Kopin Corporation — Q2 2011 Form 10-Q
Business context and period: Kopin develops and manufactures III-V semiconductor products, miniature displays and related technology. This unaudited report covers the three and six months ended June 25, 2011; comparisons are to periods ended June 26, 2010. Kopin acquired Forth Dimension Displays (FDD) in January 2011, affecting year-over-year comparability.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $31.4 million | $30.2 million | $66.4 million | $55.6 million |
| Operating income (loss) | $0.5 million | ($0.7 million) | $2.6 million | ($0.8 million) |
| Net income attributable to Kopin | $0.8 million | $1.9 million | $2.9 million | $2.9 million |
| Diluted EPS | $0.01 | $0.03 | $0.04 | $0.04 |
| Operating cash flow | Not stated for quarter | $3.5 million | $1.1 million |
- Revenue rose 4% in the quarter and 19% for the six-month period. Six-month display revenue increased to $32.8 million from $25.2 million; III-V revenue rose to $33.6 million from $30.4 million.
- Q2 net income attributable to Kopin fell year over year despite improved operating results. Lower gains on investment sales and foreign-currency losses contributed to the decline in other income.
- Product cost was 64.6% of net product revenue in Q2 and 65.7% for the first half, versus 75.0% and 74.3%, respectively, in 2010. Management cited higher military-display mix, increased III-V volume, cost reductions and production-capacity qualification. R&D expense increased to $13.5 million for the half from $9.2 million.
- Cash and equivalents were $33.2 million and marketable debt securities $66.2 million at June 25, totaling $99.3 million. Working capital was $123.9 million, versus $132.1 million at year-end 2010. Current liabilities were $17.5 million. The balance sheet reports no borrowings or other debt.
- Six-month investing cash use was $18.4 million, including $10.1 million for the FDD acquisition, net of acquired cash, and $3.9 million of capital expenditures. Kopin repurchased $1.9 million of stock. Cash decreased $16.7 million to $33.2 million.
Changes, outlook and risks
- Management forecast fiscal 2011 revenue of $130–$140 million, while cautioning that forecasts are based on customer discussions and market assumptions, not firm non-cancellable orders. Management expected stronger sales in Q3, followed by Q2, Q4 and Q1.
- Management anticipated approximately 5% fiscal 2011 price declines for HBT wafers and consumer-electronics displays; military-display prices were expected to remain relatively flat. Profitability depends on sales volume, product mix, pricing and manufacturing efficiency.
- Management expected $5–$8 million of capital expenditures over the next 12 months and said available cash resources should fund operations and capital needs for at least that period.
- FDD added $1.6 million of Q2 revenue and $2.5 million for the first half. The purchase price was approximately $11 million, with up to $7 million additional contingent consideration tied to 2011 FDD revenue; management estimated its fair value at zero. Purchase-price allocation and working-capital settlement remained subject to adjustment.
- Key risks include potential reductions in U.S. military spending, smartphone demand and customer forecasts falling short, product-price pressure, foreign-exchange exposure (not hedged), and possible impairment of Kowon long-lived assets if consumer-display sales do not improve. Management cited $3.0 million of Kowon long-lived assets at risk of potential impairment.
- A significant HBT supply agreement runs through July 2012 and could expose Kopin to monetary damages of up to $40 million for failure to meet specified supply obligations. Kopin also committed up to $3.2 million for product development if milestones are achieved.
- The filing identifies possible U.S. government default as a risk to the value of government securities. It reports no material litigation outcome, and management stated disclosure controls were effective as of June 25, 2011.
Investor verification points
- Track whether revenue guidance is achieved, particularly assumptions for smartphone-related HBT demand and military-display procurement.
- Assess product mix, selling-price changes and manufacturing efficiencies against the reported improvement in product-cost ratios.
- Review FDD’s performance, the final acquisition valuation and working-capital settlement, and whether contingent consideration becomes payable.
- Monitor cash and securities, planned capital spending, and any potential Kowon impairment or HBT supply-agreement exposure.
- Confirm the effects of investment-sale gains and foreign-currency movements when assessing recurring earnings.