INTEST CORPORATION Risk Factors and Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q for the period endedJune 30, 2022 (this "Report"), including this management's discussion and analysis ("MD&A"), contains 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," "could," "will," "should," "plans," "projects," "forecasts," "seeks," "anticipates," "goal," "objective," "target," "estimate," "future," "outlook," "vision," or variations of such words or similar terminology. Investors and prospective investors are cautioned that such forward-looking statements are only projections based on current estimations. These statements involve risks and uncertainties and are based upon various assumptions. Such risks and uncertainties include, but are not limited to: ? our ability to execute on our 5-Point Strategy; ? our ability to grow our presence in the life sciences, security, industrial and international markets; ? the possibility of future acquisitions or dispositions and the successful integration of any acquired operations; ? the success of our strategy to diversify our business by entering markets outside the semiconductor and automated test equipment ("ATE") markets, collectively the "semi market"; ? indications of a change in the market cycles in the semi market, or other markets we serve; ? developments and trends in the semi market, including changes in the demand for semiconductors; ? our ability to convert backlog to sales and to ship product in a timely manner;
? the loss of any one or more of our largest customers, or a reduction
in orders by a major customer;
? the availability of materials used to manufacture our products;
? the impact of current global supply chain constraints or other
interruptions in our supply chain caused by external factors,
including the ongoing war in Ukraine and COVID-19;
? the impact of inflation on our business and financial condition;
? the impact of COVID-19 on our business, liquidity, financial
condition and results of operations;? the sufficiency of cash balances, lines of credit and net cash from
operations;
? stock price fluctuations;
? the ability to borrow funds or raise capital to finance potential
acquisitions or for working capital;? changes in the rate of, and timing of, capital expenditures by our
customers;
? effects of exchange rate fluctuations;
? progress of product development programs;
? the anticipated market for our products;? the availability of and retention of key personnel or our ability to
hire personnel at anticipated costs;
? general economic conditions both domestically and globally, and
? other risk factors included in Part I, Item 1A - "Risk Factors" in
our 2021 Form 10-K.
These risks and uncertainties, among others, could cause our actual future
results to differ materially from those described in our forward-looking
statements or from our prior results. Any forward-looking statement made by us
in this Report is based only on information currently available to us and speaks
to circumstances only as of the date on which it is made. We are not obligated
to update these forward-looking statements, even though our situation may change
in the future.
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Overview
This MD&A should be read in conjunction with the accompanying consolidated financial statements. In addition, please refer to the discussion of our business and markets contained in Part 1, Item 1 of our 2021 Form 10-K.
We are a global supplier of innovative test and process solutions for use in manufacturing and testing across a wide range of markets including automotive, defense/aerospace, industrial, life sciences, security and semiconductor. During the year endedDecember 31, 2021 , we managed our business as two operating segments which were also our reportable segments and reporting units: Thermal Products ("Thermal") and Electromechanical Solutions ("EMS"). EffectiveJanuary 1, 2022 , we reorganized our operating segments to better align with our plan to manage and report our business going forward. This change in our operating and reporting structure reflects the evolution of our business, particularly as a result of the broadening of our product portfolio through the acquisitions we completed in the fourth quarter of 2021, which are discussed more fully in Note 3 to our consolidated financial statements in this Report. Accordingly, for 2022, we have three operating segments which are also our reportable segments and reporting units: Electronic Test (which includes our semiconductor test equipment, flying probe and in-circuit testers), Environmental Technologies (which includes our thermal test, process and storage products) and Process Technologies (which includes our induction heating and video imaging products). Prior period information has been reclassified to be comparable to the current period's presentation. All 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. These factors include, for example, the amount of engineering time required to develop the product, the market or customer to which we sell the product and the level of competing products available from other suppliers. The needs of our customers ultimately determine the products that we sell in a given time period. Therefore, the mix of products sold in a given period can change significantly when compared against the prior period. As a result, our consolidated gross margin may be significantly impacted by a change in the mix of products sold in a particular period. Markets As discussed further in Part 1, Item 1 "Markets" of our 2021 Form 10-K, we are focused on specific target markets which include automotive, defense/aerospace, industrial, life