Kopin Corporation — FY 2011 Form 10-K
Business context and period. The filing covers the fiscal year ended December 31, 2011, a 53-week year; FY 2010 was 52 weeks. Kopin develops and manufactures III-V semiconductor products, miniature displays and related modules, and is developing its Golden-i wearable computer. Results include Forth Dimension Displays (FDD), acquired in January 2011.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $131.1 million | $120.4 million |
| Gross profit | $43.4 million | $35.4 million |
| Gross margin | 34.6% | 30.4% |
| Operating income (loss) | $(0.8) million | $4.6 million |
| Net income attributable to Kopin | $3.6 million | $8.9 million |
| Diluted earnings per share | $0.06 | $0.13 |
| Cash from operating activities | $19.3 million | $13.9 million |
Revenue grew 8.9%, while attributable net income fell about 60%. The filing reports gross margin on product revenue; operating margin was approximately negative 0.6% of total revenue and attributable net margin approximately 2.7%. FY 2011 included $5.0 million of noncash impairment charges for FDD intangible assets and goodwill. FDD contributed $4.9 million of revenue and a $6.9 million operating loss.
- Revenue mix: III-V revenue was $66.5 million versus $62.2 million; display revenue was $64.6 million versus $58.2 million. Display military sales declined to $38.9 million from $40.0 million, while consumer-electronics display sales rose to $16.5 million from $10.9 million.
- Costs and margins: Cost of product revenue was $82.1 million, or 65.4% of total revenue, versus $81.2 million, or 69.6%. Research and development expense increased to $25.9 million from $19.7 million; SG&A rose to $18.9 million from $14.8 million.
- Cash, liquidity and debt: Cash and equivalents were $43.1 million and marketable debt securities $62.3 million, totaling $105.4 million, versus $110.9 million at FY 2010 year-end. Working capital was $123.9 million, down from $132.1 million; current assets were $146.4 million and current liabilities $22.5 million. Long-term obligations were $1.3 million, consisting of asset-retirement obligations; the filing reports no material borrowings.
- Investing and capital returns: Capital expenditures were $7.1 million. The FDD acquisition used $10.1 million net of cash acquired; share repurchases used $4.4 million. Management expected $5–8 million of capital expenditures over the following 12 months.
FY 2011 fourth quarter: Revenue was $35.2 million, gross profit $12.4 million and net loss attributable to Kopin $67,000. In the comparable FY 2010 quarter, revenue was $33.1 million and attributable net income was $4.7 million, including approximately $1.4 million of insurance-related gains.
Changes, outlook and risks
- Management forecast FY 2012 revenue of $110–120 million, but cautioned that forecasts were not based on firm, non-cancellable orders. It expected U.S. government defense-related product revenue to decline by approximately $20 million.
- Management expected 5–7% price declines for HBT wafers and consumer-electronics display products in 2012, with military display prices relatively flat. The expected revenue reduction and price pressure put profitability at risk.
- Skyworks represented 28% of FY 2011 revenue and AWSC 9%. If all AWSC sales were ultimately for Skyworks, the combined exposure would be 37%. The supply agreement with the major HBT customer was scheduled to expire in July 2012, subject to a last-buy option; failure to meet supply obligations could expose Kopin to damages up to $40 million.
- Military customers accounted for 30% of revenue and are a higher-margin business. The U.S. government planned to reduce purchases and potentially consolidate suppliers for a thermal weapon-sight program; losing awards could materially hurt revenue and profitability.
- Golden-i kit sales were minimal in 2011 and management did not expect material Golden-i revenue in 2012. Commercialization depended on a licensee and market adoption.
- Other risks include reliance on a small number of customers and suppliers, dependence on foundries in Taiwan and Korea, competition and product-price erosion, government contract funding and termination, fixed-price contract cost overruns, foreign-exchange exposure, and possible further FDD impairment. Kopin estimated it might repay $1.0 million of a Massachusetts employment incentive in 2012.
- A $4.3 million release of a valuation allowance for Taiwanese deferred tax assets contributed to the FY 2011 tax benefit; this is not equivalent to operating earnings or cash tax savings. Kopin reported an accumulated deficit of $124.0 million.
Management said available cash resources should support operations and capital needs for at least 12 months. The company had no off-balance-sheet arrangements and did not expect to pay cash dividends. Deloitte issued an unqualified opinion on the financial statements; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether the HBT supply agreement was renewed after its July 2012 expiration and whether customer volumes and pricing remained within expectations.
- Actual FY 2012 revenue and profitability against the $110–120 million outlook, including the expected defense-revenue decline and product-price reductions.
- U.S. military procurement decisions for thermal weapon sights, and the resulting display revenue, product mix and margins.
- FDD operating performance and whether further goodwill or intangible-asset impairment was required.
- Cash and marketable-security balances, operating cash generation, planned capital spending, and any repayment due under the Massachusetts incentive agreement.