Interlink Electronics, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results. Unless indicated otherwise, amounts below are in millions of U.S. dollars.
Business context
Interlink develops and sells force/touch sensors, membrane keypads and printed electronics, and gas sensors for industrial, medical, consumer, automotive, defense and environmental applications. The company reports one operating segment. The period includes the December 2022 acquisition of SPEC Sensors and KWJ Engineering and the March 2023 acquisition of Calman Technology; reported year-over-year growth therefore includes acquired businesses.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $4.049 | $2.040 | $7.327 | $4.031 |
| Gross profit / margin | $2.061 / 50.9% | $0.952 / 46.7% | $3.648 / 49.8% | $2.193 / 54.4% |
| Operating income (loss) | $0.406 | $(0.151) | $0.233 | $(0.133) |
| Net income | $0.381 | $0.112 | $0.190 | $0.254 |
| Net income (loss) applicable to common stockholders | $0.281 | $0.012 | $(0.010) | $0.054 |
| Basic and diluted EPS | $0.04 | $0.00 | $0.00 | $0.01 |
- Revenue increased 98.5% in Q2 and 81.8% in the first half. Q2 growth was strongest in medical, standard products and industrial markets; consumer revenue declined, and automotive revenue was nil. Medical revenue was 41.7% of Q2 sales.
- Q2 gross margin improved year over year, attributed to higher volume, lower material costs on certain orders, and favorable product and customer mix. First-half margin declined year over year, which management attributed to higher material costs on certain orders and unfavorable mix.
- Operating cash flow was $(0.245) for the first half, compared with $0.028 generated in 2022. Cash used in operations reflected $0.629 of cash use from changes in operating assets and liabilities, including higher receivables and inventory.
- Investing cash outflow was $4.310, principally the Calman acquisition, net of cash acquired. Financing cash outflow was $0.377, including $0.200 of preferred dividends and $0.177 of common-stock repurchases. Cash declined from $10.091 at year-end to $5.106 at June 30.
- At June 30, cash was $5.106, working capital was $8.3, and the company reported no indebtedness. Current assets were $10.445 and current liabilities $2.146. Lease liabilities totaled $0.234; these are not borrowings.
Changes, acquisitions and unusual items
- Calman’s acquisition-date purchase price was approximately $6.450, including additional consideration arising from a working-capital adjustment; $0.595 was held back for potential claims. Its purchase-price allocation remains provisional and includes $4.052 of goodwill, which is not expected to be tax-deductible.
- The SPEC/KWJ purchase-price allocation was revised after valuation work, including reclassification of goodwill to identifiable intangible assets. The resulting $0.082 increase in amortization expense recorded in Q2 included amounts attributable to prior quarters.
- Reported first-half revenue was $7.327, while pro forma revenue assuming both acquisitions were included for the full comparable periods was $8.088 for 2023 and $8.177 for 2022. This illustrates that reported year-over-year growth is not a like-for-like comparison.
- Q2 other income was $0.064, versus $0.342 in the prior-year quarter; the prior period included marketable-security gains. The company held no marketable equity securities at June 30.
- The company repurchased 19,403 shares for $0.177 during the first half, including a separate 5,500-share repurchase and purchases under a program authorizing up to 100,000 shares.
- Series A preferred stock has a $5.0 million liquidation preference and an 8% annual cumulative dividend. Preferred dividends were $0.200 for the first half and reduce earnings applicable to common stockholders.
Outlook, risks and contingencies
Management provided no specific revenue, earnings or cash-flow guidance. It stated that existing cash should be sufficient for current operations, while noting that changed circumstances could require additional capital or expense reductions. Management expects to continue declaring and paying monthly preferred dividends, subject to legal limitations.
Risks highlighted include unpredictable customer order timing, customer and receivables concentration, international operations and currency exposure, supply-chain and manufacturing disruptions, product quality, competition and technology changes, and the ability to attract employees or raise capital. Two customers accounted for 29% and 18% of receivables at June 30; three customers represented 23%, 13% and 11% of Q2 revenue. Federal and state deferred tax assets remain subject to a valuation allowance, and tax benefits from domestic losses are limited. No material changes to previously reported risk factors were disclosed. The company reported no pending legal proceedings and no off-balance-sheet arrangements. Related-party transactions with Qualstar and BKF Capital include shared facilities, services and reimbursements; senior executives serve in leadership roles at those entities.
Important facts for investors to verify
- How much of revenue growth reflects acquired businesses versus organic growth, and how the acquisitions are performing relative to their purchase prices.
- Whether receivables and inventory convert to cash as expected, given negative first-half operating cash flow and customer concentration.
- Calman’s final purchase-price allocation, goodwill and intangible-asset valuations, and the effect of amortization on future results.
- The sustainability of gross margins, particularly the first-half decline, and the impact of customer and product mix and material costs.
- Cash needs after acquisition spending, planned share repurchases, lease commitments and recurring preferred dividends.
- Related-party arrangements and the limits on realizing domestic tax-loss carryforwards.