Kopin Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; compared with the three months ended March 26, 2011. Unaudited consolidated results include majority-owned subsidiaries.
Financial performance
| Metric | Q1 2012 | Comparable 2011 period |
|---|---|---|
| Revenue | $25.25 million | $34.93 million |
| Product revenue | $24.65 million | $32.92 million |
| Research and development revenue | $0.59 million | $2.01 million |
| Gross profit on product revenue | $7.26 million; 29.4% margin | $10.97 million; 33.3% margin |
| Operating income (loss) | $(2.38) million | $2.16 million |
| Net income (loss) attributable to controlling interest | $(2.21) million; $(0.03) per diluted share | $2.07 million; $0.03 per diluted share |
| Operating cash flow | $(0.63) million | $0.50 million |
Cash and equivalents were $43.39 million and marketable debt securities were $58.57 million at quarter-end. Management reported total cash and marketable securities of approximately $102.0 million and working capital of $121.1 million, versus $105.4 million and $123.9 million, respectively, at December 31, 2011. The balance sheet reports no debt; total current liabilities were $21.1 million. Capital expenditures were $1.78 million in the quarter. The filing reports no separate gross-margin line; margins above are calculated from product revenue and cost of product revenue.
Changes and business drivers
- Revenue declined approximately 27.7%. Display revenue fell to $10.9 million from $17.3 million, and III-V revenue fell to $14.3 million from $17.6 million.
- Management attributed lower display sales to reduced military, consumer-electronics and R&D demand. III-V sales declined primarily because of weaker HBT wafer demand from cellular handset customers.
- Military display revenue declined to $7.6 million from $11.1 million. These products carry higher-than-average margins, contributing to the reduction in product gross margin.
- Cost of product revenue fell in dollars but rose to 70.6% of net product revenue from 66.7%. Selling, general and administrative expense increased to $5.1 million from $4.4 million; R&D expense declined to $5.1 million from $6.4 million.
- Q1 2012 results included a $0.86 million gain on sale of investments, primarily from selling 500,000 WIN Semiconductor shares. The company also reported $0.20 million of foreign-currency transaction losses and a $0.16 million equity-method loss related to KoBrite.
- Investing activities provided $2.04 million, while financing used $1.27 million, principally for share repurchases. The company repurchased 345,754 shares for approximately $1.27 million during the quarter.
Outlook, risks and contingencies
- Management forecast fiscal 2012 revenue of $110–$120 million, while cautioning that forecasts were not based on firm, non-cancellable orders and were difficult to make in the prevailing economic environment.
- Management expected U.S. government defense-related revenue to decline by up to approximately $20 million in 2012. The company could receive a smaller share—or potentially no award—on a future U.S. military thermal-weapon-sight program.
- Management expected 5%–7% price declines in 2012 for HBT wafers and consumer-electronics display products; military display prices were expected to remain relatively flat. It expected Golden-i revenue to be immaterial in 2012, but viewed such products as potentially important to future growth and profitability.
- The company expected $5–$8 million of capital expenditures over the next 12 months and said available cash resources should support operations and capital needs for at least that period. It did not expect to pay cash dividends for the foreseeable future.
- A significant III-V customer supply agreement expires in July 2012, subject to a last-time-buy option. Kopin committed to manufacturing capacity and supply terms; failure to meet obligations could expose it to court-ordered specific performance and damages of up to $40 million. The company said it had met its commitments to date.
- Approximately $2.2 million of Massachusetts incentive funding remained within billings in excess of revenue earned. Management believed approximately $1.0 million might have to be repaid in 2012; further repayment provisions apply if employment milestones are missed or operations are moved.
- The company had agreed to fund up to $1.6 million in product-development expenses if specified milestones are achieved. It also disclosed ordinary-course legal proceedings but no specific material case or quantified exposure.
- Key risks include customer and government-spending concentration, demand and pricing pressure, competition, foreign-exchange exposure (not hedged), investment-value fluctuations, and potential asset impairment. Management reported effective disclosure controls as of March 31, 2012.
Important facts for investors to verify
- Whether the $110–$120 million fiscal 2012 revenue outlook remained achievable given weaker Q1 sales and the expected decline in military spending.
- Customer orders, award outcomes and the impact of the July 2012 III-V supply-agreement expiration, including any potential exposure under its $40 million damages provision.
- Progress in restoring product margins through product mix, pricing, manufacturing yields and volume, and the actual rate of expected price declines.
- Cash use, the planned $5–$8 million of capital spending, and any repayment required under the Massachusetts incentive agreement.
- Whether Golden-i commercialization and other new products generate meaningful revenue beyond 2012; Q1 results alone do not establish that outcome.