Data I/O Corporation — Q3 2018 Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells automated and non-automated semiconductor programming systems, consumables, software and services, with emphasis on automotive electronics, IoT, secure provisioning and manufacturing automation. The filing covers the three and nine months ended September 30, 2018; financial statements are unaudited. The company is a smaller reporting company.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $6.533 million | $9.596 million | $21.367 million | $25.955 million |
| Gross margin | $4.118 million | $5.957 million | $12.783 million | $15.326 million |
| Gross margin percentage | 63.0% | 62.1% | 59.8% | 59.0% |
| Operating income | $404,000 | $1.824 million | $994,000 | $3.896 million |
| Net income | $342,000 | $1.728 million | $958,000 | $3.913 million |
| Diluted EPS | $0.04 | $0.20 | $0.11 | $0.47 |
| Operating cash flow | Not separately provided | Not separately provided | $1.840 million | $5.436 million |
Q3 operating margin was approximately 6.2% versus 19.0% in the prior-year quarter; net margin was approximately 5.2% versus 18.0%. For the first nine months, operating margin was approximately 4.7% versus 15.0%, and net margin was approximately 4.5% versus 15.1%.
- Cash and cash equivalents were $18.902 million at September 30, 2018, compared with $18.541 million at December 31, 2017. Approximately $12.0 million was held in the United States, with the remainder in foreign subsidiaries.
- Working capital was $20.598 million, up from $19.486 million at year-end 2017. The current ratio was approximately 4.2x.
- The company reported no significant debt; liabilities consisted primarily of current operating liabilities and $414,000 of long-term other payables.
- Nine-month cash flow included $1.840 million from operations, $664,000 used for capital expenditures and other investing activities, and $429,000 used in financing activities, primarily related to share issuance and withholding taxes.
- Non-GAAP EBITDA was $742,000 in Q3 and $1.935 million for nine months. Adjusted EBITDA, excluding equity compensation, was $1.024 million and $2.867 million, respectively.
Material changes versus the prior comparable period
- Q3 sales declined 31.9%; nine-month sales declined 17.7%. Automated programming systems declined 33.1% in Q3 and 20.5% for nine months, while non-automated systems declined 26.9% and 5.1%, respectively.
- International sales, representing 87.6% of Q3 revenue, declined 36.3%; U.S. sales increased 32.6% in the quarter. Management attributed the comparison partly to unusually strong 2017 demand.
- Q3 gross margin percentage improved to 63.0% from 62.1%, reflecting favorable product mix and factory variances, despite lower gross profit dollars.
- Research and development increased 0.7% in Q3 and 8.2% for nine months, reflecting personnel costs, share-based compensation and SentriX non-recurring engineering charges.
- SG&A declined 18.6% in Q3 and 1.0% for nine months, primarily due to lower incentive compensation and commissions.
- Operating cash flow fell to $1.840 million from $5.436 million, principally due to lower earnings and changes in accounts payable and accrued liabilities.
- Q3 order bookings were $7.0 million versus $8.2 million in the prior-year quarter. Backlog was $3.1 million versus $4.6 million a year earlier.
- Share-based compensation increased to $282,000 in Q3 and $932,000 for nine months, compared with $173,000 and $540,000, respectively.
Guidance, outlook, risks and unusual items
- Management provided no formal quantitative revenue or earnings guidance. It expects to fund operations and capital requirements for at least the next year using existing cash and internally generated funds.
- Management continues to focus on automotive electronics, IoT, secure provisioning, automated programming and software while pursuing cost reductions, geographic adjustments and product development.
- The business is exposed to cyclical semiconductor capital spending, rapidly changing technology, demand volatility, product mix, pricing, inventory obsolescence, warranty claims, currency fluctuations, trade and tariff issues, and international operating risks.
- Foreign currency movements reduced Q3 revenue by approximately $89,000 and gross margin by approximately $51,000; for the first nine months, currency movements increased revenue by approximately $463,000 and gross margin by approximately $166,000.
- The company maintained approximately $7 million of valuation allowance against deferred tax assets and reported $298,000 of unrecognized tax benefits at September 30, 2018. Tax years 2015–2018 remain open for U.S. examination.
- Deferred revenue was $1.9 million, of which $1.8 million was expected to be recognized within twelve months. Operating lease commitments totaled $3.061 million, and purchase commitments and other obligations totaled $1.486 million.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded that disclosure controls were effective.
- On October 31, 2018, after quarter-end, the board authorized a share repurchase program of up to $2 million over one year.
- The company adopted Topic 606 revenue recognition guidance effective January 1, 2018; management stated that the adoption did not materially affect financial results. Lease accounting changes effective January 1, 2019 were still under evaluation and are expected to add right-of-use assets and lease liabilities.
Investor verification points
- Verify whether bookings, backlog and international demand improve after the significant year-over-year revenue decline.
- Assess whether the improved gross margin percentage is sustainable or primarily reflects quarterly product mix and factory variances.
- Monitor cash generation, particularly working-capital movements and the concentration of cash in foreign subsidiaries.
- Evaluate the impact of continued R&D and share-based compensation spending on operating leverage.
- Review the effect of the new $2 million repurchase authorization on liquidity and share count.
- Track deferred tax valuation allowances, uncertain tax positions and the future balance-sheet impact of lease adoption.