sciences, security as well as both the front-end and back-end of the semiconductor manufacturing industry ("semi" or "semi market"). The semi market, which includes both the broader semiconductor market, as well as the more specialized ATE and wafer processing sectors within the broader semiconductor market, has historically been the largest single market in which we operate. The semi market is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns and is subject to periods of significant expansion or contraction in demand. Our intention is to continue diversifying our markets, our product offerings within the markets we serve and our customer base across all of our markets with the goal of reducing our dependence on any one market, product or customer. In particular, we are seeking to reduce the impact of volatility in the semi market on our results of operations. 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") and, for our induction heating products, the demand for wafer processing equipment. Demand for ATE or wafer processing equipment is primarily 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 ICs and products incorporating ICs. 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 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 revenue 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 revenue 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. These periods of heightened or reduced demand can shift depending on various factors impacting both our customers and the markets that they serve. In addition, during both downward and upward cycles in the semi market, in any given quarter, the trend in both our orders and revenue 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. -25-
-------------------------------------------------------------------------------- While a significant portion of our orders and revenue 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 revenue from the semi market to deviate from the overall trend in the 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. Recently this has become more pronounced for our sales into the wafer processing sector within the broader semiconductor market due to the limited market penetration we have into this sector and the variability of orders we have experienced from the few customers we support. 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. Acquisitions A key element to our strategy for growth is through acquisitions. As discussed more fully in Note 3 to our consolidated financial statements in this Report, during 2021, we completed three acquisitions (collectively the "acquired businesses") that expanded our technology offerings, diversified our markets and customers and expanded our reach intoEurope . OnOctober 6, 2021 , we acquired substantially all of the assets of Z-Sciences (now North Sciences), a developer of ultra-cold storage solutions for the life sciences cold chain market. This small, tuck-in transaction enhances our technology, adds new talent, and provides a low-cost entry into this fast growing, fragmented market. This business is included in our Environmental Technologies segment. OnOctober 28, 2021 , we acquired substantially all of the assets of Videology, a global designer, developer and manufacturer of OEM digital streaming and image capturing solutions. The acquisition expanded our process technology offerings, diversified our reach into key target markets and broadened our customer base. This business is included in our Process Technologies segment. OnDecember 21, 2021 , we acquired Acculogic, a global manufacturer of robotics-based electronic production test equipment and application support services. The acquisition expanded our global reach and enhanced our product portfolio with leading technologies and automation services. This business is included in our Electronic Test segment.
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
Three Months
Months Ended Ended
June 30, Change March 31, Change
2022 2021 $ % 2022 $ %
Orders:
Electronic Test $ 14,614 $ 10,279 $ 4,335 42 % $ 9,297 $ 5,317 57 %
Environmental
Technologies 9,462 8,620 842 10 % 6,914 2,548 37 %
Process
Technologies 16,442 6,206 10,236 165 % 8,852 7,590 86 %
$ 40,518 $ 25,105 $ 15,413 61 % $ 25,063 $ 15,455 62 %
Semi $ 26,732 $ 16,528 $ 10,204 62 % $ 12,382 $ 14,350 116 %
Industrial 2,366 1,642 724 44 % 3,222 (856 ) (27 )%
Auto/EV 2,750 2,724 26 1 % 2,619 131 5 %
Defense/Aerospace 1,897 1,758 139 8 % 1,851 46 2 %
Life Sciences 1,535 612 923 151 % 1,216 319 26 %
Security 989 - 989 n/a 153 836 546 %
Other 4,249 1,841 2,408 131 % 3,620 629 17 %
$ 40,518 $ 25,105 $ 15,413 61 % $ 25,063$ 15,455 62 % -26-
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Six
Months Ended
June 30, Change
2022 2021 $ %
Orders:
Electronic Test $ 23,911 $ 20,763 $ 3,148 15 %
Environmental Technologies 16,376 14,264 2,112 15 %
Process Technologies 25,294 15,308 9,986 65 %
$ 65,581 $ 50,335 $ 15,246 30 %
Semi $ 39,114 $ 33,713 $ 5,401 16 %
Industrial 5,588 4,168 1,420 34 %
Auto/EV 5,369 3,892 1,477 38 %
Defense/Aerospace 3,748 2,868 880 31 %
Life Sciences 2,751 1,564 1,187 76 %
Security 1,142 - 1,142 n/a
Other 7,869 4,130 3,739 91 %
$ 65,581 $ 50,335 $ 15,246 30 %
Total consolidated orders for the three and six months ended June 30, 2022 , were
$40.5 million and $65.6 million , respectively. This compares to $25.1 million in
each of the three months ended June 30, 2021 and March 31, 2022 and $50.3
million for the six months ended June 30, 2021 . The acquired
businesses contributed $5.4 million or 13% of the total orders in the second
quarter of 2022 and $10.4 million or 16% of the total orders in the first six
months of 2022.
