Data I/O Corporation 10-Q Summary
Reporting period: Three months ended March 31, 2012; filed May 14, 2012. Data I/O is a smaller reporting company that develops and sells automated and non-automated programming systems and related software for electronics manufacturers. The financial statements are unaudited.
Financial Performance and Position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $3.679 million | $7.043 million | Down 47.8% |
| Gross margin | $1.942 million | $4.164 million | Down 53.4% |
| Gross margin percentage | 52.8% | 59.1% | Down 6.3 percentage points |
| Operating income (loss) | $(1.700) million | $0.640 million | Declined $2.340 million |
| Net income (loss) | $(1.677) million | $0.532 million | Declined $2.209 million |
| Basic and diluted EPS | $(0.19) | $0.06 | Turned negative |
| Net cash from operations | $0.259 million | $0.172 million | Improved $0.087 million |
Operating and net margins were approximately $(46.2)% and $(45.6)%, respectively, compared with positive margins of approximately 9.1% and 7.5% in the prior-year quarter. Research and development expense increased 3.0% to $1.392 million, while SG&A increased 3.6% to $2.250 million. SG&A included approximately $425,000 of non-recurring CEO search and separation costs; excluding those items, SG&A decreased approximately $347,000.
- Cash and cash equivalents were $12.284 million at March 31, 2012, down from $18.120 million at December 31, 2011.
- Working capital was $15.046 million, down from $22.355 million at year-end.
- Total assets were $23.254 million and total liabilities were approximately $4.241 million, including $234,000 of long-term other payables. The filing does not identify conventional bank debt or other significant funded debt.
- Accounts receivable declined to $1.912 million from $4.351 million at year-end, while inventories increased to $4.487 million from $3.964 million.
- Capital expenditures were $153,000. Cash flow from financing activities was negative $6.013 million, primarily because of $6.026 million in common-stock repurchases.
Material Changes Versus the Prior Comparable Period
- Revenue declined 48% year over year and 35% sequentially from Q4 2011. Automated programming systems sales declined 57.5% to $2.030 million; non-automated programming systems sales declined 27.1% to $1.649 million.
- International sales declined 50.7% to $3.209 million and represented 87.2% of total sales. U.S. sales declined 11.2% to $470,000.
- Management attributed weaker demand to reduced capital spending related to European sovereign-debt uncertainty and a downturn in Asia-based electronics manufacturing. Customers delayed orders or shifted deliveries into the second quarter.
- Orders declined 30% to $4.2 million. Quarter-end backlog increased to $1.6 million from $0.8 million at the beginning of the quarter and $0.9 million at March 31, 2011. Deferred revenue declined to $1.2 million from $1.5 million at year-end and $1.6 million a year earlier.
- Gross margin declined primarily because lower sales volume was spread over fixed operating costs. Management cited lower factory variances and labor and overhead costs as partial offsets.
- The company repurchased approximately 1.5 million shares for approximately $6.0 million during the quarter. The repurchases materially reduced cash and contributed to shares outstanding declining to 7.7 million at March 31, 2012 from 9.2 million at December 31, 2011.
Outlook, Commentary, Risks, and Unusual Items
Management stated that the industry remains cyclical and rapidly evolving and that the company is balancing geographic shifts, rising costs, strategic investments, and weaker demand. The company continued investment in its FlashCORE architecture and RoadRunner, FLX, PS, and FlashPAK product lines, and launched the FLXHD automated duplication system for e-MMC flash memories. It also continued expanding operations in China and developing the Azido software technology acquired in 2011.
Management expects existing working capital and internally generated funds to fund operations and capital requirements for at least the next year under its operating plan. Approximately $9 million of cash was held in foreign subsidiary accounts and may face tax or other impediments to repatriation. Management cautioned that failure to achieve its business plan could adversely affect liquidity and could require expenditure reductions or additional financing. No specific revenue or earnings guidance was provided.
- Operating lease commitments totaled $4.004 million, including $864,000 for the remaining portion of 2012.
- Purchase and other obligations totaled $1.120 million at March 31, 2012, almost all due during 2012; most arrangements were cancelable with limited notice.
- The company had no material pending legal proceedings and reported no material changes to the risk factors in its 2011 Form 10-K.
- Indemnification obligations, including intellectual-property and facility-related arrangements, were not recorded because potential future payments could not be reasonably estimated; management did not expect such liabilities to be material.
- The company maintained a $9.4 million valuation allowance against deferred tax assets and reported $115,000 of unrecognized tax benefits related to uncertain tax positions.
- Share-based compensation expense was $131,000, compared with $87,000 in the prior-year quarter. Unamortized future compensation expense was approximately $1.073 million.
- Revenue recognition involves judgments regarding shipment, collectability, multiple-element arrangements, returns, and percentage-of-completion engineering contracts. Inventory obsolescence, warranty costs, customer credit, and tax valuation allowances are also significant estimates.
- Management concluded that disclosure controls and procedures were effective at a reasonable level of assurance and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether delayed customer orders convert into revenue and whether backlog improves after March 31, 2012.
- Whether demand in Europe and Asia and capital spending by electronics manufacturers recover.
- Cash usage after the completed share-repurchase programs and the company’s ability to fund operations without additional financing.
- Inventory aging, potential obsolescence, and the effect of fixed operating costs on future gross margins.
- Progress and commercial contribution from the FLXHD product and Azido software initiative.
- Restrictions, tax costs, or other limitations affecting the approximately $9 million of cash held overseas.
- The impact of non-recurring executive-transition costs and ongoing R&D and international expansion spending.
- Potential royalty obligations associated with the 2011 software-technology acquisition, which require payments of 4% of directly attributable revenues for five years; no royalty expense was recorded in Q1 2012.