Data I/O Corporation — Q2 2020 Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells semiconductor programming systems, adapters, software and maintenance services. The filing covers the quarter and six months ended June 30, 2020. The company is a smaller reporting company and reported 8,390,943 common shares outstanding as of July 30, 2020.
Operations and demand were materially affected by COVID-19-related customer and country shutdowns, travel restrictions, supply-chain uncertainty and the cyclical downturn in capital equipment spending. Approximately 93.8% of second-quarter sales and 94.0% of first-half sales were international.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $4.655 million | $5.834 million | $9.440 million | $11.892 million |
| Gross margin | $2.439 million | $3.584 million | $5.223 million | $7.269 million |
| Gross margin percentage | 52.4% | 61.4% | 55.3% | 61.1% |
| Operating income (loss) | $(0.878) million | $0.075 million | $(1.487) million | $0.105 million |
| Net income (loss) | $(1.057) million | $0.127 million | $(1.611) million | $0.153 million |
| Diluted EPS | $(0.13) | $0.02 | $(0.19) | $0.02 |
| Adjusted EBITDA | $(0.231) million | $0.728 million | $(0.341) million | $1.204 million |
Q2 bookings were $5.0 million, compared with $5.1 million in the prior-year quarter and $4.3 million in Q1 2020. Backlog was $2.8 million at June 30, 2020, compared with $2.3 million at March 31, 2020 and $2.9 million at December 31, 2019. Deferred revenue was $1.4 million.
Second-quarter sales consisted of equipment sales of $2.476 million, adapter sales of $1.324 million, and software and maintenance sales of $0.855 million. Automated programming systems declined 24.1% year over year, while non-automated programming systems declined 5.0%.
Cash flow, liquidity, debt and balance sheet
- Cash and cash equivalents were $13.273 million at June 30, 2020, down from $13.936 million at December 31, 2019.
- Six-month operating cash flow was positive $0.106 million, compared with negative $1.455 million in the prior-year period.
- Capital expenditures were $0.432 million, resulting in investing cash outflow of $0.432 million.
- Financing cash outflow was $0.159 million, primarily related to net share issuance and tax withholding.
- Working capital was $17.975 million, compared with $18.497 million at December 31, 2019.
- The company reported no debt. Current liabilities were $4.869 million, and total operating lease liabilities were approximately $1.526 million.
- Management stated that existing cash and internally generated funds are expected to fund operations and capital requirements for at least the next year under its operating plan.
Material changes versus the prior comparable period
- Q2 revenue decreased 20.2%, and first-half revenue decreased 20.6%, primarily because of COVID-19 shutdowns, seasonality and the cyclical downturn.
- Gross margin percentage fell 9.0 percentage points in Q2 and 5.8 percentage points for the first half. Management attributed the decline to fixed costs spread over lower revenue, unfavorable currency effects and factory variances.
- Operating results shifted from profit to loss, despite R&D and SG&A reductions of 3.9% and 6.9%, respectively, in Q2.
- International revenue declined 16.5% in Q2, while U.S. revenue declined 52.4%. International revenue increased as a percentage of total sales from 89.6% to 93.8%.
- Equipment sales declined 30.0% in Q2 and 30.1% for the first half; software and maintenance sales declined 2.4% and 3.1%, respectively.
- Share-based compensation increased to $0.481 million in Q2 from $0.364 million and to $0.730 million for the first half from $0.651 million.
Guidance, outlook, commentary and risks
Management did not provide specific numerical revenue or earnings guidance. It expects lower sales levels to continue affecting gross margins in Q3 2020, with improvement as business activity is restored. Automotive customers in the Americas and Europe were beginning or planning to reopen in Q3, but management expected a gradual recovery over several quarters.
The company reduced spending, deferred planned engineering increases, used remote work and implemented cash-preservation measures. It continued investing in automotive electronics, IoT, secure semiconductor provisioning, automated programming systems and software. The company was approved for the U.S. SBA PPP program but stated that it had not accepted and did not expect to accept PPP funding.
- COVID-19 may reduce demand, delay customer projects, restrict sales and service visits, disrupt manufacturing and component availability, and cause facility closures.
- Supply-chain disruption, geopolitical developments, tariffs and foreign-exchange volatility could adversely affect costs, revenue and manufacturing.
- The company may require additional cash at its U.S. headquarters; repatriation of foreign cash could create withholding taxes and other impediments.
- Management maintains a full valuation allowance against net deferred tax assets because of loss history and economic uncertainty. The valuation allowance was $8.1 million at June 30, 2020.
- Operating lease commitments totaled $1.724 million before imputed interest, and purchase commitments and other obligations totaled approximately $1.2 million, mostly payable within twelve months.
- The filing reported no material pending legal proceedings, no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements other than disclosed leases and commitments.
Unusual or notable items included a $0.640 million accelerated AMT credit refund classified as a current asset under the CARES Act, a first-half foreign-currency transaction loss of $0.031 million, and first-half other comprehensive loss of $0.180 million from foreign-currency translation.
Important facts for investors to verify
- Whether customer reopenings and automotive demand translate into sustained bookings, backlog conversion and revenue recovery.
- Whether gross margins recover from the 52.4% Q2 level as factory utilization and sales volumes improve.
- Cash burn, working-capital trends and the company’s ability to fund operations without additional financing or foreign-cash repatriation.
- Exposure to COVID-19-related supply-chain interruptions, tariffs, currency movements and international customer concentration.
- The impact of continued losses, the $8.1 million deferred-tax valuation allowance and future tax-cash requirements.
- The reconciliation and continuing relevance of management’s non-GAAP EBITDA and adjusted EBITDA measures.