The increase in orders in the first six months of 2022 as compared to the same
period in 2021 reflects greater levels of demand across all our markets combined
with the impact of the acquired businesses. In particular, demand for both our
front-end and back-end semi market applications has continued to show strength
which we attribute to a combination of increased demand for semiconductors
generally as well as the success of our new products and growth in our customer
base.
At June 30, 2022 , our backlog of unfilled orders for all products was
approximately $46.0 million compared with approximately $20.4 million at June
30, 2021 and $35.0 million at March 31, 2022 . The amounts at June 30, 2022 and
March 31, 2022 included approximately $7.7 million and $7.6 million ,
respectively, from acquired businesses. The significant increase in our backlog
as compared to June 30, 2021 reflects several orders received which we expect to
ship over a longer period of time than has historically been the case for us as
well as the impact of the acquired businesses. Our backlog includes customer
orders which we have accepted, essentially all of which we expect to deliver in
2022, subject to supply chain constraints. 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, which 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.
Revenue
The following table sets forth, for the periods indicated, a breakdown of revenue by operating segment and market (in thousands).
Three
Three Months
Months Ended Ended
June 30, Change March 31, Change
2022 2021 $ % 2022 $ %
Revenue:
Electronic Test $ 9,797 $ 9,054 $ 743 8 % $ 8,778 $ 1,019 12 %
Environmental
Technologies 7,507 6,647 860 13 % 6,993 514 7 %
Process
Technologies 12,267 6,119 6,148 100 % 8,310 3,957 48 %
$ 29,571 $ 21,820 $ 7,751 36 % $ 24,081 $ 5,490 23 %
Semi $ 16,409 $ 15,677 $ 732 5 % $ 13,390 $ 3,019 23 %
Industrial 2,930 1,524 1,406 92 % 2,799 131 5 %
Auto/EV 3,594 842 2,752 327 % 2,756 838 30 %
Defense/Aerospace 1,423 1,522 (99 ) (7 )% 1,493 (70 ) (5 )%
Life Sciences 1,169 586 583 99 % 699 470 67 %
Security 794 - 794 n/a 574 220 38 %
Other 3,252 1,669 1,583 95 % 2,370 882 37 %
$ 29,571 $ 21,820 $ 7,751 36 % $ 24,081 $ 5,490 23 %
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Six
Months Ended
June 30, Change
2022 2021 $ %
Revenue:
Electronic Test $ 18,575 $ 17,555 $ 1,020 6 %
Environmental Technologies 14,500 12,845 1,655 13 %
Process Technologies 20,577 10,976 9,601 87 %
$ 53,652 $ 41,376 $ 12,276 30 %
Semi $ 29,799 $ 28,997 $ 802 3 %
Industrial 5,729 2,951 2,778 94 %
Auto/EV 6,350 2,169 4,181 193 %
Defense/Aerospace 2,916 2,774 142 5 %
Life Sciences 1,868 1,229 639 52 %
Security 1,368 - 1,368 n/a
Other 5,622 3,256 2,366 73 %
$ 53,652 $ 41,376 $ 12,276 30 %
Total consolidated revenue for the three and six months ended June 30, 2022 was
$29.6 million and $53.7 million , respectively. This compares to $21.8 million
for the three months ended June 30, 2021 , $24.1 million for the three months
ended March 31, 2022 and $41.4 million for the six months ended June 30, 2021 .
