Data I/O Corporation — Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells semiconductor programming systems, including automated and non-automated systems, consumables, software and services. The filing covers the three and six months ended June 30, 2018. The company is a smaller reporting company and operates in a cyclical, rapidly evolving industry, with automotive electronics and Internet of Things applications identified as key growth markets.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $7.204 million | $9.135 million | $14.834 million | $16.359 million |
| Gross margin | $4.249 million | $5.202 million | $8.665 million | $9.369 million |
| Gross margin percentage | 59.0% | 56.9% | 58.4% | 57.3% |
| Operating income | $246,000 | $1.268 million | $590,000 | $2.072 million |
| Net income | $486,000 | $1.206 million | $616,000 | $2.185 million |
| Diluted EPS | $0.06 | $0.14 | $0.07 | $0.26 |
| Operating cash flow | Not separately reported for the quarter | $(798,000) | $1.298 million |
Q2 revenue declined 21.1% year over year, while six-month revenue declined 9.3%. Gross margin percentage improved because of favorable product mix, factory variances and cost-reduction efforts, but lower sales and increased operating expenses reduced operating income. Q2 operating expenses were $4.003 million, including $1.845 million of research and development and $2.158 million of selling, general and administrative expense.
- Automated programming system sales were $5.680 million in Q2, down 24.3% year over year; non-automated system sales were $1.524 million, down 6.7%.
- International sales represented 86.5% of Q2 revenue and declined 24.4%; U.S. sales increased 8.3%.
- Q2 revenue mix was approximately 65% equipment, 24% consumables and 11% software and services.
- Q2 order bookings were $7.2 million versus $10.1 million in the prior-year quarter. Backlog was $1.9 million at June 30, 2018, versus $4.7 million a year earlier.
- EBITDA was $796,000 in Q2 and $1.193 million for the first six months, compared with $1.451 million and $2.599 million, respectively, in the comparable periods. Adjusted EBITDA excluding equity compensation was $1.269 million in Q2 and $1.843 million year to date.
At June 30, 2018, cash and cash equivalents were $16.634 million, down from $18.541 million at December 31, 2017. Working capital was $20.214 million. Cash was $10.2 million in the United States, with the balance held by foreign subsidiaries. The company reported no traditional debt; liabilities included $468,000 of long-term other payables. Six-month cash usage included $798,000 from operating activities, $491,000 for investing activities and $420,000 from financing activities.
Material changes versus prior comparable periods
- Revenue, operating income and net income declined substantially year over year despite improved gross margin percentages.
- Research and development expense increased 4.2% in Q2 and 12.3% year to date, primarily due to personnel costs, stock-based compensation and SentriX-related charges supporting managed and secure programming initiatives.
- Six-month SG&A increased 9.3%, although Q2 SG&A was essentially flat year over year. Stock-based compensation increased to $473,000 in Q2 and $650,000 year to date, compared with $270,000 and $367,000, respectively.
- Operating cash flow shifted from $1.298 million provided in the first half of 2017 to $798,000 used in the first half of 2018, primarily reflecting working-capital movements, including higher receivables and lower accounts payable and accrued liabilities.
- Deferred revenue increased to $2.5 million at June 30, 2018 from $1.9 million at December 31, 2017; approximately $2.4 million was expected to be recognized within the following twelve months.
- The company adopted ASC Topic 606 using the modified retrospective method effective January 1, 2018. Management reported no material effect on financial results.
Guidance, outlook, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance. It expects continued investment in automotive electronics, IoT, secure provisioning, automated programming and related software, while emphasizing cost control and product development. Management stated that existing cash and working capital should fund operations and capital requirements for at least the next year under its operating plan.
- Key risks include cyclical semiconductor capital spending, rapidly changing technology and customer requirements, trade issues, geographic and currency changes, industry partnerships, product acceptance, inventory obsolescence and demand variability.
- International exposure is significant, and foreign-currency changes benefited Q2 revenue by approximately $138,000 and gross margin by approximately $67,000.
- The company maintains a $6.9 million valuation allowance against deferred tax assets and had $290,000 of unrecognized tax benefits at June 30, 2018.
- Operating lease commitments totaled $3.081 million, and purchase commitments and other obligations totaled $1.798 million, nearly all payable within twelve months.
- No material legal proceedings, material indemnification claims, defaults or material changes to previously disclosed risk factors were reported.
- ASC 842 lease accounting becomes effective January 1, 2019; the company was still evaluating its effect on the financial statements.
- Foreign currency translation losses reduced Q2 comprehensive income by $534,000, resulting in comprehensive loss of $48,000 despite net income of $486,000.
Important facts for investors to verify
- Whether bookings and backlog recover from the Q2 declines, particularly in automated programming systems and international markets.
- Whether improved gross margins can offset lower revenue and continued R&D investment.
- The sustainability of liquidity given negative year-to-date operating cash flow and cash held by foreign subsidiaries.
- The impact of currency volatility, trade issues and cyclical semiconductor-industry spending.
- The recognition timing of the $2.5 million deferred-revenue balance and the quality of the $1.9 million backlog.
- The future impact of the $6.9 million tax valuation allowance, uncertain tax positions and potential cash-repatriation restrictions.
- The effect of the pending lease-accounting adoption and existing lease and purchase commitments on reported liabilities and liquidity.