Business Context and Reporting Period
Company: Interlink Electronics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: The company develops and markets computer pointing devices based on patented technologies, primarily serving the computerized presentation projector market. Approximately two-thirds of revenue is derived from this market, with roughly 50% of revenues coming from Japanese customers, exposing the company to foreign currency exchange rate fluctuations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 1999 | Nine Months Ended Sep 30, 1999 | Balance Sheet (Sep 30, 1999) |
|---|---|---|---|
| Revenues | $7,207 | $20,668 | - |
| Gross Profit | $2,634 | $7,701 | - |
| Gross Margin | 37% | 37% | - |
| Operating Income | $660 | $1,699 | - |
| Net Income | $546 | $1,462 | - |
| Earnings Per Share (Diluted) | $0.08 | $0.23 | - |
| Cash and Cash Equivalents | - | - | $6,619 |
| Working Capital | - | - | $16,427 |
| Total Debt (Current + Long Term) | - | - | $2,020 |
| Operating Cash Flow (9 Months) | - | $2,701 | - |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 38% for the three-month period and 31% for the nine-month period compared to the same periods in 1998. This growth is attributed to the focus on the computerized presentation projector market and relationships with major OEMs.
- Profitability: The company transitioned from a net loss of $136,000 in the third quarter of 1998 to a net income of $546,000 in the third quarter of 1999. For the nine-month period, net income rose from $49,000 to $1,462,000.
- Expense Management: Selling, general, and administrative (SG&A) costs as a percentage of revenue declined to 20% in Q3 1999 from 24% in Q3 1998, due to leveraging fixed costs over a higher sales base.
- Liquidity: Working capital increased to approximately $16.3 million from $14.1 million at the end of 1998. Cash and cash equivalents grew from $3.9 million to $6.6 million.
- Cash Flow: Operating cash flow turned positive, generating $2.7 million for the nine months ended September 30, 1999, compared to a use of $1.1 million in the prior year period.
Guidance, Outlook, and Risks
- Outlook: Management expects gross profit percentages to vary slightly based on the mix of high-volume versus low-volume OEM business. Research and development costs are expected to remain at or near 8% of revenues.
- Year 2000 Compliance: The company believes its products and internal systems are largely Year 2000 compliant. It anticipates no material impact on results of operations from Y2K remediation costs, though it notes that uncorrected deficiencies in public utilities or vendor systems could severely impact operations.
- Foreign Currency Risk: Approximately 50% of revenues come from Japanese customers. The company uses foreign exchange forward contracts to hedge revenue exposures, mitigating the impact of sudden yen/dollar fluctuations.
- Operational Risks: Risks include significant quarterly performance fluctuations due to order timing, competitive price pressures, availability of third-party parts, and potential manufacturing interruptions.
Investor Verification Checklist
- Verify the sustainability of the 31-38% revenue growth rate and the concentration risk associated with the computerized presentation projector market (approx. 66% of revenue).
- Confirm the effectiveness of foreign currency hedging strategies given that 50% of revenue is derived from Japanese customers.
- Assess the validity of the Year 2000 compliance assertions regarding critical suppliers and public utilities.
- Review the composition of the $2.0 million in total debt and the terms of borrowings from Japanese banks.
- Monitor the trend in SG&A expenses to ensure the 20% of revenue level is maintainable as sales volumes fluctuate.