Item 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Risk Factors and Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q for the period ended March 31, 2021 (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,” “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:
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the impact of COVID-19 on our business, liquidity, financial condition and results of operations;
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our ability to successfully consolidate our EMS manufacturing operations without any impact on customer shipments, quality or the level of our warranty claims and to realize the benefits of the consolidation;
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indications of a change in the market cycles in the Semi Market or other markets we serve;
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developments and trends in the Semi Market, including changes in the demand for semiconductors;
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the loss of any one or more of our largest customers, or a reduction in orders by a major customer;
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changes in the rate of, and timing of, capital expenditures by our customers;
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the availability of materials used to manufacture our products;
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the impact of interruptions in our supply chain caused by external factors;
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the sufficiency of cash balances, lines of credit and net cash from operations;
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stock price fluctuations;
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the possibility of future acquisitions or dispositions and the successful integration of any acquired operations;
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ability to borrow funds or raise capital to finance major potential acquisitions;
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the success of our strategy to diversify our business by entering markets outside the Semi Market, including the automotive, defense/aerospace, industrial, medical, telecommunications and other markets and changes in demand in these markets
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competitive pricing pressures
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the development of new products and technologies by us or our competitors;
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effects of exchange rate fluctuations;
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progress of product development programs;
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the anticipated market for our products;
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the availability of and retention of key personnel or our ability to hire personnel at anticipated costs;
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general economic conditions both domestically and globally;
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other projections of net revenues, taxable earnings (loss), net earnings (loss), net earnings (loss) per share, capital expenditures and other financial items; and
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other risk factors included in Part I, Item 1A - "Risk Factors" in our 2020 Form 10-K.
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Material changes to such risk factors may be reported in subsequent Quarterly Reports on Form 10-Q in Part II, Item 1A. 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.
Overview
This MD&A should be read in conjunction with the accompanying consolidated financial statements.
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, medical, semiconductor and telecommunications. We manage our business as two operating segments: Thermal and EMS. Our Thermal segment designs, manufactures and sells our thermal test and thermal process products while our EMS segment designs, manufactures and sells our semiconductor test products.
Our EMS segment sells its products to semiconductor manufacturers and third-party test and assembly houses (end user sales) and to ATE manufacturers (“OEM sales”), who ultimately resell our equipment with theirs to both semiconductor manufacturers and third-party test and assembly houses. These sales all fall within the ATE sector of the broader semiconductor market. Our Thermal segment sells its products to many of these same types of customers; however, it also sells to customers in the wafer processing sector within the broader semiconductor market and to customers in a variety of other markets outside the semiconductor market, including the automotive, defense/aerospace, industrial (including consumer products packaging, fiber optics and other sectors within the broader industrial market), medical and telecommunications markets.
Both 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
We refer to the semiconductor market, including the more specialized semiconductor ATE and wafer processing sectors within the broader semiconductor market, as the “Semi Market.” All other markets are designated as “Multimarket.” Business within our Thermal segment can fall into either the Semi Market or Multimarket, depending upon how our customers utilize our products or upon their respective applications.
While the Semi Market represents the historical roots of inTEST and remains a very important component of our business, Multimarket is where we have focused our strategic growth efforts in the last several years. Our goal was to grow our business, both organically and through acquisition, in these markets as we believe these markets have historically been less cyclical than the Semi Market. Moving forward, with the launch of our new strategic plan which is discussed in Part 1, Item 1 under “Our Strategies” in our 2020 Form 10-K, we intend to broaden our strategic growth efforts to target both organic and inorganic growth in all of our currently served markets, which includes the Semi Market. Our goal is to further expand our existing product lines, strengthen our positions in served markets and drive expansion into new markets.
Prior to our acquisition of Ambrell in May 2017, we offered only highly specialized engineering solutions used for testing applications in Multimarket, the demand for which is limited and which varies significantly from period to period. Our acquisition of Ambrell not only provided expansion into new markets but also broadened our product offerings to include products sold into process or manufacturing applications. Historically, Ambrell sold its precision induction heating systems almost exclusively to customers in the industrial market but since 2018, has also had significant sales into the Semi Market. Overall, however, the acquisition of Ambrell has helped to diversify our customer base.
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 or, for Ambrell, the demand for wafer processing equipment. Demand for ATE or wafer processing equipment is 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 semiconductors and products incorporating semiconductors. 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 addition, we continue to focus on design improvements and new approaches for our own products that contribute to our net revenues as our customers adopt these new products.
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 net revenues 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 net revenues 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 net revenues 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.
