Interlink Electronics, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2017. Interlink designs, manufactures, and sells force-sensing and human-machine-interface products for consumer electronics, automotive, industrial, and medical markets. It reports one operating segment.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $2.884 million | $2.805 million | +2.8% |
| Gross profit / margin | $1.736 million / 60.2% | $1.671 million / 59.6% | Margin +0.6 percentage points |
| Operating income / margin | $531,000 / 18.4% | $618,000 / 22.0% | Income down 14.1% |
| Net income / diluted EPS | $364,000 / $0.05 | $606,000 / $0.08 | Net income down 40.0% |
| Operating cash flow | $388,000 | $185,000 | Increased |
Cash and cash equivalents were $6.373 million at March 31, 2017, versus $6.009 million at year-end 2016; working capital was $9.0 million. The company reported no indebtedness. Current liabilities totaled $722,000, and total liabilities were $722,000. Investing activities used $35,000, primarily for Singapore R&D-center expansion; there were no financing cash flows. Of cash on hand, $946,000 was held by foreign subsidiaries. Operating-lease payments remaining under disclosed leases totaled $717,000.
Changes and operating drivers
- Revenue growth reflected increased custom-product sales in industrial (+30.6%), medical (+15.7%), and consumer (+85.3%) markets, partly offset by automotive custom sales (-13.1%) and standard products (-23.0%). Asia and the Middle East rose to $1.157 million from $685,000; U.S. revenue fell to $1.226 million from $1.579 million.
- Gross margin improved as production efficiencies and fixed-cost utilization offset slightly higher cost of revenue.
- Operating expenses rose 14.4% to $1.205 million: R&D increased 26.2% to $178,000, and SG&A increased 12.6% to $1.027 million. Management attributed increases to Singapore R&D investment, staffing, and sales-and-marketing realignment.
- The effective tax rate rose to 33.8% from 4.1%; 2016 tax expense benefited substantially from NOL carryovers. Use of some federal and state NOLs is limited under ownership-change rules. Management concluded in Q4 2016 that a valuation allowance was no longer needed.
Outlook, risks, and notable items
- Management said it expected increased product demand as markets continued to recover and was pleased with Q1 performance. It gave no specific revenue or earnings guidance. It cautioned that customer order timing is unpredictable and that anticipated new automotive and medical product-line revenue may not begin until late 2017 or early 2018; end-of-life products could offset some growth.
- The company plans to expand its Singapore R&D center. On April 25, 2017, it announced plans to add 10 scientists and engineers and invest $3.5 million over three years. Management stated existing cash should fund operations for at least 12 months, but acquisitions could require additional capital.
- Revenue and receivables are concentrated: four customers each represented at least 10% of Q1 revenue (17%, 16%, 12%, and 12%); three customers represented 31%, 27%, and 10% of accounts receivable at quarter-end. No allowance for doubtful accounts was recorded.
- Risks include customer and order concentration, product and technology changes, supply or manufacturing disruptions, international and currency exposure, and intellectual-property claims. The company reported no legal proceedings at March 31; potential exposure under certain IP indemnities is not quantifiable. No material risk-factor changes were reported.
- Effective May 8, 2017, CEO and President Steven N. Bronson was also appointed CFO; the position had previously been vacant. Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Q1 increase in custom-market sales offsets the decline in standard products and automotive sales in subsequent quarters.
- Whether operating-expense growth and the higher effective tax rate continue to pressure earnings despite improved gross margin.
- Execution, cost, and expected returns of the planned $3.5 million Singapore R&D investment and hiring expansion.
- Customer concentration, order timing, and the status of new automotive and medical product programs.
- Potential acquisition funding needs, repatriation considerations for foreign-held cash, and the impact of the CEO also serving as CFO.