inTEST Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
inTEST supplies test and process solutions for semiconductor, automotive, defense/aerospace, industrial, life sciences, security and other markets. Effective January 1, 2022, it reorganized into Electronic Test, Environmental Technologies and Process Technologies. Prior-period segment data was reclassified. Results include businesses acquired in late 2021, including Videology and Acculogic.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $29.6 | $21.8 | $53.7 | $41.4 |
| Gross profit / margin | $13.5 / 46% | $11.0 / 50% | $24.6 / 46% | $20.5 / 50% |
| Operating income | $2.7 | $3.0 | $3.5 | $5.6 |
| Net earnings | $2.1 | $2.6 | $2.7 | $4.8 |
| Diluted EPS | $0.20 | $0.24 | $0.25 | $0.45 |
- Q2 revenue rose 36% year over year; six-month revenue rose 30%. Acquired businesses contributed $5.2 million in Q2 and $9.2 million in the first half.
- Q2 operating margin was about 9.2%, versus 13.9% a year earlier; first-half operating margin was about 6.6%, versus 13.6%. Management attributed lower gross margin chiefly to higher component material costs and product/customer mix, with some impact from fixed costs and staffing investments.
- Q2 net earnings fell 19%; first-half net earnings fell 44%. Operating expenses increased, including costs from acquisitions, staffing, travel and advertising, development spending and acquired-intangible amortization. There were no restructuring charges in 2022, compared with $0.2 million in Q2 2021.
- Orders were $40.5 million in Q2, up 61% year over year and from $25.1 million in Q1 2022. First-half orders were $65.6 million, up 30%. Backlog was approximately $46.0 million at June 30, versus $20.4 million a year earlier and $35.0 million at March 31; management cautioned that orders can be canceled or rescheduled and backlog is not necessarily indicative of future sales.
Cash flow, balance sheet and debt
- Operating cash flow was negative $5.1 million for the first half, versus positive $3.9 million in 2021. Management cited higher receivables (up $6.6 million) and inventory (up $4.9 million), partly offset by higher accounts payable.
- Cash and cash equivalents were $10.5 million at June 30, down from $21.2 million at year-end. Short-term U.S. Treasury investments were $3.5 million; working capital was $28.7 million, versus $27.0 million at year-end. Current assets were $55.6 million and current liabilities $26.9 million.
- Term Note debt was $18.2 million, including $4.1 million current; the company repaid $1.9 million in the first half. No revolver borrowings were outstanding; $10.0 million of revolving capacity and $4.5 million of Term Note availability remained. The debt is secured by substantially all tangible and intangible assets and subject to financial covenants.
- One $12.0 million borrowing had a hedged annual rate of approximately 3.2%. The unhedged borrowing’s rate was approximately 2.8% at June 30 and increased to approximately 3.6% effective August 1, 2022.
- Investing cash outflow was $3.8 million, including $3.5 million used to purchase Treasury bills; financing cash outflow was $1.8 million. Management expects cash, available borrowing capacity and anticipated operating cash flows to cover near-term requirements.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided in the filing. Management described strong demand across markets, particularly semiconductor applications, and continued efforts to diversify beyond semiconductors.
- Supply-chain constraints, higher costs and logistics delays were expected to continue for the foreseeable future. Acculogic relies on a Belarus-based sole-source supplier for certain material; the company reported a six-to-nine-month supply and was qualifying an alternate source.
- COVID-19 cases caused lost production time at one facility in April, while China shutdowns required alternate delivery plans. Further disruption could affect production or shipments. The filing also identifies inflation, foreign exchange, semiconductor cyclicality, customer concentration, order timing and acquisition integration among material risks.
- Acculogic purchase accounting was finalized, including a $371,000 working-capital refund and a $500,000 increase to contingent consideration in the first half. The company also recorded a $130,000 stock-award expense catch-up after raising the expected vesting level for certain awards from 100% to 150%.
- The company reported no material legal proceedings, no material changes to the risk factors in its 2021 Form 10-K, and effective disclosure controls at quarter-end.
Investor verification points
- Whether backlog converts to revenue on schedule given supply constraints and customer rescheduling or cancellations.
- Whether gross margins recover as material costs, product mix and acquisition-related costs change.
- Working-capital trends, particularly receivables and inventory, and their effect on operating cash flow.
- Available liquidity, debt covenant headroom, variable-rate exposure and the August 2022 borrowing-rate increase.
- Progress in qualifying an alternate source for Acculogic’s Belarus-sourced material and the effect of geopolitical and COVID-related disruption.
- Acquisition performance, contingent consideration and the sustainability of growth in non-semiconductor markets.