Third party market share statistics are not available for the products we manufacture and sell into the Semi Market; therefore, comparisons of period over period changes in our market share are not easily determined. As a result, it is difficult to ascertain if Semi Market volatility in any period is the result of macro-economic or customer-specific factors impacting Semi Market demand, or if we have gained or lost market share to a competitor during the period.
While approximately half of our orders and net revenues 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 net revenues to deviate from the overall trend in the Semi 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.
As previously mentioned, as part of our ongoing strategy to grow our business, we continue to diversify our served markets to address the thermal test and thermal process requirements of several markets outside the Semi Market. These include the automotive, defense/aerospace, industrial, medical, telecommunications and other markets, which we refer to as Multimarket. We believe that these markets are usually less cyclical than the Semi Market. While market share statistics exist for some of these markets, due to the nature of our highly specialized product offerings in these markets, we do not expect broad market penetration in many of these markets and therefore do not anticipate developing meaningful market shares in most of these markets.
In addition, because of our limited market share, our Multimarket orders and net revenues in any given period do not necessarily reflect the overall trends in the markets within Multimarket. Consequently, we are continuing to evaluate buying patterns and opportunities for growth in Multimarket that may affect our performance. The level of our Multimarket orders and net revenues has varied in the past, and we expect will vary significantly in the future, as we work to build our presence in Multimarket and establish new markets for our products.
Restructuring and Other Charges
On September 21, 2020, we notified employees in our Fremont, California facility of a plan to consolidate all manufacturing for our EMS segment into our manufacturing operations located in Mt. Laurel, New Jersey. The consolidation was substantially completed during the fourth quarter of 2020 and resulted in the termination of certain employees at the Fremont location. Prior to the consolidation, our interface products were manufactured in the Fremont facility, and our manipulator and docking hardware products were manufactured in the Mt. Laurel facility. The consolidation was undertaken to better serve customers through streamlined operations and reduce the fixed annual operating costs for the EMS segment. A small engineering and sales office will be maintained in northern California. The costs related to these actions are included in restructuring and other charges on our consolidated statement of operations and are discussed in more detail in Note 3 to our consolidated financial statements in this Report and in our 2020 Form 10-K.
The EMS facility consolidation resulted in the termination of certain employees at the Fremont location, including all of our interface product line assembly staff who were located at that facility. As a result of transitioning our interface manufacturing operations to New Jersey, we have hired new production staff for this product line in our Mt. Laurel facility. These new employees are being trained to assemble our products which may impact customer shipments and quality of our interface products over the next several months. In addition, we have recently experienced difficulty in hiring personnel at the costs projected in our forecasts. This has resulted in the need to increase the labor rates offered for certain positions. If we cannot find savings in other areas or increase the price for which we sell our products in an amount sufficient to cover these additional labor costs, we may experience reduced margins in future periods. See “Risks Related to Our Business Operations” in Item 1A “Risk Factors” of our 2020 Form 10-K.
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).
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Three
Months Ended
March 31,
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Change
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Three
Months
Ended
December 31,
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Change
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2021
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2020
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$
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%
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2020
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$
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%
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Orders:
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Thermal
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$
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14,746
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$
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10,499
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$
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4,247
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40
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%
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$
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11,065
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$
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3,681
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33
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%
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EMS
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10,484
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3,277
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7,207
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220
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%
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6,554
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3,930
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60
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%
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$
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25,230
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$
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13,776
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$
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11,454
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83
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%
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$
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17,619
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$
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7,611
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43
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%
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Semi Market
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$
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17,174
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$
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6,692
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$
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10,482
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157
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%
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$
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11,129
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$
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6,045
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54
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%
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Multimarket
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8,056
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7,084
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972
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14
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%
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6,490
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1,566
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24
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%
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$
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25,230
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$
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13,776
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$
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11,454
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83
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%
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$
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17,619
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$
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7,611
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43
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%
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Total consolidated orders for the three months ended March 31, 2021 were $25.2 million compared to $13.8 million for the same period in 2020 and $17.6 million for the three months ended December 31, 2020. Orders from customers in Multimarket for the three months ended March 31, 2021 were $8.1 million, or 32% of total consolidated orders, compared to $7.1 million, or 51% of total consolidated orders for the same period in 2020 and $6.5 million or 37% of total consolidated orders for the three months ended December 31, 2020.
