Interlink Electronics, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. The company designs and sells force-sensing and human-machine-interface products for consumer, automotive, industrial, and medical markets. Financial amounts below are in U.S. dollars; statements report amounts in thousands unless noted.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2.649 million | $3.246 million | $8.797 million | $9.105 million |
| Gross profit / margin | $1.657 million / 62.6% | $1.950 million / 60.1% | $5.454 million / 62.0% | $5.464 million / 60.0% |
| Operating income / margin | $532,000 / 20.1% | $937,000 / 28.9% | $1.902 million / 21.6% | $2.469 million / 27.1% |
| Net income | $352,000 | $614,000 | $1.265 million | $1.969 million |
| Diluted EPS | $0.05 | $0.08 | $0.17 | $0.27 |
- For the nine months, operating cash flow was $1.853 million, investing cash outflow was $173,000, and financing cash inflow was $34,000. Cash and cash equivalents increased $1.789 million to $7.798 million.
- At September 30, cash was $7.798 million, current assets were $10.628 million, current liabilities were $537,000, and working capital was approximately $10.1 million. The company reported no indebtedness. Foreign subsidiaries held $1.7 million of cash, which management intended to keep invested abroad.
- Operating leases required future minimum payments of $668,000 through 2021. Capital expenditures and intangible asset purchases totaled $173,000 in the first nine months.
Changes versus comparable periods
- Q3 revenue declined 18.4% year over year; nine-month revenue declined 3.4%. Management attributed the decline principally to an automotive customer redesign that eliminated the company’s solution from a product platform.
- Automotive revenue fell 87.3% in Q3 and 32.6% for the nine months. Nine-month industrial, medical, and consumer revenue grew 28.0%, 19.3%, and 31.8%, respectively; standard-product revenue declined 10.6%.
- Despite lower revenue, gross margin improved in both comparison periods, which management attributed to production efficiencies and better fixed-cost utilization. Operating expenses rose: nine-month R&D increased 13.5% and SG&A increased 19.6%, reflecting investment in Singapore R&D, sales and marketing, and strategic partnerships. Lower operating income and higher nine-month tax expense contributed to lower net income.
- Customer concentration remained material: three customers accounted for 35%, 20%, and 11% of receivables at quarter-end. For the first nine months, two customers each represented 16% of revenue.
Outlook, risks, and unusual items
- Management expected Q4 2017 automotive custom-product sales and total revenue to be lower than the year-earlier quarter because of the customer platform change. New medical product lines were beginning to generate revenue in late 2017, but management cautioned that end-of-life products could offset some growth in early 2018.
- The company planned to expand its Singapore R&D organization over the next three to five years and continued to evaluate acquisition opportunities in 2017 and 2018. No quantified revenue or earnings guidance was provided.
- Management believed existing cash would fund operations for at least the next 12 months. Acquisitions could require additional capital; management noted possible equity dilution or debt obligations if external financing were needed.
- Key risks include customer and product concentration, unpredictable order timing and product life cycles, international operations and currency exposure, manufacturing or supply disruption, product quality, competition, and intellectual-property risks. Management said there were no material changes to the risk factors from its 2016 Form 10-K.
- The company reported no pending legal proceedings at September 30, 2017. It disclosed uncapped intellectual-property and director/officer indemnification obligations whose maximum potential losses could not be determined. CEO Steven N. Bronson’s employment agreement includes severance, change-in-control payments, and accelerated equity vesting in specified circumstances.
- The nine-month effective tax rate was 33.9%, versus 21.4% in 2016; prior-year tax expense benefited from NOL carryovers. Remaining federal and state NOLs are subject to ownership-change limitations. Management had concluded in late 2016 that a valuation allowance against deferred tax assets was no longer warranted.
Important facts for investors to verify
- Whether replacement automotive programs or other customers can offset the lost platform, and how the stated Q4 revenue expectation compares with subsequent results.
- Whether growth in medical, industrial, and consumer products persists, and how product end-of-life transitions affect early-2018 revenue.
- Whether higher R&D and commercial spending produces new designs, partnerships, and sustainable growth while preserving margins.
- Customer concentration in revenue and receivables, order timing, and collection trends.
- Cash availability and tax consequences if foreign-held cash is needed domestically; the impact of NOL limitations and evolving tax rules.
- Potential exposure under uncapped indemnities and the CEO’s severance and change-in-control terms.