The acquired businesses contributed $5.2 million or 18% of the total revenue in
the second quarter of 2022 and $9.2 million or 17% of the total revenue in the
first six months of 2022.
Excluding the revenue generated by the acquired businesses, growth in revenue
for the three and six months ended June 30, 2022 was 12% and 7%, respectively,
compared to the same periods in 2021. This primarily reflects the aforementioned
strength in both the front-end and the back-end of the semi market. The acquired
businesses contributed to growth in life sciences, security and other markets.
War in
The ongoing war betweenRussia andUkraine continues to contribute to global inflationary pressures and the availability of certain raw materials produced in that region, further exacerbating global supply chain challenges that emerged after the onset of the COVID-19 pandemic as described below. As discussed in Part 1, Item IA "Risk Factors" in our 2021 Form 10-K, Acculogic, which we acquired inDecember 2021 , purchases certain material from a key sole-source supplier inBelarus , which is bordered byRussia to the east and northeast andUkraine to the south. We estimate that we currently have a six to nine month supply of this material. In addition, we are in the process of qualifying an alternate supplier for this material. In addition, while we have been able to mitigate a significant portion of the supply chain and logistics challenges that we have encountered in the first six months of 2022, we expect to continue to experience increased prices, lack of availability and logistics delays for the foreseeable future. The actions we are taking to mitigate these risks include qualifying new vendors as alternate sources in our supply chain, increasing our inventory of raw materials and ordering further in advance of when we expect to need materials than has been our practice in the past. We have increased, and may further increase, the prices that we charge our customers as a result of increased raw material expenses. We are also working with our customers to find alternate options for the shipment of products where they control aspects of the logistics process. However, the situation is evolving and shifting rapidly at times, and the success of our efforts to mitigate and address the impacts on our business may not be successful. As a result, we could see increases in our costs or reduced revenue which would impact the level of our earnings in future periods. -28- -------------------------------------------------------------------------------- Please refer to Part 1, Item 1A of our 2021 Form 10-K for further discussion of the risks associated with our business operations, including risks associated with foreign operations. COVID-19 Pandemic With respect to the COVID-19 pandemic, we are following the guidance of the CDC and the local regulatory authorities in regions outside theU.S. While in most cases we are no longer requiring employees to wear masks indoors in our domestic locations, we continue to closely monitor the case numbers in individual facilities and have temporarily reinstituted mask requirements when we have deemed it prudent to do so. We are encouraging all employees to receive COVID-19 vaccinations and boosters, if possible. We are continuing to conduct temperature screenings and encouraging all employees to maintain social distancing when appropriate. We are also continuing to allow employees to work remotely either part-time or full-time in circumstances when possible. DuringApril 2022 , an increase in COVID-19 cases at one of our facilities resulted in a loss of production time. Additionally, the shutdowns inChina required us to find alternate plans for delivery of our products to the country. Although we were able to take actions to lessen the impact of these events on our business, if the spread of COVID-19 or its variants continues to worsen, we may experience additional lost production time or further interruption in our ability to ship our products to our customers. In addition, if one or more of our significant customers or suppliers is impacted, or if significant additional governmental regulations and restrictions are imposed, our business could be negatively impacted in the future. We continue to monitor the situation closely and will adjust our operations as necessary to protect the health and well-being of our employees and to minimize the impact on our business operations. To the extent that further governmental mandates or restrictions are implemented in the future, we currently expect to be able to continue to operate our business in a manner similar to how we have operated over the past two years. Results of Operations The results of operations for all of our operating segments are generally affected by the same factors described in the Overview section 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
Revenue. Revenue was$29.6 million for the three months endedJune 30, 2022 compared to$21.8 million for the same period in 2021, an increase of$7.8 million , or 36%. Revenue attributable to the acquired businesses totaled$5.2 million in the second quarter of 2022. We believe the increase in our revenue during the second quarter of 2022 primarily reflects the factors previously discussed under "Revenue" in the Overview section above. Gross Margin. Our consolidated gross margin was 46% of revenue for the three months endedJune 30, 2022 as compared to 50% of revenue for the same period in 2021. The decrease in our gross margin primarily reflects an increase in our component material costs as a percentage of revenue, reflecting changes in product and customer mix. To a lesser extent, there was also an increase in our fixed operating costs as a percent of