Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We develop and manufacture products primarily for medical applications. We market components to other equipment manufacturers for incorporation in their products and sell finished devices to physicians, hospitals, clinics, and other treatment centers. Our medical products primarily serve the fluid delivery, cardiovascular, and ophthalmology markets. Our other medical and non-medical products include instrumentation and disposables used in valves and inflation devices used in marine and aviation safety products.

Our products are used in a wide variety of applications by numerous customers. We encounter competition in all of our markets and compete primarily on the basis of product quality, price, engineering, customer service, and delivery time.

Our business strategy is to provide hospitals, physicians, and other healthcare providers with the tools they need to improve the lives of the patients they serve. To do so, we provide a broad selection of products in the areas of our expertise. We have diverse product lines serving primarily the fluid delivery, cardiovascular, and ophthalmic markets, and this diversity has served us well as we encounter changing market conditions. Research and development, or R&D, efforts are focused on improving current products and developing highly-engineered products that meet customer needs and serve niche markets with meaningful sales potential. Proposed new products may be subject to regulatory clearance or approval prior to commercialization and the time period for introducing a new product to the marketplace can be unpredictable. We also focus on controlling costs by investing in modern manufacturing technologies and controlling purchasing processes. We have been successful in consistently generating cash from operations and have used that cash to reduce or eliminate indebtedness, to fund capital expenditures, to make investments, to repurchase stock, and to pay dividends.

Our strategic objective is to further enhance our position in our served markets by:

For the three months ended June 30, 2022, we reported revenues of $48.9 million, up 14 percent, operating income of $11.0 million, up 13 percent, and net income of $9.3 million, up 5 percent from the three months ended June 30, 2021.

Results for the three months ended June 30, 2022

Consolidated net income totaled $9.3 million, or $5.21 per basic and $5.20 per diluted share, in the second quarter of 2022. This is compared with consolidated net income of $8.9 million, or $4.89 per basic and $4.88 per diluted share, in the second quarter of 2021. The income per basic share computations are based on weighted average basic shares outstanding of 1,794 thousand in the 2022 period and 1,826 thousand in the 2021 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,798 thousand in the 2022 period and 1,828 thousand in the 2021 period.

Consolidated revenues of $48.9 million for the second quarter of 2022 were 14.5 percent higher than revenues of $42.7 million for the second quarter of 2021. Our second quarter 2022 results were favorably impacted by a 37% increase in Cardiovascular revenues compared to the second quarter of 2021.

Revenues by product line were as follows (in thousands):

Cost of goods sold of $28.0 million for the second quarter of 2022 was 13 percent higher than our cost of goods sold of $24.8 million for the second quarter of 2021, primarily due to higher sales volumes. Our cost of goods sold in the second quarter of 2022 was 57.4 percent of revenue compared to 58.2 percent of revenue in the second quarter of 2021.

Gross profit of $20.8 million in the second quarter of 2022 was $3.0 million or 16.6 percent higher than in the comparable 2021 period. Our gross profit percentage in the second quarter of 2022 was 42.6 percent of revenues compared with 41.8 percent of revenues in the second quarter of 2021. The increase in gross profit percentage in the 2022 period compared to the 2021 period was related to increases in sales of higher margin products, improvements in pricing, and improved efficiency in our manufacturing processes.

Our second quarter 2022 operating expenses of $9.8 million were $1.7 million higher than the operating expenses for the second quarter of 2021. This increase was attributable to an $869 thousand increase in general and administrative expenses, primarily for compensation and depreciation, a $755 thousand increase in selling expenses, primarily for compensation and commissions, and a $108 thousand increase in R&D expenses, primarily for supplies.

Operating income of $11 million in the second quarter of 2022 represented a $1.2 million, or 12.6 percent, increase in operating income over second quarter 2021 operating income. This increase was due to higher sales and gross profit discussed above, partially offset by higher operating expenses. Operating income was 22.6 percent of revenues for the second quarter of 2022 and 22.9 percent of revenues for the second quarter of 2021.

Interest and dividend income in the second quarter of 2022 was $292 thousand compared with $183 thousand for the same period in the prior year. The increase in interest and dividend income was due to dividends received on equity investments.

