inTest Corp. (INTT)

[MikeDDKing]

Initiating inTEST at Outperform
zacks

On Monday August 23, 2010, 4:53 pm EDT

inTEST Corporation (NasdaqCM: INTT) is a designer, manufacturer and marketer of mechanical, thermal and electrical products that are used by semiconductor manufacturers in conjunction with automatic test equipment (ATE) in the testing of integrated circuits (ICs).

Beyond its blue chip portfolio of semiconductor manufacturers, the acquisition of Sigma has propelled the firm to diversify into non-semi thermal testing products. This has the effect of diversifying revenues and opens the company up to new markets. In the test equipment world, change is good -- be it the broad switch to mobile computing, the march to finer geometries, or the growth of electronic content in automobiles, more chip content means more testing for inTEST.

The testing of devices is a critical step during the semiconductor production process. Typically, semiconductor companies test each device at two different stages during the manufacturing process to ensure its functional and electrical performance prior to shipment to the device user. These companies use semiconductor testing equipment to first test a device after it has been fabricated but before it has been packaged to eliminate non-functioning parts.

Then, after the functioning devices are packaged, they are tested again to determine if they fully meet performance specifications. Testing is an important step in the manufacturing process because it allows devices to be fabricated at both maximum density and performance -- a key to the competitiveness of semiconductor manufacturers.

Trends

Looking at the Mechanical bookings in the first half of 2009 versus 2010, customer mix and product mix changes makes it apparent that the industry has changed toward stronger sales for testers. Last year during the first half of 2009, 90% of the firm’s business was to end users and 10% to OEMs. This year, that split is approximately 70-30, indicating the tester sales have rebounded.

Another metric is change in the ratio of docking to manipulator sales. A year ago, the ratio was 88% docking to 12% manipulators; that ratio is now 70-30. Electrical and Mechanical bookings in the second quarter were down from the previous quarter. This was primarily the result of an order rush in the first quarter.

inTEST remains well positioned to achieve solid revenue growth and operating leverage as complexity in electronics rations up and chip content increases. We see an even-keeled semiconductor equipment market recovery and point to market research firm Gartner’s expectations that the current upturn to be one of the first in which the peak revenue in capital equipment does not surpass previous growth cycles, which may well help to mitigate the boom/bust scenario seen in the past.

The firm has a diversified portfolio that includes non-semiconductor markets. This revenue should be a bit more inelastic and run on a different cyclical time frame than the semiconductor business.

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