revenue, reflecting both the impact of the acquired businesses as well as headcount investments in our legacy business. Selling Expense. Selling expense was$4.0 million for the three months endedJune 30, 2022 compared to$2.6 million for the same period in 2021, an increase of$1.4 million , or 55%. The acquired businesses account for approximately$976,000 of this increase. The remaining increase primarily reflects headcount investments and increased travel and advertising costs across all our segments. Engineering and Product Development Expense. Engineering and product development expense was$1.9 million for the three months endedJune 30, 2022 compared to$1.4 million for the same period in 2021, an increase of$503,000 , or 37%. The acquired businesses account for approximately$472,000 of this increase. Other than the costs associated with the acquired businesses, there were no significant changes in the components of engineering and product development expense. General and Administrative Expense. General and administrative expense was$4.9 million for the three months endedJune 30, 2022 compared to$3.8 million for the same period in 2021, an increase of$1.2 million , or 31%. The acquired businesses account for approximately$1.0 million of this increase. The amount attributable to the acquired businesses includes amortization expense of approximately$453,000 related to acquired intangible assets. The remaining increase primarily reflects headcount investments in our legacy business as well as an increase in stock-based compensation expense. During the second quarter of 2022, we recorded a catch-up adjustment of$130,000 related to the performance-based awards that are expected to vest onAugust 24, 2023 . This adjustment was a result of a change in the probable vesting percentage for these awards which is now 150% as compared to 100%. These increases were partially offset by a reduction in legal fees. -29- -------------------------------------------------------------------------------- Restructuring and Other Charges. For the three months endedJune 30, 2021 , we recorded$197,000 in restructuring and other charges related to the consolidation of the manufacturing operations in our Electronic Test segment and the retirement of our former Chief Financial Officer. There were no similar charges in the three months endedJune 30, 2022 . Income Tax Expense. For the three months endedJune 30, 2022 , we recorded income tax expense of$454,000 compared to income tax expense of$447,000 for the same period in 2021. Our effective tax rate was 18% for the three months endedJune 30, 2022 compared to 15% for the same period in 2021. 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.
Six Months Ended
Revenue. Revenue was$53.7 million for the six months endedJune 30, 2022 compared to$41.4 million for the same period in 2021, an increase of$12.3 million , or 30%. Revenue attributable to the acquired businesses totaled$9.2 million in the first six months of 2022. We believe the increase in our revenue during the first six months of 2022 primarily reflects the factors previously discussed under "Revenue" in the Overview section above. Gross Margin. Our consolidated gross margin was 46% of revenue for the six months endedJune 30, 2022 as compared to 50% of revenue for the same period in 2021. The decrease in our gross margin primarily reflects an increase in our component material costs as a percentage of revenue, reflecting changes in product and customer mix. To a lesser extent, there was also an increase in our fixed operating costs as a percent of revenue, reflecting both the impact of the acquired businesses as well as headcount investments in our legacy business. Selling Expense. Selling expense was$7.5 million for the six months endedJune 30, 2022 compared to$5.0 million for the same period in 2021, an increase of$2.5 million , or 50%. The acquired businesses account for approximately$1.8 million of this increase. The remaining increase primarily reflects headcount investments and increased travel and advertising costs across all our segments. Engineering and Product Development Expense. Engineering and product development expense was$3.8 million for the six months endedJune 30, 2022 compared to$2.7 million for the same period in 2021, an increase of$1.1 million or 41%. The acquired businesses account for approximately$950,000 of this increase. The remainder of the increase primarily reflects headcount investments in our legacy business as well as an increase in spending on materials used in product development projects. These increases were partially offset by a decrease in legal fees related to our intellectual property. General and Administrative Expense. General and administrative expense was$9.8 million for the six months endedJune 30, 2022 compared to$6.9 million for the same period in 2021, an increase of$2.8 million , or 41%. The acquired businesses account for approximately$2.1 million of this increase. The amount attributable to the acquired businesses includes amortization expense of approximately$915,000 related to acquired intangible assets. The remaining increase primarily reflects headcount investments in our legacy business, higher levels of professional fees for third-party professionals who assist us with strategic initiatives, investor relations and other regulatory matters and an increase in stock-based compensation expense. During the second quarter of 2022, we recorded a catch-up adjustment of$130,000 related to the performance-based awards that will vest onAugust 24, 2023 . This adjustment was a result of a change in the probable vesting percentage for these awards which is now 150% as compared to 100%. These increases were partially offset by a reduction in legal fees.
