Interlink Electronics, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparisons are with FY 2015. This is an annual filing, not a standalone fourth-quarter report. Interlink designs and sells force-sensing human-machine-interface components and custom solutions for automotive, industrial, medical, and consumer markets. Its main manufacturing facility is in Shenzhen, China.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $11.886 million | $10.514 million | +13.0% |
| Gross profit / margin | $7.006 million / 58.9% | $5.645 million / 53.7% | Margin +5.2 percentage points |
| Operating expenses | $4.159 million | $3.963 million | +4.9% |
| Operating income / margin | $2.847 million / 24.0% | $1.682 million / 16.0% | Margin +8.0 percentage points |
| Net income / diluted EPS | $2.893 million / $0.39 | $1.731 million / $0.23 | Net income +67.1% |
| Operating cash flow | $1.886 million | $2.138 million | Down $252,000 |
| Investing cash flow | $(230,000) | $(68,000) | Higher spending, mainly Singapore R&D expansion |
Cost of revenue was nearly flat despite higher sales, and fell to 41.1% of revenue from 46.3%, reflecting manufacturing efficiencies and improved fixed-cost utilization. SG&A rose 13.3%, partly due to SEC filing and NASDAQ-listing costs and expanded sales leadership; R&D expense declined 25.9% amid lower staffing and government grants, though management expects R&D spending to rise.
Revenue by market: automotive $3.670 million (+21.4%); industrial $1.608 million (+25.9%); medical $1.399 million (+4.8%); consumer $1.340 million (−18.3%); standard products $3.869 million (+19.5%). Management attributed growth chiefly to automotive and industrial custom products and standard products; consumer custom sales declined primarily because of order timing.
Financial position and liquidity
- Cash and cash equivalents were $6.009 million at year-end, up from $4.430 million; working capital was $8.5 million. The company reported no indebtedness.
- Current assets were $9.385 million and current liabilities $873,000; total assets were $10.471 million and stockholders’ equity $9.598 million.
- Operating cash flow was below net income, in part because of working-capital movements and a $675,000 non-cash deferred-tax benefit. Inventory rose to $1.268 million from $1.015 million.
- Future minimum operating lease payments totaled $796,000. No cash dividends were paid or anticipated in the foreseeable future.
Material changes, outlook, and unusual items
- In the fourth quarter, management reversed its $989,000 valuation allowance against deferred tax assets, concluding that future taxable income was sufficiently likely. The company reported a $675,000 net deferred-tax benefit for 2016; tax effects and NOL use remain subject to limitations from a prior ownership change.
- Management said existing cash should fund operations for at least the next 12 months. It plans to expand its Singapore R&D organization and evaluate strategic acquisitions in 2017; no quantified revenue or earnings guidance was provided.
- Management expected increased product demand as markets recovered, while cautioning that new automotive and medical product wins were not expected to contribute until late 2017 or early 2018 and could be offset partly by products reaching end of life.
- Three customers accounted for 22.4%, 11.7%, and 11.3% of FY 2016 revenue. International sales were 42.5% of revenue. Two customers represented 44% and 15% of year-end receivables.
- Key risks include customer and order concentration, long and uncertain design-to-production cycles, pricing pressure and rapid technology change, reliance on suppliers (including some single-source components), China manufacturing and international exposure, and protection of intellectual property. CEO Steven N. Bronson beneficially owned 71.3% of shares and also led two other public companies.
- The company reported no pending legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether FY 2016 margin improvement reflects sustainable production efficiencies or a favorable product mix, and how future R&D and SG&A investment will affect profitability.
- Timing, customer commitments, and expected revenue contribution from recent automotive and medical design wins, alongside product end-of-life offsets.
- Customer concentration, receivable exposure, order timing, and inventory growth relative to demand.
- The recoverability and utilization limits of deferred tax assets and NOL carryforwards, including the effect of the 2016 valuation-allowance release.
- Funding needs and potential dilution or debt if acquisitions or planned Singapore R&D expansion exceed available cash.
- Exposure to supplier disruption, China operations, foreign exchange, export controls, and intellectual-property claims.