Interlink Electronics, Inc. — Q2 2018 Form 10-Q
Business context and period. Interlink designs and sells force-sensing and human-machine-interface products for consumer, automotive, industrial, and medical markets. This unaudited report covers the quarter and six months ended June 30, 2018; fiscal year ends December 31. Amounts below are USD thousands unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2,683 | $3,264 | $5,256 | $6,148 |
| Gross profit / margin | $1,548 / 57.7% | $2,061 / 63.1% | $2,959 / 56.3% | $3,797 / 61.8% |
| Operating income | $430 | $839 | $649 | $1,370 |
| Net income | $359 | $549 | $477 | $913 |
| Diluted EPS | $0.05 | $0.07 | $0.06 | $0.12 |
| Operating cash flow | Not separately stated | Not separately stated | $1,190 | $949 |
Q2 operating margin was 16.1%, compared with 25.7% a year earlier; six-month operating margin was 12.4%, versus 22.3%. Cash and cash equivalents were $5,944 at June 30, down from $7,772 at year-end 2017; restricted cash was $5. Working capital was $7.6 million, and the company reported no indebtedness. Total liabilities were $544 and total assets were $9,402. Cash used in investing activities was $2,997, including $2,764 of share repurchases and spending on equipment and improvements. Cash provided by financing activities was $6.
Material changes and management commentary
- Revenue fell 17.8% in Q2 and 14.5% for the first half. Management attributed the decline primarily to an automotive customer changing its product design, eliminating the need for Interlink’s solution. Automotive revenue fell 88.3% in Q2 and 84.5% for the first half.
- Industrial, medical, and standard-product sales partly offset the automotive decline. Gross margin contracted as lower volume left less revenue to absorb fixed manufacturing and overhead costs; the filing also cites additional costs tied to the automotive customer loss in Q1.
- R&D expense rose 51.0% in Q2 and 37.6% for the first half, mainly reflecting Singapore R&D expansion and increased engineering staffing. Management plans substantial further investment in that center over the next three years.
- Management expects revenue to be lower in the second half of 2018 until automotive revenue is replaced. It reported a $880,000 purchase order from an existing medical customer in July, for deliveries from October 2018 through June 2019, while cautioning that maturing product lines may offset some growth.
- Management stated existing cash should fund operations for at least 12 months. It is pursuing acquisitions; a transaction could require funding beyond available cash, and additional capital may not be available on acceptable terms. A $35 million universal shelf registration statement was available, with no securities issued under it as of June 30.
Risks, contingencies, and unusual items
- Customer concentration is material: two customers represented 18% and 13% of Q2 revenue; three customers represented 40%, 20%, and 10% of receivables at June 30. The filing also identifies risks from customer losses, product quality, international operations and currency movements, supply availability, manufacturing disruption, competition, technology and intellectual property, and access to capital.
- Q2 other income was $62, compared with expense of $2 in Q2 2017; the filing text does not provide a clear explanation for the Q2 amount.
- Income tax expense was $133 in Q2 and $188 for the first half; effective tax rates were 27.0% and 28.3%, respectively. Management expects the rate to remain below prior periods, primarily due to foreign earnings mix and U.S. tax reform, but notes quarterly fluctuations are possible. Federal and state NOLs are subject to ownership-change limitations.
- Operating lease commitments totaled $690 through 2021. The company reported no legal proceedings at June 30. It has customer and manufacturer IP indemnities with no stated maximum exposure, and executive severance/change-in-control obligations.
- Separate from its $1 million repurchase program, the company repurchased 867,681 shares from an existing stockholder for approximately $2.603 million. The CEO is also chairman and CEO of BKF Capital and CEO of Qualstar; the filing discloses office cost-sharing and other related-party transactions with those companies.
Important facts for investors to verify
- How much of the lost automotive revenue can be replaced, and whether the $880,000 medical order converts to timely shipments and revenue.
- Whether lower sales and reduced fixed-cost absorption continue to pressure gross margin, operating profit, and cash generation.
- Progress, cost, and expected returns from the planned Singapore R&D expansion and any acquisition activity or related financing needs.
- The reason for the $62,000 of Q2 other income and the economics and governance process for the large private share repurchase and related-party arrangements.
- Share-count reconciliation: the balance sheet reports 6.479 million shares at June 30, the note reports 6,478,797, and the cover reports 6,482,784 as of August 9, 2018.