Other investment income in the second quarter of 2022 was a $308 thousand loss compared with Other investment income of $963 thousand in the second quarter of 2021. These amounts were attributable to unrealized gains and losses on equity investments resulting from changes in the market values of the investments in each quarter.

Income tax expense was $1.7 million for second quarter of 2022 compared with $2.0 million for the second quarter of 2021. The effective tax rate for the second quarter of 2022 was 15.6 percent compared with 18.4 percent for the second quarter of 2021. The decrease in the second quarter 2022 period effective tax rate was primarily related to increased tax benefits for sales outside the United States under the foreign derived intangible income deduction as well as the R&D tax credit.

Results for the six months ended June 30, 2022

Consolidated net income totaled $17.8 million, or $9.94 per basic and $9.91 per diluted share, in first six months of 2022. This is compared with consolidated net income of $16.7 million, or $9.12 per basic and $9.10 per diluted share, in the first six months of 2021. The income per basic share computations are based on weighted average basic shares outstanding of 1,796 thousand in the 2022 period and 1,826 thousand in the 2021 period. The income per diluted share computations are based on weighted average diluted shares outstanding of 1,800 thousand in the 2022 period and 1,830 thousand in the 2021 period.

Consolidated revenues of $96.0 million for the first six months of 2022 were 17.3 percent higher than revenues of $81.9 million for the first six months of 2021. This increase in revenue was due to increased sales volumes in our Cardiovascular, Fluid Delivery, and Other product lines.

Revenues by product line were as follows (in thousands):

Cost of goods sold of $55.9 million for the first six months of 2022 was $8.3 million higher than in the comparable 2021 period. This increase was mainly due to higher sales volumes. Our cost of goods sold in the first six months of 2022 was 58.3 percent of revenues compared to 58.2 percent of revenues in the first six months of 2021.

Gross profit was $40.0 million in the first six months of 2022 and $34.2 million in the first six months of 2021. Our gross profit percentage was 41.7 percent of revenues in the first six months in 2022 and 41.8 percent in 2021.

Operating expenses of $18.8 million for the first six months of 2022 were $3.3 million higher than the operating expenses for the first six months of 2021. This increase was attributable to a $1.798 million increase in general and administrative expenses, primarily for compensation and depreciation, a $1.35 million increase in selling expenses, primarily for compensation and travel costs, and a $174 thousand increase in R&D expenses, primarily for supplies.

Operating income of $21.3 million for the first six months of 2022 represented a $2.6 million, or 14 percent increase, in operating income from the first six months of 2022. Operating income was 22.2 percent of revenues for the first six months of 2022 and 22.9 percent of revenues for the first six months of 2021.

Interest and dividend income for the first six months of 2022 was $429 thousand, compared with $399 thousand for the same period in the prior year. The increase in interest and dividend income was primarily due to dividends received on equity investments.

Other investment income for the first six months of 2022 was a $548 thousand loss compared to $1.0 million gain in the first six months of 2021. These amounts were attributable to unrealized gains and losses on equity investments resulting from changes in the market values of our investments in each time period.

Income tax expense was $3.4 million for the first six months in 2022 and $3.6 million for the first six months in 2021. The effective tax rate for the first six months of 2022 was 16.0 percent, compared with 17.6 percent for the first six months of 2021. The decrease in the 2022 period effective tax rate was primarily related to increased tax benefits for sales outside the United States under the foreign derived intangible income deduction as well as the R&D tax credit. We expect the effective tax rate for 2022 to be approximately 17 percent.

Liquidity and Capital Resources

As of June 30, 2022, we had a $75.0 million revolving credit facility with a money center bank pursuant to which the lender is obligated to make advances until February 28, 2024. The credit facility is secured by substantially all of our inventories, equipment, and accounts receivable. Interest under the credit facility is assessed at 30-day, 60-day or 90-day LIBOR, as selected by us, plus 1.0 percent and is payable monthly. We had no outstanding borrowings under the credit facility at June 30, 2022 and we were in compliance with all financial covenants.

At June 30, 2022, we had a total of $66.4 million in cash and cash equivalents, short-term investments, and long-term investments. At December 31, 2021, cash and cash equivalents, short-term investments, and long-term investments totaled $80.7 million.

