standards.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, long-lived assets, goodwill, identifiable intangibles, contingent consideration liabilities and deferred income tax valuation allowances. We base our estimates on historical experience and on appropriate and customary assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Some of these accounting estimates and assumptions are particularly sensitive because of their significance to our consolidated financial statements and because of the possibility that future events affecting them may differ markedly from what had been assumed when the financial statements were prepared. As of June 30, 2020, there have been no significant changes to the accounting policies that we have deemed critical. These policies are more fully described in our 2019 Form 10-K.
Off -Balance Sheet Arrangements
There were no off-balance sheet arrangements during the six months ended June 30, 2020 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.