| INTEST CORP Item 1A RISK FACTORS The following are some of the factors that could materially and adversely affect our future performance or could cause actual results to differ materially from those expressed or implied in our forward-looking statements |
| The risks and uncertainties described below are not the only ones facing us and we cannot predict every event and circumstance that may adversely affect our business |
| However, these risks and uncertainties are the most significant factors that we have identified at this time |
| If one or more of these risks actually occurs, our business, results of operations, and financial condition would likely suffer, and the price of our stock would be negatively affected |
| Our sales reflect the cyclicality of the semiconductor industry, which causes our operating results to fluctuate significantly |
| Our business depends in significant part upon the capital expenditures of semiconductor manufacturers |
| Capital expenditures by these companies depend upon, among other things, the current and anticipated market demand for semiconductors and the products that utilize them |
| Typically, semiconductor manufacturers curtail capital expenditures during periods of economic downtown |
| Conversely, semiconductor manufacturers increase capital expenditures when market demand requires the addition of new or expanded production capabilities or the reconfiguration of existing fabrication facilities to accommodate new products |
| These market changes have contributed in the past, and will likely continue to contribute in the future, to fluctuations in our operating results |
| We believe current industry forecasts and recent trends in our orders and sales activity suggest we have entered the next up-cycle |
| If we have entered the next up-cycle, we cannot be certain how long this up-cycle will last or what the rate of increase or decrease in our orders and net revenues will be in any future period |
| Any decline in our customers &apos markets or in general economic conditions would likely result in a reduction in demand for our products and could harm our consolidated financial position, results of operations, cash flows and stock price |
| An up-cycle that is more rapid than we expect may require additional debt or equity financing to meet working capital requirements or capital expenditure needs |
| We cannot be sure that such financing will be available when required or on what terms such financing would be available |
| If we are not able to control our operating expenses during a cyclical downturn, or if an upturn is more rapid than we anticipate, we may not have sufficient cash to operate our businesses |
| In recent years, we have implemented cost controls and restructured our operations with the goal of significantly reducing our fixed operating costs to position ourselves to more effectively meet the needs of the fluid ATE market |
| If a downturn in the industry is more severe than we have planned for, or if we are not able to control our operating expenses, the level of our cash may not be sufficient to operate our businesses |
| Conversely, if an upturn is stronger than we plan for, we may need additional cash to finance our working capital needs or for capital expenditures |
| We cannot determine with certainty that, if needed, we would be able to raise additional funding through either equity or debt financing under these circumstances or on what terms such financing would be available |
| - 11 - Our operating results often change significantly from quarter to quarter and may cause fluctuations in our stock price |
| During the last several years, our operating results have fluctuated significantly from quarter to quarter |
| We believe that these fluctuations occur primarily due to the cycles of demand in the semiconductor manufacturing industry |
| In addition to the changing cycles of demand in the semiconductor manufacturing industry, other factors that have caused our quarterly operating results to fluctuate in the past, and that may cause fluctuations or losses in the future, include: * the technological obsolescence of our inventories; * quantities of our inventories greater than is reasonably likely to be utilized in future periods; * significant product warranty charges; * the recording of valuation allowances against deferred tax assets; * competitive pricing pressures; * the impairment of our assets due to reduced future demand for our products; * our ability to control operating costs; * costs associated with implementing our restructuring initiatives; * costs associated with compliance with the Sarbanes-Oxley Act of 2002 and new SEC regulations; * delays in shipments of our products; * the mix of our products sold; * the mix of customers and geographic regions where we sell our products; * changes in the level of our fixed costs; * costs associated with the development of our proprietary technology; * costs and timing of integration of our acquisitions and plant relocations and expansions; * our ability to obtain raw materials or fabricated parts when needed; and * cancellation or rescheduling of orders by our customers |
| Because the market price of our common stock has tended to vary based on, and in relation to, changes in our operating results, fluctuations in the market price of our stock are likely to continue as variations in our quarterly results continue |
