Interlink Electronics, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Interlink designs, manufactures, and sells force-sensing components and human-machine-interface solutions for consumer electronics, automotive, industrial, and medical markets. Amounts below are in U.S. dollars; financial statement amounts are in thousands unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3.264 million | $3.054 million | $6.148 million | $5.859 million |
| Gross profit (margin) | $2.061 million (63.1%) | $1.843 million (60.3%) | $3.797 million (61.8%) | $3.514 million (60.0%) |
| Operating income (margin) | $839,000 (25.7%) | $914,000 (29.9%) | $1.370 million (22.3%) | $1.532 million (26.1%) |
| Net income | $549,000 | $749,000 | $913,000 | $1.355 million |
| Diluted EPS | $0.07 | $0.10 | $0.12 | $0.18 |
Q2 revenue grew 6.9% year over year, while net income declined about 27%. For the first half, revenue increased 4.9%, but net income fell about 33%. Gross margin improved in both comparisons, but higher operating expenses and taxes reduced earnings. SG&A rose 41% in Q2 and 26% for the first half, which management attributed primarily to sales and marketing strategy investments. The effective tax rate was 33.4% for Q2 and 34.2% for the first half, versus 19.4% and 13.2% in the comparable 2016 periods; prior-period tax expense benefited from NOL carryforwards.
Cash, liquidity, and balance sheet
- Cash and cash equivalents were $6.968 million at June 30, 2017, up from $6.009 million at December 31, 2016; $1.4 million was held by foreign subsidiaries. Restricted cash was $5,000.
- Working capital was $9.6 million. Current assets were $10.506 million and current liabilities $883,000. The company reported no indebtedness.
- First-half operating cash flow was $949,000, compared with $1.156 million in 2016. Investing used $60,000, versus $166,000; financing provided $34,000, entirely from stock-option exercises. Cash increased by $959,000 during the period.
- Total assets were $11.514 million and stockholders’ equity $10.631 million. Management stated existing cash should fund operations for at least the next 12 months, while noting acquisitions could require additional capital.
Material changes and operating trends
- Q2 market revenue increased in automotive (+10%), industrial (+52%), and consumer (+33%); standard-product revenue declined 14%. For the first half, industrial and consumer grew 39% and 53%, while standard products declined 18% and automotive was nearly flat.
- Revenue growth was driven by custom products sold to existing customers. Production efficiencies and better fixed-cost utilization improved gross margin despite nearly flat cost of revenue.
- First-half R&D expense rose 6% as the company expanded engineering investment and its Singapore R&D center. Q2 R&D expense was lower than the prior-year quarter, attributed to investment timing.
- U.S. revenue declined in the first half, while Asia and Middle East revenue increased; the filing reports revenue by shipment destination.
Outlook, risks, and contingencies
Management expects total revenue and automotive custom-product sales in the second half of 2017 to be lower than the comparable 2016 period because a major customer’s design change removed the need for Interlink’s solution. New automotive and medical product programs may begin generating revenue in late 2017 or early 2018, but management cautioned that phase-outs of existing products may offset some growth. The company plans to expand Singapore R&D over the next three to five years, accelerate investment over the next 12–18 months, and continue evaluating potential acquisitions. No quantified full-year revenue or earnings guidance was provided.
Key risks include unpredictable customer order timing and customer concentration, product and technology competition, product quality or reliability issues, international operations and foreign exchange, supply or manufacturing disruptions, intellectual-property matters, and the ability to attract employees or obtain capital. Four customers each accounted for at least 10% of first-half revenue; two customers represented 42% and 25% of accounts receivable at quarter-end. The company had no legal proceedings at June 30, but disclosed operating lease commitments totaling $738,000 through 2021 and indemnities whose maximum potential exposure could not be determined. It also disclosed severance and change-in-control provisions for CEO Steven N. Bronson, who has leadership roles at related entities BKF Capital Group and Qualstar. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the major customer’s design change and expected second-half automotive weakness develop as described, and how new automotive and medical programs ramp.
- Whether custom-product growth can offset continued weakness in standard products and end-of-life programs.
- Whether higher selling and marketing costs and planned R&D expansion produce growth without further pressure on operating margins.
- Customer concentration, receivable exposure, foreign-held cash, lease obligations, and the company’s ability to fund any acquisitions without new financing.
- The effect of restricted NOL utilization and changing tax rules on future tax expense and deferred tax assets.