Data I/O Corporation 2018 Form 10-K Summary
Business context and reporting period
Data I/O Corporation designs and sells automated and manual programming systems, security provisioning solutions, software, adapters and related services for programmable semiconductor devices. Its primary markets include automotive electronics, IoT, industrial, consumer electronics and programming centers.
The filing covers the fiscal year ended December 31, 2018. The source provides annual results rather than a separate fourth-quarter income statement or cash flow statement. Data I/O is a smaller reporting company listed on the Nasdaq Capital Market under DAIO.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $29.224 million | $34.051 million |
| Gross margin | $17.356 million; 59.4% | $20.059 million; 58.9% |
| Operating income | $1.738 million | $5.047 million |
| Net income | $1.606 million | $5.449 million |
| Diluted EPS | $0.19 | $0.65 |
| Net cash from operating activities | $2.112 million | $9.126 million |
| Capital expenditures | $0.907 million | $2.154 million |
| Cash and cash equivalents | $18.343 million | $18.541 million |
| Working capital | $21.065 million | $19.486 million |
| Current ratio | 4.1 | 3.5 |
| Total debt | No significant debt reported | No significant debt reported |
Adjusted EBITDA excluding equity compensation was $4.045 million in 2018, compared with $6.668 million in 2017. The company reported a $291,000 income tax expense in 2018 versus a $288,000 tax benefit in 2017. The 2017 benefit included a $531,000 net benefit related to the Tax Cuts and Jobs Act.
Material changes versus the prior comparable period
- Net sales declined 14.2%, primarily reflecting strong cyclical automotive electronics and programming-center demand in 2017, followed by reduced demand in 2018.
- Automated programming-system sales decreased 16.5% to $23.252 million; non-automated system sales decreased 3.6% to $5.972 million.
- Equipment sales declined 21.7% and adapter sales declined 6.3%, while software and maintenance sales increased 38.1% to $3.268 million.
- International sales represented 88.2% of revenue, down from 91.6%. U.S. sales increased 19.6% to $3.436 million, while international sales declined 17.3% to $25.788 million.
- Order bookings declined approximately 21% to $27.0 million, and year-end backlog fell to $1.9 million from $4.0 million.
- Gross margin improved modestly to 59.4% because of cost reductions, partially offset by unfavorable currency translation.
- Operating income fell 65.6% as lower revenue outweighed relatively stable operating expenses. R&D increased 6.7% to $7.361 million and SG&A increased 1.7% to $8.257 million.
- Operating cash flow declined substantially, primarily due to lower net income, higher inventories and changes in liabilities and deferred revenue.
- Inventory increased to $5.185 million from $4.168 million, while deferred revenue decreased to $1.392 million from $1.787 million.
- Automotive electronics-related orders increased to 60% of orders in 2018 from 54% in 2017, increasing customer and market concentration.
Liquidity, capital allocation and accounting matters
- Cash decreased $198,000 during 2018 to $18.343 million after operating, investing, financing and foreign-exchange effects.
- Management stated that available cash and working capital should fund operations and capital requirements for at least the next year under its operating plan.
- The company repurchased 101,975 shares for $533,463, plus commissions and charges, under a program authorizing up to $2 million through October 31, 2019. Approximately $1.467 million remained available at December 31, 2018.
- Operating lease commitments totaled $3.117 million, primarily for facilities. Upon adoption of ASC 842 on January 1, 2019, the company expected to recognize approximately $2.6 million of lease assets and liabilities.
- Data I/O adopted ASC 606 using the modified retrospective method. Management stated that adoption did not materially affect 2018 results.
- U.S. deferred tax assets were fully offset by a $6.970 million valuation allowance because of the company’s loss history and uncertainty regarding future realization.
Outlook, management commentary and risks
Management is focused on maintaining profitability in the core programming business while investing in security provisioning, automotive electronics, IoT, automated handling systems and software. The SentriX security provisioning offering uses a pay-per-use model, which management views as a growth opportunity but acknowledges may be slower to gain customer acceptance than upfront equipment sales.
- Demand is cyclical and depends on customers’ capital spending, semiconductor production levels, product launches and order timing.
- Automotive electronics concentration creates exposure to reduced demand, higher customer quality requirements, certification requirements and potentially greater contractual liability.
- International operations expose the company to foreign-exchange volatility, tariffs, trade restrictions, export licensing, regulatory changes and collection risk. Approximately 88% of sales were international.
- Tariffs affecting products manufactured in the United States and China could pressure revenue, costs and gross margins.
- Competition includes lower-cost automated solutions, regional providers, in-circuit and in-system programming, over-the-air programming and device-specific semiconductor-manufacturer solutions.
- Rapid changes in semiconductor packages, memory technologies, UFS adoption, security protocols and manufacturing practices could make existing products less competitive or reduce demand for pre-placement programming.
- Some components and subassemblies are sourced from single or limited suppliers, creating potential availability, pricing and product-introduction risks.
- New security products and services may require continued investment before market demand is established, and the pay-per-use model may not be accepted by customers.
- Management identified potential future funding needs if revenue or cash flow is insufficient, although it reported no current financing commitments and believed existing liquidity was adequate for at least one year.
- No material legal proceedings or indemnification claims were reported as of December 31, 2018. Management and the auditor reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation because Data I/O qualifies as a smaller reporting company.
Important facts for investors to verify
- Whether bookings, backlog and revenue stabilize after the 2018 decline, particularly in automotive electronics and programming centers.
- Whether software, maintenance and security-provisioning revenue can continue offsetting pressure on equipment sales.
- The effect of tariffs, foreign-exchange movements and international trade policies on gross margin and demand.
- Inventory growth, customer receivable concentration and cash conversion, including the decline in operating cash flow.
- Customer concentration: Bosch and Data Copy Limited represented approximately 16% and 13% of 2018 sales, respectively.
- The company’s ability to fund R&D and strategic security investments without reducing liquidity or requiring external financing.
- The actual balance-sheet impact and ongoing expense implications of ASC 842 lease accounting adopted January 1, 2019.
- The source filing’s apparent inconsistency in describing the 2018 stock repurchase disclosure should be reconciled against the audited statements and subsequent filings.