We believe that the increases in our consolidated orders during the three months ended March 31, 2021 compared to the same period in 2020 and to the three months ended December 31, 2020 primarily reflect the end of the downturn in the Semi Market, where approximately half of our business is derived. This downturn began in the first quarter of 2019. We believe that the significant level of increase in orders from the Semi Market for these same time periods also reflects the impact of the interruption of the normal recovery in the Semi Market cycle that was caused by the onset of COVID-19 in the first half of 2020, as well as increased demand for semiconductors, generally, both of which we believe are driving the current shortage in the global supply of semiconductors (which are also referred to as “integrated circuits” or “ICs”). To a lesser extent, we also experienced an increase in orders from Multimarket, primarily from the industrial market.
At March 31, 2021, our backlog of unfilled orders for all products was approximately $17.1 million compared with approximately $8.1 million at March 31, 2020 and $11.5 million at December 31, 2020. Our backlog includes customer orders which we have accepted, substantially all of which we expect to deliver in 2021. While backlog is calculated on the basis of firm purchase orders, a customer may cancel an order or accelerate or postpone currently scheduled delivery dates. Our backlog may be affected by the tendency of customers to rely on short lead times available from suppliers, including us, in periods of depressed demand. In periods of increased demand, there is a tendency towards longer lead times that has the effect of increasing backlog. As a result, our backlog at a particular date is not necessarily indicative of sales for any future period.
Net Revenues
The following table sets forth, for the periods indicated, a breakdown of the net revenues by operating segment and market (in thousands).
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Three
Months Ended
March 31,
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Change
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Three
Months
Ended
December 31,
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Change
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2021
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2020
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$
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%
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2020
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$
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%
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Net revenues:
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Thermal
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$
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11,055
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$
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9,334
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$
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1,721
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18
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%
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$
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10,675
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$
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380
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4
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%
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EMS
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8,501
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1,896
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6,605
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348
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%
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4,200
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4,301
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|
102
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%
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$
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19,556
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|
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$
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11,230
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|
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$
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8,326
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74
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%
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$
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14,875
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|
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$
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4,681
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31
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%
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Semi Market
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$
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13,320
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$
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5,011
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$
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8,309
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|
166
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%
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$
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7,614
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|
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$
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5,706
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|
75
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%
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Multimarket
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6,236
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6,219
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17
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|
|
|
-
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%
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7,261
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|
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|
(1,025
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)
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|
(14
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)%
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|
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$
|
19,556
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|
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$
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11,230
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|
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$
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8,326
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|
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|
74
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%
|
|
$
|
14,875
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|
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$
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4,681
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|
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31
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%
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Total consolidated net revenues for the three months ended March 31, 2021 were $19.6 million compared to $11.2 million for the same period in 2020 and $14.9 million for the three months ended December 31, 2020. We believe the increase in our consolidated net revenues compared to the same period in 2020 and the three months ended December 31, 2020 primarily reflects the aforementioned increase in demand from the Semi Market.
Net revenues from customers in Multimarket for the three months ended March 31, 2021 were $6.2 million, or 32% of total consolidated net revenues, compared to $6.2 million, or 55% of total consolidated net revenues for the same period in 2020 and $7.3 million or 49% of total consolidated net revenues for the three months ended December 31, 2020. The reduced net revenues in Multimarket for the first quarter of 2021 compared to the fourth quarter of 2020 primarily reflect weaker demand from customers in the industrial market and, to a lesser extent, customers in the defense/aerospace and medical markets. These declines were partially offset by an increase in net revenues from customers in the automotive market. Net revenues from Multimarket customers were relatively flat for the first quarter of 2021 compared to the same period in 2020. Increases from the automotive market were offset by decreases in demand from customers in the industrial and defense/aerospace markets.
COVID-19 Pandemic
Demand from all of the markets we serve was significantly affected by COVID-19 during the first half of 2020. The impact of COVID-19 on demand from the Semi Market was intensified during the first half of 2020 because our business operations were also being negatively affected by a global downturn in the Semi Market at that time. The Semi Market, from which approximately half of our orders and net revenues are derived, entered a cyclical downturn in the beginning of 2019. During the first quarter of 2020, before the spread of COVID-19, we had started to see indications that the downturn was coming to an end. These indications included increased quoting activity and order levels for the first quarter of 2020 compared to the fourth quarter of 2019. However, we believe COVID-19 delayed the recovery in the Semi Market as the increase in activity leveled off during late March 2020. Although we saw slightly increased order rates from our customers in the Semi Market during the second and third quarters of 2020, it was not until the fourth quarter of 2020 that we saw a significant increase in our orders from the Semi Market, which we believe indicates that we have now entered the next cyclical upturn. During the fourth quarter of 2020, our orders from the Semi Market increased 53% sequentially and were 141% higher than in the fourth quarter of 2019, the low point of the prior cyclical downturn for the products that we sell. This trend in our orders from the Semi Market continued in the first quarter of 2021 with a further 54% sequential increase from the level in the fourth quarter of 2020. We believe the level of increase in our orders and net revenues from the Semi Market during the fourth quarter of 2020 and the first quarter of 2021 reflects a combination of increased demand in the market resulting from the interruption of the normal recovery in the Semi Market cycle caused by the onset of COVID-19 in the first half of 2020, as well as increased demand for semiconductors, generally. We believe this increase in demand is being driven both by changing technology as well as increased use of technology across all aspects of daily life, such as in devices that facilitate remote work and education, smart technology used in homes and businesses, the increase in the number of ICs used in the automotive industry and changes occurring in the telecommunications and mobility markets.