| Our customers &apos purchasing patterns are erratic and can result in fluctuations in our backlog and quarterly results |
| Our backlog at December 31, 2005 was dlra6dtta0 million compared to dlra5dtta8 million at December 31, 2004 |
| Our backlog at the beginning of a quarter typically does not include all orders necessary to achieve our sales objectives for that quarter |
| Orders in our backlog are subject to cancellation, delay or rescheduling by our customers with limited or no penalties or ability to collect bill back amounts |
| Throughout recent years, we have experienced customer-requested shipment delays and order cancellations, and we believe it is probable that orders will be cancelled and/or delayed in the future |
| In addition, during a downturn, some of our customers may rely on short lead times generally available from suppliers, including us, whereas in periods of stronger demand, and longer lead times, customers need to book orders earlier |
| We have experienced varying levels of product warranty costs in recent periods and cannot predict the level of such costs that we may incur in future periods |
| We accrue product warranty charges quarterly, based upon our historical claims experience |
| In addition, from time to time, we accrue additional amounts based upon known product warranty issues, such as product retrofits |
| For the years ended December 31, 2005, 2004, and 2003, our product warranty charges were dlra549cmam000, dlra2dtta0 million and dlra1dtta9 million, or 1dtta0prca, 2dtta8prca and 4dtta0prca of net revenues, respectively |
| The level of our product warranty charges both in absolute dollars and as a percentage of net revenues is affected by a number of factors including the cyclicality of demand in the ATE industry, the prototype nature of much of our business, the complex nature of many of our products and, at our discretion, providing warranty repairs or replacements to customers after the contractual warranty period has expired in order to promote strong customer relations |
| If our products have reliability, quality or other problems, or the market perceives our products to be deficient, we may suffer reduced orders, higher manuf acturing costs, delays in collecting accounts receivable and higher service, support and warranty expenses |
| - - 12 - Recently enacted and proposed changes in securities laws and regulations are likely to increase our costs |
| The Sarbanes-Oxley Act of 2002 has required changes in some of our corporate governance procedures and our disclosure and compliance practices |
| These developments have increased our legal compliance and financial reporting costs |
| We expect these developments to make it more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantially higher costs to obtain coverage or reduce our coverage |
| This could make it more difficult for us to attract and retain qualified members of our board of directors and executive officers |
| In order to comply with certain requirements of the Sabanes-Oxley Act, such as the internal control system requirements of Section 404 of the Act, we have incurred, and expect to incur significant additional expenses in future periods to comply with these new requirements |
| We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result |
| We seek to acquire additional businesses |
| If we are unable to do so, our future rate of growth may be reduced or limited |
| A key element of our growth strategy is to acquire businesses, technologies or products that expand and complement our current businesses |
| We may not be able to execute our acquisition strategy if: * we are unable to identify suitable businesses or technologies to acquire; * we do not have access to required capital at the necessary time; or * we are unwilling or unable to outbid larger, more resourceful companies |
| Our acquisition strategy involves financial and management risks which may adversely affect our earnings in the future |
| If we acquire additional businesses, technologies or products, we will face the following additional risks: * future acquisitions could divert managementapstas attention from daily operations or otherwise require additional management, operational and financial resources; * we might not be able to integrate future acquisitions into our business successfully or operate acquired businesses profitably; * we may realize substantial acquisition related expenses which would reduce our net earnings in future years; and * our investigation of potential acquisition candidates may not reveal problems and liabilities of the companies that we acquire |
| If any of the events described above occur, our earnings could be reduced |
| If we issue shares of our stock or other rights to purchase our stock in connection with any future acquisitions, we would dilute our existing stockholders &apos interests and our earnings per share may decrease |
| If we issue debt in connection with any future acquisitions, lenders may impose covenants on us which could, among other things, restrict our ability to increase capital expenditures or to acquire additional businesses |
| Our industry is subject to rapidly evolving technological change, and our business prospects would be negatively affected if we are unable to respond to innovation in the semiconductor industry |