Restructuring and Other Charges. For the six months ended
Income Tax Expense. For the six months endedJune 30, 2022 , we recorded income tax expense of$532,000 compared to income tax expense of$813,000 for the same period in 2021. Our effective tax rate was 17% for the six months endedJune 30, 2022 compared to 14% for the same period in 2021. 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. -30-
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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 revenue, results of operations and net cash flows difficult. Our primary historical source of liquidity and capital resources has been cash flow generated by our operations. In 2021, we also utilized our credit facility, which is discussed below, to fund our acquisitions. We manage our businesses to maximize operating cash flows as our primary source of liquidity for our short-term cash requirements, as discussed below. We use cash to fund growth in our operating assets, for new product research and development, for acquisitions and for stock repurchases. We currently anticipate that any additional long-term cash requirements related to our strategy would be funded through a combination of our cash and cash equivalents, our credit facility or by issuing equity. Credit Facility As discussed in Note 12 to our consolidated financial statements in this Report, onOctober 15, 2021 , we entered into theOctober 2021 Agreement with M&T. TheOctober 2021 Agreement includes a$25 million Term Note and a$10 million revolving credit facility and replaces our prior credit facility with M&T. TheOctober 2021 Agreement has a five-year contract period that expires onOctober 15, 2026 and draws under the Term Note will be permissible for two years. The principal balance of the revolving credit facility and the principal balance of any amount drawn under the Term Note will accrue interest based on the Secured Overnight Financing Rate or a bank-defined base rate plus an applicable margin, depending on leverage. TheOctober 2021 Agreement includes customary affirmative, negative and financial covenants, including a maximum ratio of consolidated funded debt to consolidated EBITDA and a fixed charge coverage ratio. Our obligations under theOctober 2021 Agreement are secured by liens on substantially all of our tangible and intangible assets. OnOctober 28, 2021 , we drew$12 million under the Term Note to finance the acquisition of Videology. We also entered into an interest rate swap agreement with M&T as of this date which is designed to protect us against fluctuations in interest rates during the five-year repayment and amortization period. As a result, the annual interest rate we expect to pay for this draw under the Term Note is fixed at approximately 3.2% based on current leverage. OnDecember 29, 2021 , we drew$8.5 million under the Term Note to finance the acquisition of Acculogic. We did not enter into an interest rate swap agreement with M&T related to this draw. The annual interest rate we expect to pay for this draw under the Term Note is variable. AtJune 30, 2022 it was approximately 2.8% based on current leverage. EffectiveAugust 1, 2022 , this rate had increased to approximately 3.6%. AtJune 30, 2022 , there were no amounts borrowed under our revolving credit facility. This facility has a total borrowing availability of$10.0 million . AtJune 30, 2022 we had utilized$20.5 million of the availability under our Term Note and we had$4.5 million remaining available under our Term Note.
Liquidity
Our cash and cash equivalents and working capital were as follows (in
thousands):
June 30, December 31,
2022 2021
Cash and cash equivalents $ 10,543 $ 21,195
Working capital $ 28,690 $ 27,005
As of June 30, 2022 , $2.8 million , or 26%, 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 capacity available under our
revolving credit facility and the anticipated net cash to be provided by our
operations in the next twelve months to be sufficient to support our short-term
working capital requirements and other corporate requirements. Our revolving
credit facility is discussed in Note 12 to our consolidated financial statements
in this Report.