As of the date of this filing, all of our operations continue to be deemed “critical and essential business operations” under the various governmental COVID-19 mandates, which has allowed us to continue to operate our business with certain modifications. These modifications include a significant number of our employees working remotely. Such employees have been provided with the tools and technology necessary to do so. Additionally, we have implemented workplace safeguards designed to protect the health and well-being of our employees. Employees who remain in our facilities are following WHO and CDC recommended safety practices, as well as state and local directives. We have had occasions where one or more employees have contracted COVID-19 and entered our facilities while infected. To date, we have managed these occurrences with minimal disruption to our business while protecting other employees, but there can be no assurances that we can avoid similar occurrences in the future or, that in such cases, we can avoid significant disruption of our operations.
The aftermarket service and support that we provide to our customers has been, and we expect may continue to be, adversely impacted by COVID-19. Specifically, the travel restrictions that remain in place, coupled with limitations on visitors into customer facilities, have resulted in the reduction or suspension of in-person service and support activities. The net revenues associated with these aftermarket service and support activities typically range from 8% to 10% of our consolidated net revenues. Although these net revenues returned to a more typical range during the second half of 2020, they declined again in the first quarter of 2021. If the spread of COVID-19 or variations of the virus worsen, these revenues may continue to be reduced in future periods.
While the negative impact of COVID-19 on our business was reduced significantly in the second half of 2020 and the first quarter of 2021, the spread of the virus or variants of the virus could worsen and one or more of our significant customers or suppliers could be impacted, or significant additional governmental regulations and restrictions could be imposed, thus negatively impacting our business in the future. As a result of our current level of working capital as well as the availability of our revolving credit facility, which is discussed in Note 9 to our consolidated financial statements in this Report, we currently expect to have sufficient liquidity to operate our business throughout 2021. Our revolving credit facility, which had no outstanding balance, was set to mature on April 9, 2021. As discussed in Note 14 to our consolidated financial statements in this Report, we modified this facility on April 10, 2021 and extended it as modified through April 9, 2024.
Results of Operations
The results of operations for our two operating segments are generally affected by the same factors described in the Overview and COVID-19 Pandemic section. 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 March 31, 2021 Compared to Three Months Ended March 31, 2020
Net Revenues. Net revenues were $19.6 million for the three months ended March 31, 2021 compared to $11.2 million for the same period in 2020, an increase of $8.3 million, or 74%. We believe the significant increase in our net revenues during the first quarter of 2021 primarily reflects the current cyclical upturn in the Semi Market as previously discussed in the Overview and COVID-19 Pandemic section.
Gross Margin. Our consolidated gross margin was 49% of net revenues for the three months ended March 31, 2021 compared to 43% of net revenues for the same period in 2020. The increase in our gross margin as a percentage of net revenues primarily reflects a decrease in our fixed operating costs as a percentage of net revenues. Although our fixed operating costs were relatively unchanged in absolute dollar terms, they declined from 22% of net revenues in the first quarter of 2020 to 13% of net revenues in the first quarter of 2021. This is a result of these costs being more fully absorbed by the higher net revenues levels in the first three months of 2021. Our accruals for excess and obsolete inventory declined in absolute dollar terms by $131,000, or 77%, and as a percentage of net revenues, from 2% in the first quarter of 2020 to less than 1% in the first quarter of 2021. The decreases in our fixed operating costs and excess and obsolete inventory charges were partially offset by an increase in our component material costs as a percentage of net revenues, reflecting changes in the mix of products sold.
Selling Expense. Selling expense was $2.4 million for the three months ended March 31, 2021 compared to $2.1 million for the same period in 2020, an increase of $351,000, or 17%. The increase primarily reflects higher levels of commissions in our EMS segment as a result of the higher net revenue levels achieved for the three months ended March 31, 2021 compared to the same period in 2020. This increase was partially offset by a reduction in travel costs for the three months ended March 31, 2021 compared to the same period in 2020. Our sales personnel have not yet returned to the level of travel that was typical prior to the onset of COVID-19.