| Semiconductor technology continues to become more complex as manufacturers incorporate ICs into an increasing variety of products |
| This trend, and the rapid changes needed in automatic testing systems to respond to developments in the semiconductor industry, are likely to continue |
| We cannot be certain that we will be successful in developing, manufacturing or selling products that will satisfy customer needs or attain market acceptance |
| Our failure to provide products that meet customer needs or gain market acceptance will negatively affect our business prospects |
| If we are not able to obtain patents on or otherwise preserve and protect our proprietary technologies, our business may suffer |
| We have obtained domestic and foreign patents covering some of our products which expire between the years 2007 and 2020, and we have applications pending for additional patents |
| Some of our products utilize proprietary technology that is not covered by a patent or similar protection, and, in many cases, cannot be protected |
| We cannot be certain that: - - 13 - * any additional patents will be issued on our applications; * any patents we own now or in the future will protect our business against competitors that develop similar technology or products; * our patents will be held valid if they are challenged or subjected to reexamination or reissue; * others will not claim rights to our patented or other proprietary technologies; or * others will not develop technologies which are similar to, or can compete with, our unpatented proprietary technologies |
| If we cannot obtain patent or other protection for our proprietary technologies, our ability to compete in our markets could be impaired |
| Claims of intellectual property infringement by or against us could seriously harm our businesses |
| From time to time, we may be forced to respond to or prosecute intellectual property infringement claims to defend or protect our rights or a customerapstas rights |
| These claims, regardless of merit, may consume valuable management time, result in costly litigation or cause product shipment delays |
| We may have to enter into royalty or licensing agreements with third parties who claim infringement |
| These royalty or licensing agreements, if available, may be costly to us |
| If we are unable to enter into royalty or licensing agreements with satisfactory terms, our business could suffer |
| In instances where we have had reason to believe that we may be infringing the patent rights of others, or that someone may be infringing our patent rights, we have asked our patent counsel to evaluate the validity of the patents in question, as well as the potentially infringing conduct |
| If we become involved in a dispute, neither the third parties nor the courts are bound by our counselapstas conclusions |
| Our business will suffer if we cannot compete successfully with manufacturers whose products are similar to ours |
| We compete with numerous manufacturers, many of whom have greater financial resources and more extensive design and production capabilities than we do |
| Some of our principal competitors in the sale of manipulator, docking and tester interface products are Reid-Ashman Manufacturing Inc, Microhandling GmbH, Esmo AG, Credence Systems Corp, LTX Corporation, Teradyne Inc |
| Some of our principal competitors in the sale of temperature management products are Thermonics Inc, ERS Elektronik GmbH and Advances Temperature Test Systems GmbH In order to remain competitive with these and other companies, we must be able to continue to commit a significant portion of our personnel, financial resources, research and development and customer support to developing new products and maintaining customer satisfaction worldwide |
| If we are not able to compete successfully, our business will suffer |
| We generate a large portion of our sales from a small number of customers |
| If we were to lose one or more of our large customers, operating results could suffer dramatically |
| accounted for 16prca, 16prca and 11prca of our consolidated net revenues in 2005, 2004 and 2003, respectively |
| accounted for 11prca of our net consolidated revenues in 2004 |
| accounted for 18prca of our consolidated net revenues in 2003 |
| While all three of our operating segments sold to these customers, these revenues were primarily generated by our manipulator/docking hardware and tester interface segments |
| Our ten largest customers accounted for approximately 56prca, 62prca and 60prca of our net revenues in 2005, 2004 and 2003, respectively |
| The loss of any one or more of our largest customers, or a reduction in orders by a major customer, could materially reduce our net revenues or otherwise materially affect our business, financial condition or results of operations |
| Significant fluctuations in our net revenues strain our management, employees and other resources |
| Over the last several years, we have experienced significant fluctuations in our net revenues due to the cyclical nature of the ATE industry |
| During the most recent downturn, our net revenues declined from a peak of dlra22dtta7 million in the second quarter of 2004 to dlra10dtta7 million in the first quarter of 2005, a decline of 53prca |
