Interlink Electronics, Inc. — Q3 2018 Form 10-Q
Business 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 nine months ended September 30, 2018; fiscal year ends December 31. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1.920m | $2.649m | $7.176m | $8.797m |
| Gross profit / margin | $1.048m / 54.6% | $1.657m / 62.6% | $4.007m / 55.8% | $5.454m / 62.0% |
| Operating income / margin | $0.103m / 5.4% | $0.532m / 20.1% | $0.752m / 10.5% | $1.902m / 21.6% |
| Net income / margin | $0.099m / 5.2% | $0.352m / 13.3% | $0.576m / 8.0% | $1.265m / 14.4% |
| Diluted EPS | $0.02 | $0.05 | $0.08 | $0.17 |
For the nine months, operating cash flow was $1.775m, versus $1.853m in 2017. Investing used $3.006m, including $2.764m of share repurchases and spending on Singapore R&D-center improvements and equipment. Financing provided $0.006m. Cash and cash equivalents were $6.436m at September 30, 2018, down from $7.772m at year-end 2017; restricted cash was $0.005m. Working capital was $7.8m. The company reported no indebtedness and no short- or long-term investments. Cash held by foreign subsidiaries was $2.3m.
Total assets were $9.561m and total liabilities $0.651m at quarter-end. Current assets were $8.404m against current liabilities of $0.651m. No litigation was pending at September 30; future operating lease payments totaled $0.592m.
Changes versus prior year
- Revenue fell 27.5% in Q3 and 18.4% year to date. Automotive revenue was negligible in Q3 and declined 85.6% year to date, chiefly after a major customer changed product design and another product reached end of life.
- Q3 revenue also declined in medical, consumer and standard products; industrial revenue rose 6.6%. Year-to-date industrial and standard-product revenue increased, but did not offset automotive, medical and consumer declines.
- Lower volumes reduced gross profit and margins, as fixed manufacturing costs were spread over less revenue. R&D spending rose 20.9% year to date to $0.683m, while SG&A declined 13.9% to $2.572m.
- Year-to-date income tax expense was $0.242m, compared with $0.650m; the company cited the U.S. Tax Cuts and Jobs Act and its mix of domestic and foreign earnings. Foreign currency translation reduced comprehensive income by $0.111m year to date.
- The company repurchased and retired 901,691 shares during the period for approximately $2.765m in two private transactions. Shares outstanding were 6,482,784 at September 30.
Outlook, commentary and risks
- Management expects revenue to be lower in Q4 2018 and into early 2019 while it works to replace lost automotive revenue; it said Q3 results may be indicative of the following 12 months given extended sales cycles. Management also expects Q4 SG&A to increase as it revamps the global sales organization.
- A $0.880m purchase order from an existing medical customer is scheduled for deliveries from October 2018 through June 2019. Management cautioned that end-of-life products may offset some expected growth.
- Management plans to continue investing in R&D and expanding its Singapore engineering center over the next several years. It believes current cash is adequate for at least the next 12 months, but acquisitions could require additional capital; the company has a $35m universal shelf registration statement and had not issued securities under it as of September 30.
- U.S. tariffs of up to 25% apply to specified China-origin products imported into the United States. The company said customers may be delaying orders or considering alternative suppliers; tariffs may pressure costs, margins and demand. It is monitoring ways to mitigate the impact.
- Revenue and receivables are concentrated: three customers represented 47% of Q3 revenue, and two customers represented 70% of accounts receivable at quarter-end. Other identified risks include customer and product life-cycle changes, order timing, international operations and currency movements, supply or manufacturing disruptions, competition, intellectual-property claims and the ability to attract staff and raise capital.
- Management reported effective disclosure controls at September 30 and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported other than the added trade-policy and tariff risk.
Key facts for investors to verify
- Whether revenue stabilizes and new medical orders can offset automotive customer and product losses, including the timing and fulfillment of the $0.880m order.
- Whether tariffs affect customer demand, product costs and gross margins, and what mitigation measures prove effective.
- How continued R&D investment and planned sales-team changes affect operating expenses, cash generation and profitability.
- The concentration and collectability of receivables, given that two customers represented 70% of quarter-end receivables.
- The use of cash for repurchases and potential acquisitions, and whether foreign-held cash or additional financing becomes necessary.