Kopin Corporation — Q3 2011 Form 10-Q
Business context and period. The unaudited quarter ended September 24, 2011; comparative results are for the quarter and nine months ended September 25, 2010. Kopin develops and manufactures III-V semiconductor products, including HBT transistor wafers, and miniature displays. It also earns research and development revenue. The company acquired Forth Dimension Displays (FDD) in January 2011.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $29.6m | $31.6m | $95.9m | $87.2m |
| Operating income (loss) | ($0.2m) | $1.8m | $2.4m | $1.1m |
| Net income attributable to Kopin | $0.8m | $1.4m | $3.7m | $4.3m |
| Diluted EPS | $0.01 | $0.02 | $0.06 | $0.06 |
| Operating cash flow | Not separately provided | Not separately provided | $11.1m | $5.8m |
- Nine-month product gross margin was approximately 34.0%, compared with 28.1% in 2010; Q3 product gross margin was approximately 33.2%, compared with 32.3%. These are calculated from product revenue less product cost.
- At September 24, cash and equivalents were $40.2m and marketable debt securities were $63.1m, totaling $103.3m, down from $111.0m at December 25, 2010. Working capital was $123.6m, versus $132.1m.
- Nine-month investing cash outflow was $17.5m, including $10.1m net cash paid for FDD and $5.7m in capital expenditures. Financing cash outflow was $3.1m, primarily for share repurchases. Cash declined $9.7m over the period.
- Total assets were $188.8m and stockholders’ equity was $169.5m. The balance sheet presents no borrowing or interest-bearing debt line; debt levels should be confirmed against the complete filing.
Changes versus the prior comparable period
- Q3 revenue fell 6.4%, while nine-month revenue rose 10.0%. The nine-month increase includes FDD, which contributed about $4.0m of revenue; Q3 FDD revenue was about $1.5m.
- Q3 product revenue and operating results weakened. Management attributed lower III-V sales to reduced demand from handset customers and lower Q3 military-display sales; higher consumer-display and R&D sales partly offset the display decline.
- Nine-month display revenue increased to $46.8m from $40.1m, primarily from military, R&D and FDD sales. Nine-month III-V revenue rose to $49.1m from $47.1m.
- Research and development expense increased to $19.9m from $13.9m for nine months, reflecting Golden-i development, smartphone-related III-V development, capacity qualification and funded programs. SG&A increased to $13.5m from $11.7m.
- Nine-month net income attributable to Kopin declined despite higher revenue and operating income, partly reflecting lower gains on investment sales. Q3 results also included a $1.0m foreign-currency gain and a $0.15m impairment charge on marketable debt securities.
Outlook, risks and unusual items
- Management expected 2011 revenue of $128m–$132m. The forecast was based on customer discussions and other assumptions, not firm, non-cancellable orders. Management expected HBT and consumer-display selling prices to decline about 5% for 2011, while military-display prices were expected to remain relatively flat.
- Management said cash resources should support operations and capital needs for at least 12 months, and expected $5m–$8m of capital expenditures over the next 12 months.
- A significant HBT customer supply agreement runs through July 2012. Failure to meet supply obligations could result in monetary damages of up to $40m, as well as possible court-ordered specific performance.
- FDD recorded a loss of about $1.5m for the first nine months. Its revenue was concentrated in one product and two customers; weaker-than-expected sales could lead to impairment of the $4.6m goodwill balance. Management also identified possible impairment risk for Kowon assets if activity remains weak.
- FDD’s purchase price included up to $7m of contingent consideration tied to 2011 revenue; management estimated none would be payable. Purchase-price allocation and the final working-capital settlement remained subject to adjustment. Goodwill is not tax deductible.
- The company had committed to fund up to $3.2m of product-development expenses if specified milestones are achieved. It also reported a $1.4m warranty accrual and $5.4m in operating lease obligations.
- Risks discussed include potential reductions in military spending, smartphone demand and customer market-share shifts, product price pressure, foreign-exchange exposure (not hedged), investment credit risk, and cybersecurity. The filing describes ordinary-course legal proceedings but provides no specific material case or quantified exposure.
- Golden-i revenue and profits were not expected to be significant in 2011; management viewed optical pods and software licensing as potential future growth sources. Management reported effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Confirm the 2011 revenue outlook against subsequent reported results and the assumptions behind customer demand, military procurement and smartphone growth.
- Track FDD customer sales, operating performance, goodwill impairment testing, contingent consideration and completion of the purchase-price and working-capital adjustments.
- Assess exposure under the HBT supply agreement, including the potential $40m damages provision, and the milestone-based development commitment.
- Review cash and marketable-security composition, credit quality and impairment exposure, and planned capital spending and repurchases.
- The filing text reports different nine-month diluted weighted-average share counts in the statements of operations and EPS note (65,623,807 versus 65,263,807). It also gives inconsistent share-count figures in the cover page and balance-sheet disclosures; verify against the original filing.