| During the prior downturn, our net revenues declined from a peak of dlra24dtta5 million for the quarter ended September 30, 2000 to dlra7dtta4 million for the quarter ended September 30, 2001, a decline of 70prca |
| Conversely, in previous upcycles, our net revenues have increased significantly period-over-period |
| As a result of these sometimes sudden and significant changes in our market, we have implemented cost controls, including salary and benefit reductions, and restructured our operations |
| These fluctuations in our net revenues, restructurings and compensation changes place strain on our management, employees and other resources |
| - - 14 - If we do not continue to retain the services of key personnel, relationships with, and sales to, some of our customers could suffer, which could have a negative impact on our business |
| The loss of key personnel could adversely affect our ability to manage our business effectively |
| Our future success will depend largely upon the continued services of our senior management and certain other key employees |
| We do not have employment agreements with any of our executive officers or other key employees |
| Our future success will depend, in part, upon our ability to retain our managers, engineers and other key employees |
| Our business could suffer if we were unable to retain one or more of our senior officers or other key employees |
| A substantial portion of our operations exists outside the US, which exposes us to foreign political and economic risks |
| We have operated internationally for many years and expect to expand our international operations as necessary to continue expansion of our sales and service to our non-US customers |
| Our foreign subsidiaries generated 31prca and 24prca of consolidated net revenues in 2005 and 2004, respectively |
| Export sales from our US manufacturing facilities totaled dlra14dtta9 million, or 28prca of consolidated net revenues, in 2005 and dlra17dtta8 million, or 25prca of consolidated net revenues, in 2004 |
| The portion of our consolidated net revenues that were derived from sales by our subsidiaries in the Asia-Pacific region was 20prca in 2005 and 14prca in 2004 |
| We expect our international revenues will continue to represent a significant portion of total net revenues |
| However, in addition to the risks generally associated with sales and operations in the US, sales to customers outside the US and operations in foreign countries are subject to additional risks, which may, in the future, affect our operations |
| These risks include: * political and economic instability in foreign countries; * the imposition of financial and operational controls and regulatory restrictions by foreign governments; * the need to comply with a wide variety of US and foreign import and export laws; * trade restrictions; * changes in tariffs and taxes; * longer payment cycles; * fluctuations in currency exchange rates; and * the greater difficulty of administering business abroad |
| We conduct business in foreign currencies, and fluctuations in the values of those currencies could result in foreign exchange losses |
| In 2005, approximately 10prca of our net revenues were denominated in Japanese yen and approximately 10prca were denominated in Euros |
| During 2005, we recorded foreign exchange currency transaction losses of dlra134cmam000 |
| Future fluctuations in the value of the Japanese Yen or the Euro could result in foreign exchange losses |
| Any strengthening of the US dollar in relation to the currencies of our competitors or customers, or strengthening or weakening of the Japanese yen or Euro in relation to other currencies in which our customers or competitors do business, could adversely affect our competitiveness |
| Moreover, a strengthening of the US dollar or other competitive factors could put pressure on us to denominate a greater portion of our sales in foreign currencies, thereby increasing our exposure to fluctuations in exchange rates |
| Any devaluation of these currencies would hurt our business |
| We do not undertake hedging activities against all of our exchange rate risk |
| Fluctuations in exchange rates may adversely af fect our competitive position or result in foreign exchange losses, either of which could cause our business to suffer |
| Changes to financial accounting standards may affect our reported results of operations |
| We prepare our financial statements to conform to accounting principles generally accepted in the United States of America, or US GAAP US GAAP is subject to the SEC and various bodies formed to interpret and create appropriate accounting policies |
| A change in those policies can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced |
| Accounting rules affecting many aspects of our business, including rules relating to accounting for business combinations, asset impairment, revenue recognition, restructuring or disposal of long-lived assets and stock option grants have recently been revised or are currently under review |
| Changes to those rules or current interpretation of those rules may have a material adverse effect on our reported financial results or on the way we conduct our business |
| - - 15 - inTEST CORPORATON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005 |