Business Context and Reporting Period
Company: Interlink Electronics, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Business Overview: The company develops and markets computer pointing devices based on patented technologies (VersaPoint, VersaPad, RemoteLink), primarily for the computerized presentation projector market. Approximately two-thirds of revenue is derived from this market, with roughly 50% of revenues coming from Japanese customers, exposing the company to foreign currency exchange rate fluctuations.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 1999 |
6 Months Ended June 30, 1999 |
6 Months Ended June 30, 1998 |
|---|---|---|---|
| Revenues | $6,958 | $13,461 | $10,508 |
| Gross Profit | $2,671 | $5,067 | $3,964 |
| Gross Margin | 38.4% | 37.6% | 37.7% |
| Operating Income | $574 | $1,039 | $231 |
| Net Income | $508 | $916 | $185 |
| Diluted EPS | $0.08 | $0.15 | $0.04 |
| Cash from Operations (6mo) | $2,332 | ||
| Cash and Equivalents (End of Period) | $6,141 | ||
| Working Capital | $15,471 | ||
| Total Debt (Current + Long Term) | $2,073 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 30% for the quarter and 28% for the six-month period compared to the same periods in 1998. This growth is attributed to increased sales of pointing devices for presentation projectors.
- Profitability: Net income surged to $916,000 for the six months ended June 30, 1999, compared to $185,000 in the prior year period. Operating income improved significantly from $231,000 to $1,039,000.
- Expense Management: Selling, general, and administrative (SG&A) expenses as a percentage of revenue declined to 22% from 27% in the prior year quarter, due to leveraging fixed costs over a higher sales base and a greater mix of OEM sales.
- Cash Flow: Operating cash flow turned strongly positive, generating $2.332 million in the first six months of 1999, compared to a use of $1.639 million in the same period of 1998. This was driven by positive operations and improved accounts receivable management.
Outlook, Risks, and Contingencies
- Guidance: Management expects gross profit percentages to vary slightly based on the mix of high-volume versus low-volume OEM business. R&D costs are expected to remain at or near 8% of revenues.
- Year 2000 Compliance: The company believes its products and internal systems are largely compliant. Estimated costs to eliminate remaining deficiencies are under $100,000, with completion expected by September 1999. The company has not received notice of material Y2K deficiencies from significant vendors.
- Foreign Currency Risk: Approximately 50% of revenues are from Japanese customers. The company uses foreign exchange forward contracts to hedge revenue exposures, mitigating the impact of sudden exchange rate changes.
- Operational Risks: Risks include significant quarterly performance fluctuations due to order timing, competitive price pressures, and potential interruptions in third-party parts availability.
Investor Verification Checklist
- OEM Concentration: Verify the stability of relationships with major Original Equipment Manufacturers (OEMs), which account for approximately two-thirds of revenue.
- Japanese Market Exposure: Confirm the current status of Japanese customer orders and the effectiveness of currency hedging strategies given the 50% revenue exposure.
- Year 2000 Readiness: Monitor the completion of the Y2000 remediation program by the September 1999 deadline and any updates regarding supplier compliance.
- Debt Obligations: Review the terms of the bank line of credit and capital lease obligations, noting the mix of borrowings from Japanese banks.
- Seasonality: Assess the risk of quarterly volatility, as a significant portion of orders and shipments occur in the last month of each quarter.