Our material short-term cash requirements include payments due under our various
lease agreements, recurring payroll and benefits obligations to our employees,
purchase commitments for materials that we use in the products we sell and
principal and interest payments on our debt. We estimate that our minimum
short-term working capital requirements currently range between $8.0 million and
$10.0 million . We also anticipate making investments in our business in the next
twelve months including hiring of additional staff, updates to our website and
other systems and investments related to our geographic and market expansion
efforts. We expect our current cash and cash equivalents, in combination with
the borrowing capacity available under our revolving credit facility and the
anticipated net cash to be provided by our operations to be sufficient to
support these additional investments as well as our current short-term cash
requirements.
Our current strategy for growth includes pursuing acquisition opportunities for
complementary businesses, technologies or products. As discussed further in the
Overview, on October 28, 2021 , we acquired substantially all of the assets of
Videology and on December 21, 2021 , we completed the acquisition of Acculogic.
We utilized $20.5 million under our new credit facility to finance these
acquisitions. As previously discussed, we currently anticipate that any
additional long-term cash requirements related to our strategy would be funded
through a combination of our cash and cash equivalents, the remaining
availability under our new credit facility or by issuing equity.
-31-
--------------------------------------------------------------------------------Cash Flows Operating Activities. Net cash used in operations during the six months endedJune 30, 2022 was$5.1 million . During this same period, we recorded net earnings of$2.7 million and had non-cash charges of$2.5 million for depreciation and amortization, which included$638,000 of amortization related to our ROU assets. We also recorded$923,000 for amortization of deferred compensation expense related to stock-based awards. Our operating lease liabilities declined$701,000 during this period. During the six months endedJune 30, 2022 , accounts receivable increased$6.6 million , reflecting the increase in revenue in the second quarter of 2022 compared to the fourth quarter of 2021, as well as the fact that a significant portion of the revenue recorded during the second quarter of 2022 was shipped inJune 2022 . Inventories and accounts payable increased$4.9 million and$3.5 million , respectively, also reflecting the increase in business levels. Accrued wages and benefits decreased$981,000 during the six months endedJune 30, 2022 reflecting the payment inMarch 2022 of profit-based bonuses accrued in 2021 on our results for the 2021 year. Investing Activities. Net cash used in investing activities for the six months endedJune 30, 2022 was$3.8 million . InApril 2022 , we used$3.5 million to purchaseU.S. treasury bills, which mature inOctober 2022 . During six months endedJune 30, 2022 , we received a refund from the seller of approximately$371,000 of the purchase price for Acculogic. This refund reflects the final post-closing working capital adjustment. During the six months endedJune 30, 2022 , purchases of property and equipment were$708,000 , primarily reflecting leasehold improvements to our facility inMansfield, Massachusetts for the space that our Videology subsidiary occupied in the second quarter of 2022 and the purchase of new software tools to assist in the consolidation and reporting of our business operations. These purchases were funded using our working capital. We have no significant commitments for capital expenditures for the balance of 2022; 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. These additional cash requirements would be funded by our cash and cash equivalents, anticipated net cash to be provided by operations and our revolving credit facility. Financing Activities. Net cash used in financing activities for the six months endedJune 30, 2022 was$1.8 million . During the six months endedJune 30, 2022 , we made principal payments on our Term Note totaling$1.9 million and received$121,000 as a result of purchases of our stock that were made by our employees under the ESPP. We also acquired$10,000 of stock as a result of shares withheld by us from employees to satisfy tax liabilities incurred by them as a result of vesting of restricted stock awards. These shares are classified as treasury stock on our consolidated balance sheets.
New or Recently Adopted Accounting Standards
See the Notes to our consolidated financial statements in this Report for information concerning the implementation and impact of new or recently adopted accounting standards.
Critical Accounting Estimates The preparation of consolidated financial statements in conformity withU.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, 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 ofJune 30, 2022 , there have been no significant changes to the accounting estimates that we have deemed critical. Our critical accounting estimates are more fully described in our 2021 Form 10-K.
Off -Balance Sheet Arrangements
There were no off-balance sheet arrangements during the six months endedJune 30, 2022 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.
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