Engineering and Product Development Expense. Engineering and product development expense was relatively unchanged at $1.3 million for both the three months ended March 31, 2021 and 2020. There were no significant changes in any of the components of engineering and product development expense.
General and Administrative Expense. General and administrative expense was $3.2 million for the three months ended March 31, 2021 compared to $2.9 million for the same period in 2020, an increase of $285,000, or 10%. The increase primarily reflects higher levels of profit-based bonus accruals and an increase in the value of stock-based compensation awards granted to our senior management and Board of Directors. These increases were partially offset by a reduction in salary and benefits expense, reflecting headcount reductions. The reduction in headcount was primarily in our Thermal segment and, to a lesser extent, in our corporate staff. We also recorded a lower level of fees for third party professionals who assist us in compliance related matters during the first quarter of 2021 compared to the same period in 2020.
Restructuring and Other Charges. For the three months ended March 31, 2021, we recorded $55,000 in restructuring and other charges related to the consolidation of our EMS manufacturing operations. During the same period in 2020, we recorded $8,000 in restructuring and other charges related to headcount reductions in our Corporate staff.
Income Tax Expense (Benefit). For the three months ended March 31, 2021, we recorded income tax expense of $366,000 compared to an income tax benefit of $250,000 for the same period in 2020. Our effective tax rate was 14% for the three months ended March 31, 2021 compared to 18% for the same period in 2020. 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.
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 revenues, 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, and we manage our businesses to maximize operating cash flows as our primary source of liquidity. We use cash to fund growth in our operating assets, for new product research and development, for acquisitions and for stock repurchases.
Liquidity
Our cash and cash equivalents and working capital were as follows (in thousands):
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Cash and cash equivalents
|
|
$
|
10,195
|
|
|
$
|
10,277
|
|
Working capital
|
|
$
|
21,285
|
|
|
$
|
18,108
|
|
As of March 31, 2021, $3.4 million, or 33%, 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 Notes 1, 9 and 14 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 and purchase commitments for materials that we use in the products we sell. We estimate that our minimum short-term working capital requirements currently range between $5.0 million and $7.0 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. However, should the impact of COVID-19 on our operations, including the disruption to our business that would be caused by any unanticipated facility closures or significantly reduced demand from our customers, be more significant than we currently expect, we may need additional financial resources, including additional debt or equity financings in the long-term. There can be no assurance that any such debt or equity financings would be available on favorable terms or rates or at all.
Our current growth strategy includes pursuing acquisition opportunities for complementary businesses, technologies or products. We currently anticipate that any long-term cash requirements related to our acquisition strategy would be funded all or in part through obtaining additional third-party debt or issuing equity. If we were to obtain additional third-party debt, we do not currently know at what rates or on what terms any such debt would be available.
Cash Flows
Operating Activities. For the three months ended March 31, 2021, we recorded net earnings of $2.2 million. Net cash used in operations during this period was $337,000. During the three months ended March 31, 2021, we had non-cash charges of $740,000 for depreciation and amortization which included $280,000 of amortization related to our ROU assets. During the three months ended March 31, 2021, we also recorded $269,000 for amortization of deferred compensation expense related to stock-based awards. Accounts receivable increased $5.1 million during the three months ended March 31, 2021, reflecting the significant increase in net revenues in the first quarter, while inventories and accounts payable increased $783,000 and $1.2 million, respectively, also reflecting the increase in business levels. Customer deposits increased $799,000 during the three months ended March 31, 2021, primarily in our Thermal segment.
Investing Activities. During the three months ended March 31, 2021, purchases of property and equipment were $388,000, primarily reflecting leasehold improvements to our facility in Mt. Laurel, New Jersey which were funded using our working capital. We have no significant commitments for capital expenditures for the balance of 2021; 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. During the three months ended March 31, 2021, we received $717,000 as a result of the exercise of options to acquire 99,740 shares of our stock. These options were issued to certain current and former employees under our stock-based compensation plans which are discussed in Note 10 to our consolidated financial statements in this Report.
New or Recently Adopted Accounting Standards
See the Notes to our consolidated financial statements 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 with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, 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 of March 31, 2021, there have been no significant changes to the accounting estimates that we have deemed critical other than the change in accounting estimate that is discussed in Note 2 to our consolidated financial statements in this Report. Our critical accounting estimates are more fully described in our 2020 Form 10-K.
Off -Balance Sheet Arrangements
There were no off-balance sheet arrangements during the three months ended March 31, 2021 that have or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.