Data I/O Corporation — Q1 2019 Form 10-Q Summary
Business Context and Reporting Period
Data I/O Corporation designs and sells programming systems, adapters, software, and maintenance services used primarily in automotive electronics, IoT, industrial controls, consumer electronics, and programming centers. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company reported 8,218,684 common shares outstanding as of April 30, 2019.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $6.058 million | $7.629 million | Down 20.6% |
| Gross margin | $3.685 million; 60.8% | $4.416 million; 57.9% | Dollar margin down 16.6%; rate up 2.9 points |
| Operating income | $29 thousand | $344 thousand | Down 91.6% |
| Net income | $26 thousand | $130 thousand | Down 80.0% |
| Basic and diluted EPS | $0.00 | $0.02 | Down |
| Operating cash flow | $(3.264) million | $(1.631) million | Outflow increased $1.633 million |
| Capital expenditures | $175 thousand | $338 thousand | Down 48.2% |
| Adjusted EBITDA | $476 thousand | $574 thousand | Down 17.1% |
Operating margin was approximately 0.5% in Q1 2019 versus 4.5% in Q1 2018. Net margin was approximately 0.4% versus 1.7%.
- Revenue by type: equipment sales were $3.711 million, down 27.9%; adapter sales were $1.461 million, down 13.6%; software and maintenance were $886 thousand, up 12.2%.
- Automated programming systems revenue was $4.803 million, down 19.6%; non-automated systems revenue was $1.255 million, down 24.2%.
- International revenue represented 94.1% of sales, compared with 86.6% in the prior-year quarter. International sales were $5.702 million and U.S. sales were $356 thousand.
- Order bookings were $6.2 million in both periods. Backlog was $2.0 million at March 31, 2019, compared with $2.7 million a year earlier. Deferred revenue was $1.6 million versus $1.7 million.
- Cash and cash equivalents were $14.782 million at March 31, 2019, down from $18.343 million at December 31, 2018 and below $16.816 million at March 31, 2018.
- Working capital was $20.521 million, compared with $21.065 million at December 31, 2018. Accounts receivable increased approximately $900 thousand and inventory increased approximately $500 thousand during the quarter.
- The filing does not report conventional borrowings or interest-bearing debt. Operating lease liabilities totaled $2.399 million, including $662 thousand current and $1.737 million long term.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because unusually strong automotive electronics and programming-center demand in 2017 had produced a substantial backlog, followed by lower demand, particularly from programming-center customers.
- Gross margin percentage improved because of favorable product and channel mix, factory variances, cost reductions, and factory utilization, despite lower sales volume.
- R&D expense decreased 10.5% to $1.681 million, primarily due to lower headcount-related and incentive compensation costs, partially offset by higher stock compensation.
- SG&A decreased 9.9% to $1.975 million due mainly to lower commissions, headcount-related costs, incentive compensation, and marketing activity, partially offset by higher stock compensation.
- Foreign currency transaction losses improved to $104 thousand from $176 thousand, while Q1 2019 included a $60 thousand gain on sale of assets.
- The company adopted ASC 842 on January 1, 2019, recognizing a $2.176 million right-of-use asset and approximately $2.558 million of lease liabilities at adoption. The adoption had no income-statement impact but reduced reported working capital through the current lease liability.
- The company repurchased 57,612 shares during Q1 at an average price of $5.39 for approximately $312 thousand including commissions. The remaining authorization under the $2 million program was approximately $1.156 million at March 31, 2019.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that it is focusing on automotive electronics, IoT programming technologies, secure supply-chain solutions, automated programming systems, software, and security provisioning for secure elements, authentication chips, and secure microcontrollers. The company continues to characterize its industry as cyclical and rapidly evolving and is managing geographic shifts, exchange-rate volatility, trade issues, tariffs, cost pressures, and strategic investments.
- Management expects existing cash and working capital to fund operations and capital requirements for at least the next year under its operating plan. It cautioned that losses, growth initiatives, share repurchases, acquisitions, or failure to achieve the business plan could reduce liquidity and require expenditure reductions or additional financing.
- Capital expenditures are expected to be funded by existing and internally generated funds, with planned investment in rental, security-provisioning, sales-demonstration, and test equipment.
- Inventory and production commitments totaled $1.831 million at March 31, 2019, with all but $700 thousand expected to be paid within twelve months. Most arrangements were cancelable with short notice and without significant penalty.
- Operating lease commitments totaled $2.650 million before $251 thousand of imputed interest. Cash paid for operating lease liabilities was $196 thousand during the quarter.
- The company reported no material pending legal proceedings and no known indemnification claims expected to have a material adverse effect. Management reported no material changes to the risk factors in the 2018 Form 10-K.
- Management maintained a $6.9 million valuation allowance against deferred tax assets. The Q1 2019 tax benefit of $29 thousand primarily reflected conversion of AMT credits into a receivable following IRS rule changes.
- The filing states that disclosure controls were effective at a reasonable level of assurance and that no material changes occurred in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether bookings and backlog convert into sustained revenue growth after the 20.6% year-over-year sales decline.
- Whether the improved 60.8% gross margin rate is sustainable as product mix, factory utilization, tariffs, and inventory levels change.
- The pace of cash use, particularly working-capital investment in receivables and inventory, and the effect of continued share repurchases.
- Progress and commercial adoption of security provisioning, automotive, IoT, and automated programming products.
- The adequacy of the company’s liquidity if operating losses, cyclical demand, foreign-exchange volatility, tariffs, or required U.S. cash repatriation increase.
- Potential future effects of the $2.399 million operating lease liability, $1.831 million of purchase commitments, warranty obligations, and the deferred-tax-asset valuation allowance.