Cash flows from operating activities of $18.3 million for the six months ended June 30, 2022 were primarily comprised of net income plus the net effect of non-cash expenses and an increase in accounts payable. During the first six months of 2022, we used $22.3 million for the purchase of investments, $15.2 million for the addition of property and equipment, $7.0 million for dividends, and $9.3 million for the purchase of treasury stock. During the same period, maturities and sales of investments generated $20.2 million in cash. For the six months ended June 30, 2021, cash flows from operating activities of $16.0 million were primarily comprised of net income plus the net effect of non-cash expenses, offset by increases in accounts receivable. During the first six months of 2021, we used $16.1 million for the purchase of investments, $7.3 million for the addition of property and equipment, $10.5 million for the purchase of treasury stock and $6.4 million for dividends. During the same period, maturities and sales of investments generated $19.4 million in cash.

At June 30, 2022, we had working capital of $118.3 million, including $16.4 million in cash and cash equivalents and $34.1 million in short-term investments, compared to working capital of $123.2 million at December 31, 2021. The $4.9 million decrease in working capital during the first six months of 2022 was primarily related to an increase in accounts payable and accrued expenses of $4.8 million.

We believe that our $66.4 million in cash, cash equivalents, short-term investments, and long-term investments, along with cash flows from operations and available borrowings of up to $75.0 million under our credit facility, will be sufficient to fund our cash requirements for at least the foreseeable future, including the costs associated with the expansion of one of our manufacturing facilities. We believe that our strong financial position would allow us to access equity or debt financing should that be necessary.

COVID-19 Impact

The COVID-19 pandemic continues to impact the global economy, cause market instability and uncertainty in the labor market, and put pressure on supply chains and healthcare systems, and it has impacted, and will likely continue to impact, our business. The pandemic continues to evolve and the full extent of its impact will depend on future developments, which are highly uncertain and cannot be determined at this time. We will continue to monitor the COVID-19 pandemic as well as resulting legislative and regulatory changes to manage our response and assess and seek to mitigate potential adverse impacts on our business. For additional discussion regarding the COVID-19 pandemic and our related risks, see Part I, Item 1A, “Risk Factors” included in our 2021 Form 10-K.

Forward-Looking Statements

Statements in this Management’s Discussion and Analysis and elsewhere in this Quarterly Report on Form 10-Q that are forward looking are based upon current expectations, and actual results or future events may differ materially. Therefore, the inclusion of such forward-looking information should not be regarded as a representation by us that our objectives or plans will be achieved. Such statements include, but are not limited to, our effective income tax rate for 2022, our ability to fund our cash requirements for the foreseeable future with our current assets, long-term investments, cash flow, and borrowings under the credit facility, our access to equity and debt financing, and the impact of the COVID-19 pandemic on our business. Words such as “expects,” “believes,” “anticipates,” “intends,” “should,” “plans,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements contained herein involve numerous risks and uncertainties, and there are a number of factors that could cause actual results or future events to differ materially, including, but not limited to, the following: the risk that the COVID-19 pandemic leads to further material delays and cancellations of, or reduced demand for, procedures in which our products are utilized; curtailed or delayed capital spending by hospitals and other healthcare providers; disruption to our supply chain; closures of our facilities; delays in training; delays in gathering clinical evidence; diversion of management and other resources to respond to the COVID-19 pandemic; the impact of global and regional economic and credit market conditions on healthcare spending; the risk that the COVID-19 pandemic further disrupts local economies and causes economies in our key markets to enter prolonged recessions; changing economic, market and business conditions; acts of war or terrorism; the effects of governmental regulation; the impact of competition and new technologies; slower-than-anticipated introduction of new products or implementation of marketing strategies; implementation of new manufacturing processes or implementation of new information systems; our ability to protect our intellectual property; changes in the prices of raw materials; changes in product mix; intellectual property and product liability claims and product recalls; the ability to attract and retain qualified personnel; and the loss of, or any material reduction in sales to, any significant customers. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic review which may cause us to alter our marketing, capital expenditures or other budgets, which in turn may affect our results of operations and financial condition. The forward-looking statements in this Quarterly Report on Form 10-Q are made as of the date hereof, and we do not undertake any obligation, and disclaim any duty, to supplement, update or revise such statements, whether as a result of subsequent events, changed expectations or otherwise, except as required by applicable law.