inTEST Corporation — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. Comparisons are with fiscal 2021 unless noted. The filing reports annual results, not a separate fourth-quarter summary.
Business context
inTEST supplies test and process solutions for semiconductor, automotive, defense/aerospace, industrial, life sciences and security markets. In 2022 it reported three segments: Electronic Test, Environmental Technologies and Process Technologies. The segment structure changed from two segments in 2021; prior-year segment data was reclassified for comparison. 2022 results include a full year of operations from three businesses acquired in late 2021: North Sciences, Videology and Acculogic.
Financial results and liquidity
- Revenue: $116.8 million, up 37.6% from $84.9 million. Acquired businesses contributed $19.7 million of 2022 revenue; they contributed $1.5 million after acquisition in 2021.
- Net earnings and EPS: Net earnings were $8.5 million versus $7.3 million. Diluted EPS was $0.78 versus $0.68.
- Operating results: Gross profit was $53.4 million; gross margin declined to 46% from 49%. Operating income was $10.7 million, compared with $8.5 million. Interest expense increased to $635,000 from $89,000.
- Cash flow: Net cash used in operating activities was $1.4 million, despite net earnings of $8.5 million. The filing attributes the cash use chiefly to working-capital increases, including a $10.6 million inventory increase and a $4.9 million increase in receivables. Investing activities used $1.2 million; financing activities used $3.7 million.
- Liquidity: Cash and cash equivalents were $13.4 million, down from $21.2 million; working capital was $33.2 million, up from $27.0 million. An additional $1.1 million was restricted cash.
- Debt and facility: Term Note principal was $16.1 million at year-end, including $4.1 million current; no borrowings were outstanding under the $10 million revolving facility. The company reported $30 million of remaining Term Note availability. Its amended facility matures in September 2027 and is secured by substantially all tangible and intangible assets. The company reported compliance with covenants at year-end.
- Orders and backlog: Orders rose 27% to $129.6 million. Backlog increased to $46.8 million from $34.1 million; substantially all was expected to ship in 2023, but customer orders may be canceled or rescheduled.
Changes versus 2021
- Revenue growth was broad-based: semiconductor revenue increased 24.5% to $68.4 million, while non-semiconductor markets collectively grew to $48.0 million from $30.0 million. Semiconductor remained the largest market, at 58.6% of revenue.
- Revenue grew in each reported segment: Electronic Test to $40.2 million from $32.5 million; Environmental Technologies to $30.2 million from $26.9 million; and Process Technologies to $46.4 million from $25.5 million.
- Gross margin fell three percentage points, primarily due to higher component costs and changes in product, customer and sales-channel mix. Selling, engineering and development expenses also increased, reflecting acquired operations and investments in staffing and growth.
- Net operating cash flow shifted from $10.8 million provided in 2021 to $1.4 million used in 2022, as working capital expanded and customer deposits and deferred revenue declined.
Outlook, commentary and risks
- Management’s stated strategic target is annual revenue of $200 million to $250 million by 2025, supported by organic growth and acquisitions while maintaining a strong margin profile. This is a strategic goal, not specific near-term financial guidance; the filing gives no 2023 revenue or earnings forecast.
- Management expects supply-chain availability, pricing and logistics pressures to continue to varying degrees. Actions include qualifying alternate suppliers, carrying more inventory, ordering earlier and raising customer prices where possible.
- A key supply risk is Acculogic’s sole-source material supplier in Belarus. The company estimated a six-to-nine-month supply and said it was qualifying an alternate source.
- Other key risks include semiconductor-market cyclicality, customer concentration (the ten largest customers represented about 43% of revenue), acquisition integration and financing, inflation and labor costs, foreign-currency and international exposure, and geopolitical tensions involving China and Taiwan.
- The unhedged Acculogic acquisition borrowing carried an approximately 4.0% rate at year-end 2022, which rose to approximately 6.7% effective March 1, 2023. The company had an interest-rate swap on the other acquisition-related draw.
- Acculogic contingent consideration had a year-end estimated fair value of $1.4 million, with potential payments capped at CAD $5.0 million through 2026. No payment was due for 2022.
- The annual goodwill impairment assessment identified no impairment. The auditor identified goodwill valuation as a critical audit matter, citing the judgment involved in revenue growth, operating margin and discount-rate assumptions.
- No material legal proceedings or material off-balance-sheet arrangements were reported. Management concluded disclosure controls and internal control over financial reporting were effective at the reasonable-assurance level.
Investor verification priorities
- Assess whether the increase in revenue and backlog converts into shipments, earnings and operating cash flow, given 2022’s negative operating cash flow.
- Track gross margin recovery or further pressure from input costs, pricing, hiring costs and product mix.
- Separate organic growth from acquisition contributions and evaluate integration performance and segment profitability.
- Review debt repayment, variable-rate exposure, covenant headroom and the availability and terms of additional borrowing.
- Monitor qualification of the Belarus-related alternate supplier and any resulting production, cost or delivery effects.
- Test the assumptions supporting the 2025 revenue target and the goodwill valuations, particularly projected growth, margins and discount rates.